Fund profile: South Korea

$2.25 billion heading for alternative investments

The $25 billion Korea Investment Corp., Seoul, is preparing to invest approximately $2.25 billion in private equity, real estate and hedge funds, the KIC's first move into alternative investments, said Scott E. Kalb, chief investment officer.

Private equity strategies will include LBO, mezzanine, distressed, growth capital and venture capital, according to the fund's 2008 annual report.

Although KIC officials have been planning the moves for more than a year, 2008 “wasn't the right time” to start making investments, Mr. Kalb said. “Last year was not an alpha year; it was a capital preservation year.”

Created in 2005, the KIC's mission is to enhance the country's wealth and to incubate development of Korea's financial services industry. Funding for the move into alternatives will come from a fresh $5 billion contribution expected from the government this year.

Another approximately $1.25 billion from the contribution is expected to be earmarked for strategic investments, where KIC will take direct ownership stakes in companies. At the end of 2008, strategic investments made up approximately 5% of total assets. For example, in 2008, the fund invested $2 billion in Merrill Lynch & Co.'s preferred stock, although the company later was acquired by Bank of America Corp.

As of Dec. 31, the fund's asset allocation was: 31.4% global government bonds; 28.3% stocks; 16.7% asset-backed securities; 12.9% corporate bonds; 7.4% agency bonds; and 3.3% cash and derivatives.

Although 65% of the KIC's assets were originally run by outside money managers, the fund gradually brought assets in-house; internal management accounted for about half of total assets as of Dec. 31, Mr. Kalb said. The fund this year will raise the proportion run internally to 65% or more, he said. The KIC passively manages global equities and global bonds in-house, leaving external managers to focus on specialized investments in which the internal team does not have “a particular edge.”

Fund officials are looking to work on joint investment opportunities with other sovereign wealth funds — including the A$65 billion ($51.5 billion) QIC Ltd. (formerly the Queensland Investment Corp.), Brisbane, Australia, and the $23 billion Khazanah Nasional Berhad, Kuala Lumpur, Malaysia — and pension funds and endowments worldwide, Mr. Kalb said. He didn't elaborate on the plans.

But he noted sovereign wealth funds are “not really competitive” with each other. “We're all really different,” he said. “We don't get paid relative to our performance to other sovereigns. In fact, we think that there are good relationships and good skills for cooperation.”

Mr. Kalb said relationships are important when selecting managers, especially for alternative investments that have longer lockups. “You're getting into bed together and you'd better make sure you've got a perfect relationship,” he said. — Drew Carter