Fund management to Korea
Trends and opportunities
Exporting services to the Republic of Korea (ROK, also known as South Korea) remains extremely difficult for foreign firms, even with the advantages of the Korea-Australia Free Trade Agreement (KAFTA). There are many reasons for this, including cultural and regulatory factors as well as market dynamics. But in several sectors—most notably funds management and infrastructure—there are genuine opportunities.
South Korean funds are struggling to deliver yield, and the strength and sophistication of Australia’s funds management capabilities are increasingly recognised in South Korea as a solution. A number of Australian funds have already won mandates in the country, and there is significant potential for further growth in this sector. With major demographic pressure building, South Korea is also considering replicating elements of Australia’s super system – this has the potential to open up substantial opportunities for our super sector in South Korea.
With the lowest birth rate in the Organisation for Economic Co-operation and Development (OECD), South Korea’s rapidly aging population now needs increased financial security from personal investments. New consumer expectations are challenging a traditionally short-term investment mindset, and are putting pressure on banks and funds to deliver higher returns. This in turn is driving greater interest by institutions in higher yield ‘alternative’ products, such as offshore investments and partnerships with foreign firms. Infrastructure and real estate are now two areas of particular interest for many South Korean firms.
The size of the alternative investment opportunity to off-shore countries is substantial. Assets under management of the National Pension Service (NPS)—the third largest pension fund in the world—are projected to grow to A$830 billion by 2020. To help achieve this, the fund will increase its share of alternative investments to over 12 per cent by 2020. Another emerging trend is that of South Korea’s financial institutions becoming main players in offshore investments, together with more co-investment under Corporate Partnership Funds, compared to past investments dominated by Korean industrial corporates.
The Korean Government’s push to develop Seoul as an international financial hub is also contributing to new interest in offshore opportunities, along with a stated aim of creating a more globally competitive industry.
Korean institutional investors are increasingly interested in alternative assets
Growth of pension funds
South Korean pension fund and asset management industry is experiencing a rapid growth of assets under management (AUM) – attributed to changing (and increasingly aging) demographic profile of the country.
The pool of pension funds is projected to increase by two-three fold by 2020, led by National Pension Service with a current AUM of A$600 billion. This is set to grow to A$830 billion by 2020. Samsung Life Insurance, the largest of universal life insurer in the country, has an estimated AUM of over US$190 billion in 2016.
Rising interests in alternative (real) assets
Pension funds are increasingly seeking to invest into non-traditional asset classes (commonly described as ‘real assets’ in South Korea) including commercial real-estate, infrastructure and renewables, due to flattening domestic capital market.
South Korea’s National Pension Service intends to allocate around 10.3 per cent of its entire fund to real asset classes in 2016 – others are expected to follow this trend.
Investment may take a form of equity injection, straight buy-outs, debt and mezzanine financing, but a majority of institutional investors prefers to remain passive – subscribing into established fund of funds with a proven track record.
Asset under management
Asset under Management by major South Korean institutional investors include:
- National Pension Service: A$609.5 billion
- Samsung Life Insurance: A$271.2 billion
- Korea Federation of Community Credit: A$142.4 billion
- Hanhwa Life Insurance: A$119.4 billion
- Korea Post: A$119.0 billion
- Korea Investment Corporation: A$113.1 billion
- Kyobo Life Insurance: A$103.6 billion
- NH Life Insurance: A$68.7 billion
- Allianz /Tongyang Life Insurance: A$47.4 billion
(Source: National Pension Service, Korea Investment Corporation, Korea Life Insurance Association, Korea Federation of Community Credit and Korea Post).
Asset under Management by some second tier South Korean institutional investors include:
- National Agricultural Cooperative Federation: A$107 billion (AI: 10 per cent)
- Korea Teachers’ Credit Union: A$28.5 billion (AI: 19 per cent)
- The Korea Teachers Pension Fund: A$17.8 billion (AI: 6 per cent)
- Government Employees Pension Service: A$6.2 billion
- Military Mutual Aid Association: A$10.2 Billion
- Public Officials Benefit Association: A$10.1 Billion (AI: 25 per cent)
- Construction Workers Mutual Aid Association: A$3.2 Billion (AI: 10 per cent)
(Source: National Agricultural Cooperative Federation, Korea Teachers’ Credit Union, The Korea Teachers Pension Fund, Government Employees Pension Service, Military Mutual Aid Association, Public Officials Benefit Association, Construction Workers Mutual Aid Association).
Opportunities and challenges for Australian firms
These developments represent an opportunity for the Australian financial services sector, which has a reputation for quality in South Korea and is understood to offer a reliable, rule-of-law investment environment with stable growth and returns. Australia’s status as one of the largest and most sophisticated funds markets in Asia is also well known throughout the country. Given limited experience in South Korea in investing in alternative products and the relatively small number of specialised investment professionals, there are also opportunities for Australian financial services firms to help manage investments there. South Korean investors are increasingly hiring offshore asset management companies for their overseas investments. For example, a large proportion of the Korean Investment Corporation’s equities investments were made through commercial fund managers.
Considerations for Australian firms entering the South Korean financial services market
Australian firms are well-placed to bring cutting-edge capabilities in asset management, infrastructure funding, international banking and governance to assist the South Korean financial sector’s push overseas.
However, challenges remain for foreign firms active in the country, including restrictions on local distribution channels, a controlled foreign exchange market and a regulatory environment subject to rapid change. Australian firms contemplating entering this market should consider the following:
- Plan and execute a long-term corporate strategy. Be prepared for short-term volatility and setbacks while focusing on your overall business objectives in South Korea.
- Understand the unique regulatory framework as it applies to your product suite. Financial regulators have concentrated powers and relevant legislation can change quickly. This can cause unexpected challenges for foreign firms.
- Be prepared for a challenging and highly competitive market environment, with local players dominating distribution channels.
- There is no substitute for on-the-ground coverage. Establishing a local presence should be considered to facilitate regular engagement with South Korean investors.
- If establishing a local presence is not feasible, investment in time and travel will be required to establish and nurture key business relationships with partners in South Korea. Choosing the right local business partner will be the key to success.
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