Will Korea’s NPS be the next CPPIB?

The National Pension Service of South Korea, with $471 billion in assets under management, looks up to its Canadian and Dutch counterparts and is seeking a more active role in infrastructure investment.

“Pension funds from Canada and the Netherlands have been building in-house capabilities for investment. They are now competing with GPs. I think that in the long term, NPS should go in that direction, too,” said Sang-Hyun Yoo, head of global alternative investment, at a recent event in Seoul, adding that NPS will no longer be satisfied with just being a passive investor in funds.

NPS, its pension peers and Korean insurance companies are not newbies in the infrastructure space. Korean investors have a “legacy” of investing in infrastructure which goes back to the 1990s, according to Niklas Amundsson, managing director of Monument Group. They had an initial focus on the domestic market, helping the country build its infrastructure, before starting to look at overseas markets a few years ago, he said.

Kerry Ching, managing director at AMP Capital, shared a similar view, describing this evolution as the “smooth education” of Korean investors, gaining familiarity with the asset class and going beyond their home market. She sees investors from Korea and its North Asian neighbours having a strong interest in co-investments, despite being relatively new to overseas infrastructure markets.

Major Korean institutional investors, including NPS, said they would increase their offshore infrastructure allocations in 2017, and a majority of them saw the US and renewable energy as the most attractive region and sector respectively for infrastructure investment, according to an October survey of 20 chief investment officers of Korean institutions by The Korea Economic Daily.

While most of the investors surveyed favoured senior loans, NPS stood out with its preference for equity investments. In particular, it is interested in assets and companies in the utilities and transport sectors in Europe and Australia. NPS has already made good on that interest this year with a €250 million commitment to Macquarie's latest European vehicle. It also acquired a 15 percent stake in the $7.4 billion, 50-year lease of Port of Melbourne, investing alongside GIP, China Investment Corporation and QIC, among others.

NPS is not stopping there, though, and is now in the process of recruiting new members for its alternatives teams. Specifically, it has been looking for infrastructure portfolio managers at senior associate to vice president level, to be based in its three overseas offices in Singapore, New York and London.

But while NPS is beefing up its in-house investment capabilities, the Canadian/Dutch pension model is not an easy one to follow. Some market insiders point to resource constraints as a big challenge even for the massive NPS – not to mention for smaller Korean pensions and insurers looking to set up teams to invest directly in infrastructure.

NPS had committed 11.7 trillion won ($9.92 billion; €9.34 billion) to infrastructure as of this June, which, while not quite as large, compares favourably to some of the infrastructure portfolios built up by the big Canadian pension funds. It remains to be seen whether the next stage of that portfolio growth will come from overseas direct investments. In the near term, though, managers on the lookout for big co-investment cheques or chunky separate accounts could be in for a treat.