South Korea’s Yellow Umbrella, the mutual aid association for small and mid-sized business owners under Korea Federation of Small and Medium-sized Businesses (KBIZ), is increasing exposure to investments in debt for financing domestic corporations and acquisitions, as the COVID-19 outbreak has resulted in reduced investment opportunities in other alternative assets.
Yellow Umbrella aims to allocate 17.8 percent of its total assets under management, or 2.56 trillion won, to alternative assets in 2020. The amount – which includes 900 billion won new investments earmarked this year – represents a 58.5 percent increase compared to 2019.
Yellow Umbrella originally planned to invest in domestic and foreign alternatives with a focus on private debt and real estate. But, in the first three months of 2020, the association saw its alternative investments are heavily concentrated in debt for domestic corporations. During this period, the asset owner has completed investments equal to 35 percent of its total planned investment in this asset class for the year, exceeding the initial goal of 25 percent.
This is due to reduced investment opportunities in real estate and foreign alternatives in the wake of the COVID-19 outbreak. “In the first quarter, Yellow Umbrella’s investment portfolio was largely focused on debt for domestic corporations, including acquisition financing and refinancing,” an industry insider said. “That was because investment opportunities in foreign alternative assets were hard to come by and real estate transactions also declined significantly due to the fallout of COVID-19.”
“The situation is seemingly not different for other domestic institutional investors,” the industry insider noted. “[Yellow Umbrella] is focusing on the management of alternative assets in which it previously invested at the same time to make sure it can meet the return target,” he added. Yellow Umbrella’s return objective for the alternative investment category is 4.49 percent.
In the second quarter, Yellow Umbrella is expected to maintain an investment strategy similar to that in the first quarter. It is currently said to be reviewing whether to participate in a sell-down process to finance a real estate and renewable energy developer.
“Alternative investment opportunities currently available are mostly derived from M&A deals in the domestic market,” a pension fund official said. “We expect our investment portfolio in the second quarter to be much like that of the first quarter, and will likely continue to take a conservative approach in making investment decisions in the second half of the year.”
Yellow Umbrella has beefed up its alternative investment in recent years. In 2017, its investment in alternatives increased 145 percent from roughly 200 billion won in 2016 and has since grown by 40 to 60 percent each year, with the amount increasing nearly tenfold just in four years. Yellow Umbrella appears to speed up its effort to expand exposure to alternative assets after it implemented organizational changes last year to strengthen its asset management unit.
The share of alternative investments in the association’s total assets under management has also increased significantly, being the second largest behind bonds which account for 63.5 percent of total assets. This year marks the first time that the share of stocks in Yellow Umbrella’s assets dropped from the second place after bonds. (By reporter Kim Byung-yoon)