South Korea’s National Pension Service (NPS) has put stable returns at the forefront of its selection of external alternative managers, resulting in giving an edge to bigger private equity firms.

NPS announced in a release on June 30 five general partners (GPs) that will receive capital commitments worth a combined 800 billion won ($664.6 million) after a two-month long process. They include Glenwood Private Equity, Macquarie Korea Asset Management, SkyLake Investment, IMM Investment and JKL Partners.

NPS’ process of awarding mandates this year attracted attention because the pension fund abandoned its so-called “league system.” Previously it received proposals separately based on size of the applying firms and let them compete in separate groups.

NPS removed such separation this year, giving applicants greater discretion as to fund size and strategy. The move was seen as a sign that the public pension scheme thought the country’s private equity industry is at a mature stage and there are sufficient high quality managers that can compete without artificial restrictions.

NPS received total 15 proposals, most of which were from private equity firms with a relatively strong reputation and scale, seemingly because younger or smaller ones chose to avoid competing with bigger rivals.

The applicants were narrowed down to 10 before five managers were finally selected based on due diligence and interview results. All of them were among the main players in the domestic private equity industry considering their track record and firm’s size.

NPS would have placed more weight on stable returns when making a final decision at a time of heightened market uncertainty caused by the fallout from the Covid-19 pandemic, industry watchers said.

But some industry watchers are concerned about NPS’ focus on stable yield combined with the elimination of the league system because this could mean decreasing opportunities for smaller private equity firms to raise funds.

“The selection results were not surprising. NPS appears to have made a safe choice by choosing bigger firms amid concerns over the Covid-19 pandemic,” an industry insider said. “I have no objection to managers with a strong track record being selected, but it’s also true that it is difficult for smaller firms to compete with their bigger rivals to win a mandate.”

Less opportunities resulting from the change to NPS’ selection system could be a blow particularly to mid-sized private equity firms that have a relatively strong track record, because winning a mandate from the NPS has been regarded as an achievement that raises those firms’ reputation in the industry. (Reporting by Hee-yeon Han)