The acquisition by South Korea’s Military Mutual Aid Association of a minority stake in Welcome Break might have seemed a rather trivial deal at first glance.
According to Korean media sources, the $9 billion pension fund paid 40 billion won ($34.6 million; €30.4 million) to financial firm Korea Investment & Securities to acquire around 3 percent of the UK motorway service station operator (a market source confirmed the deal to us, without providing further details).
Investments in core-plus assets are still somewhat new among Korean institutions. In that sense, the deal underlines how Korean investors are exploring new ways to invest in the asset class as they face high valuations for more traditional infrastructure assets.
“Because of current return constraints, more investors will start looking at ‘infra-like’ assets,” the market source told us.
As we reported last week, Korean investment firms are having problems selling down overseas infrastructure assets. Two sources in Korea told Infrastructure Investor that the prospective buyers of these assets have become wary of rising price tags and their current owners’ overly optimistic cashflow assumptions.
“Investors are starting to realise assets can’t deliver the right returns due to high valuations,” one of the sources said.
Among other criticisms, sources spoke of a “very aggressive” market, with competition among Korean financial firms driving up asset prices abroad while underestimating underlying risks.
One of the sources indicated that the mismatch between valuations and risks in the Korean market might have spread across real assets. Our sister publication PERE hinted last week at similar problems in real estate, examining whether the premium locked in by Korean investors for an asset in a non-core European market matched its underlying risks.
To be sure, not everyone agrees with this assessment. One source made clear that Korean investors understood the underlying characteristics of acquired assets, notwithstanding financial firms’ “optimism”.
But the consensus seems to be that Korean investors are becoming more reluctant to purchase certain infrastructure assets from domestic financial firms. A source from a Korean insurance company said: “Attitudes among investors are changing, and they are becoming very selective when it comes to PPPs and merchant power [assets].”
What doesn’t look set to change – despite the lack of opportunities in South Korea – is investor appetite for infrastructure. That’s particularly true in the insurance market, where favourable regulation encourages investment in the asset class.
As a result, some of the country’s biggest insurers are already building up their in-house capabilities and going direct, and thereby seeking to take financial firms out of the equation. Other hefty investors are looking to commit to the multibillion-dollar funds that are being raised by some of the industry’s biggest names.
Still, not all these options are available to smaller investors. Mid-sized pension funds wary of overpriced core infrastructure and looking to capture better returns might start exploring opportunities in less-competitive sectors.
It’s likely, then, that we will start to see other Korean institutions following the Military Mutual Aid Association down the core-plus or ‘infra-like’ path.
If they do, we will soon learn whether discontent with current pricing practices will be limited to traditional infrastructure.
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