Korean institutionals in overseas investment drive

The South Korean government will join hands with Korea Investment Corporation to launch an infrastructure fund, targeting overseas markets.

Increased appetite for infrastructure and a scarcity of domestic opportunities is driving a growing number of Korean investors to overseas markets, according to industry insiders.

Mic Kang, a vice president and senior analyst at Moody’s, told Infrastructure Investor that institutions are considering partnerships with domestic construction companies looking to participate in foreign infrastructure projects.

The move was partly driven, he explained, by a sparse deal pipeline in their local market.

“Considering that Korea’s key infrastructure sectors are dominated by state-owned companies, which are unlikely to be privatised in the near future, we see limited growth potential for domestic institutional investors within the domestic market.”

Kang also observed that state-backed infrastructure firms were unlikely to expand their overseas investments in an aggressive fashion, as they try to shore up their balance sheets under the mid- to long-term financial management guidelines issued by the Korean government.

“We therefore see an increasing chance that domestic companies participating in overseas projects will partner with institutional investors to share both the funding burden and the risks associated with overseas projects, given institutional investors’ growing interest in infrastructure investment and the Korean government’s aim to boost exports.”

Korea’s Ministry of Land, Infrastructure and Transport last week announced the creation of a $2 billion fund to help local construction firms expand into foreign markets.

According to local news agency Yonhap, the Korea Overseas Infrastructure Fund (KOIF) is expected to provide the initial funding needed for builders to engage in developing projects that require a sizable injection of money upfront.

It is understood that the government and Korea Investment Corporation (KIC), the country's $86 billion sovereign wealth fund, will jointly operate the vehicle, with the latter contributing some of its foreign reserve holdings. KIC declined to comment on the matter.

Choi Kyung-hwan, Korea’s Finance Minister, believes there is a “pressing need” for local builders to climb the value-added chain if they want to continue growing. Citing the launch of the China-led Asian Infrastructure Investment Bank (AIIB), Choi said there will be more opportunities for Korean construction companies to take part in large-scale projects in Asia.

KOIF will come in handy at a time when the oil slump is causing many countries in the Middle East to switch from placing orders to asking developers to come up with funds to launch projects, according to the Ministry, which sees the region as the largest market for local builders.

The government expects to channel up to $20 billion into overseas projects from other financial institutions thanks to the seed capital provided by KOIF. The fund will target returns of about 6 percent on its investments, according to the Ministry.

It is reported that the first project to receive money from KOIF could be a $1 billion hydroelectric power station in Georgia to be built by Korea Hydro & Nuclear Power, a subsidiary of Korea Electric Power Corporation (KEPCO). KEPCO controls 93 percent of Korea’s power supply.

Other potential recipients include power plant projects in Turkey, Poland, as well as transportation infrastructure in Indonesia and Vietnam.