Cash rich Korean Institutional Investors turning to overseas Private Equity to boost their returns ZAINAB OUMERYEM KOREAN INVESTORS HUNGRY FOR OVERSEAS INVESTMENTS

 EXECUTIVE SUMMARY  SOUTH KOREAN INVESTORS FAST GROWING ASSETS  ALLOCATIONS TO ALTERNATIVES OVERSEAS LIKELY TO EXPAND  SOUTH KOREA LARGEST INVESTORS ON THE MOVE  CONCLUSION  BIBLIOGRAPHY CONTENT

The Private Equity funds have raised $311bn in Capital worldwide during the three first quarters of 2013, a record amount since By allocating more Capital to Private Equity funds, institutional investors or Limited Partners have shown more confidence toward this investment strategy. The other side of the picture is that competition to raise new funds is much tougher. General Partners, particularly in Europe, are increasing their exposure to Non-Domestic investors. Some cash rich investors, though, are seeking opportunities outside their traditional markets. South Korea, an often underestimated country, has seen its institutional investors assets increase dramatically in the past years and reach the point where the domestic markets became too small for them to invest in. Among those, the Korea National Pension System, the largest Institutional investor of the country, will triple its assets to reach $900bn by Korean Institutional Investors will likely increase their allocations to Alternative strategies overseas as it appears to be a good tradeoff between insuring higher returns, reducing the risk through diversification while avoiding to create an asset bubble in the domestic markets. International Asset Management firms like Blackrock, Wellington Management and American Century Investments, have already started to add Korea Focused institutional executives and sales teams in the past year. Now, Private Equity Firms and more generally, Alternative focused firms, are likely to follow the pace. Those who will be the first to adapt their strategies in order to better serve Korean investors will benefit from the long-term increasing funds looking to be invested. EXECUTIVE SUMMARY Korea’s large Institutional Investors hold fast growing assets and are likely to invest in Alternative strategies overseas in the coming years

Projection of Pension Assets of Korea National Pension Fund (NPS) *Source : NPF Actuarial Projection Report ( ) (2008, NPS Research Institute) Korean Pension Assets to peak  South Korea has experienced a proliferation of mutual funds, pension funds and insurance firms during the last decades  The Pension assets started an ascendant curve and are expected to peak in the next five years and stay at high levels for a decade or more driven by an upward trend of the working population  The National Pension System (NPS), the largest Pension Fund of the country and the fourth in the world is expected to triple its assets by 2020 to reach around $900bn The National Pension System (NPS) In this context, South Korea has seen its institutional investors assets increase dramatically in the past years and reach the point where the domestic markets became too small for them to invest in KOREAN INVESTORS FAST GROWING ASSETS

 Investments in overseas alternatives is likely to increase as it appears to be a good tradeoff between insuring higher returns, reducing the risk though diversification while avoiding to create an asset bubble in the domestic markets *Source : Central Bank of Korea Evolution of Bank of Korea Base Rate  The current level of low interest rates of the country as well as the rest of the world is likely to push pension funds and insurance companies to include more profitable investments instead of highly rated bonds that they have traditionally targeted. Low interest rates Korean Institutional Investors assets are growing sharply. Some of them have started to invest overseas several years ago. The tendency is likely to continue in the coming years, for three main reasons:  The assets under management are increasing dramatically and exceeding the domestic market capabilities Korean Assets to exceed domestic market capabilities  Korean Pension funds are under political and economic pressure to invest overseas to boost their return in order to ensure retirements of a population with one of the longest life expectancy and lowest fertility rates in the OECD countries Korean Pension Funds under political and economic pressure INVESTMENTS IN OVERSEAS ALTERNATIVES LIKELY TO EXPAND

 National Pension Fund has been established in 1988 to secure financial resources to pay back pension benefits for the insured such as Old-age Pension, Survivor Pension, and Disability Pension  Its assets have increased dramatically in the past years and are expected to further grow in the coming years About the National Pension System (NPS) *Source : The National Pension System Evolution of the NPS Assets International Presence  January 1988: Opening of Seoul Office  July 2011: Opening of New York Office  July 2012: Opening of London Office

