The National Pension Service (NPS) has started selecting companies to manage its investment mandates based on performance assessments. This will allow free competition among private equity (PE) investment companies and venture capitals (VCs) focusing on alternative investments.  

South Korea’s state fund waived the conventional way of selecting management companies by categories like large-cap and mid-cap funds and instead decided to assign the mandates after reviewing the past track records and future investment plans submitted by the companies, sources said.

This change of selection process was made based on the premise that it has become easier to distinguish between high-and-low performing PEs, as the domestic PE market has now entered the maturity stage since it was created more than 15 years ago.

It’s a good opportunity for small PEs which can effectively demonstrate their solid performance to be selected as management companies. However, famous large PEs may not be able to get the chance to win the mandate from the NPS if they fail to pitch their track records well.

Of the total 1.95 trillion won ($1.58 billion) the NPS had earmarked for regular investments this year, 950 billion won will be committed to companies that pass performance assessments. Eight hundred billion won and 150 billion won will be allocated to PEs and VCs respectively.

The NPS has recently closed the application of the proposal in the PE section and begun to work on document review. It is going to select VCs in the second half of this year.

The competition rate in the PE section was around three to one, higher than in previous years when the rate was slightly above two to one. The NPS is going to start due diligence and presentation review among PEs next month. 

If the management companies selected by the NPS show excellent performance well above market expectations, other institutions like mutual aid associations are expected to follow suit given the NPS is the oldest and largest fund in Korea by assets under management.

The NPS has 714.3 trillion won in assets under its management as of the end of February. (Reporting by Hee-heon Han)