*Source : Korea Investment Corporation website Investments Overseas to Increase  The South Korean National Pension Fund has announced it will raise its investments overseas from 14% to 20% by 2016  Its assets are expected to triple by 2020 to reach $900bn Domestic fixed income Less than 60% Overseas fixed income Less than 10% Domestic Equity More than 20% Overseas Equity More than 10% Alternatives More than 10% Projected Allocations by 2016 *Source : NPF 2012 Annual Report *Source: National Pension Fund 2012 Annual Report Benchmark for Alternative Assets

*Source : Korea Investment Corporation 2012 Annual Report Evolution of KIC’ Assets Under Management (in $bn) About Korea Investment Corporation (KIC)  Korea Investment Corporation (KIC) signed an investment management agreement with the Bank of Korea and the Ministry of Strategy and Finance in June and October of 2006, and began investing the entrusted assets in November  KIC’s mission is to preserve and enhance sovereign wealth for future generations. Its assets under management have grown significantly to reach $57bn as of 2012 up from $1.1bn in 2006 and $42.9bn in KIC specializes in overseas investments  July 2005: Opening of Seoul Office  July 2010: Opening of New York Office  December 2011: Opening of London Office International Presence

*Source : Korea Investment Corporation press release Private Equity 40% $2.0bn- $4.0bn Hedge Funds 30% 1.5bn – $3.0bn Real Estate 30% $1.5bn – $3.0bn Total $5bn - $10bn Projected Allocations by Asset Class  KIC announced last August it will increase holdings of Alternative strategies to 20% of its portfolio by 2016 up from 6.1% at the end of 2012 equivalent to $5bn to $10bn new investments  According to its Chief Investment Officer, the investments would be spread equally between the class of assets. 40% of the announced amount is expected to be invested in Private Equity, equivalent to $2bn to $4bn in total Allocations To Alternatives overseas to increase *Source: Korea Investment Corporation 2012 Annual Report Benchmark for Alternative Assets

CONCLUSION Korea’s Institutional Investors hold fast growing assets that they need to invest. Korean Pension Funds, in particular, have seen their assets increase dramatically in the past years. These assets are expected to peak in the coming five years and stay at high levels for a decade or more, sustained by an upward trend of the working population. The rapid aging population combined with the current low levels of interest rates are pushing Korean Pensions Services and Mutual Funds to take risks and seek better returns. Other large institutional investors experience the same challenge. All have in common their growing interest for Alternative strategies, among which Private Equity overseas. The largest institutional investors of the country have already included more allocations to Alternatives overseas in their investments strategies. Among others, Korea’s largest institutional investor, the National Pension Fund (NPS), will raise its investments overseas from 14% to 20% by 2016 while the sovereign wealth fund of the country, the Korea Investment Corporation (KIC), will invest between $5bn and $10bn in overseas Alternatives by More and more international Asset Management firms are turning to Korea Institutional Investors to raise funds. The tendency is likely to continue among Alternatives focused firms in the coming years.

Zainab Oumeryem ESCP Europe

“Korea's NPS to boost alternatives exposure” Asian Venture Capital Journal, 17 June 2013 “Firms bulking up sales staff to win won in S. Korea” Pensions & Investments Research center, April 1st, 2013 The National Fund Service Management Report – 2012, 2011 & 2010 The Korean Investment Corporation Annual Report – 2012, 2011 & 2010 “Korea state fund to spend up to $10 billion on alternatives”, Bloomberg, August 9th 2013 “Private Equity Global Report 2013” Bain & Company “Global Alternatives Report 2013” Preqin “South Korean pension to expand its foray into international assets”, the Financial Times, October 21st 2012 “Mutual funds make a hit in South Korea”, April 17th 2008, New York Times “S.Korea KIC to boost private market investments”, August 24th 2010, Reuters “Korea’s major public funds are marching in”, May 31st 2012, Investments & Pensions Asia “Private Equity Eye – South Korea”, November 2012, SVG Advisors “S.Korea state pension fund to create foreign-currency account”, June 24th 2013, Reuters BIBLIOGRAPHY