Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market
Alternative investments allow for an illiquidity premium, which can help KIC achieve outstanding returns as a long-term investor.
Alternative investments play a critical role in diversifying overall portfolio risk and increasing investment efficiency due to their low correlation with traditional investments. They also allow for an illiquidity premium, helping KIC, as a long-term investor, achieve outstanding returns.
KIC started investing in alternative assets in 2009 with private equity and steadily broadened our investment spectrum to include real estate, infrastructure and hedge funds. The result is a balanced alternative portfolio that can support efficient overall portfolio management through investments diversified by vintage, region and strategy.
To achieve higher returns, we continue to expand our global network of sovereign wealth funds, pension funds and GPs and explore promising investment opportunities, including co-investments. As of the end of December 2021, KIC’s annualized investment return since inception for alternative investments was 8.83%.
Private equity investments, which are illiquid, growth-oriented long-term investments within the alternative asset portfolio, is a strategy that provides a higher return than do other asset groups. KIC established its alternative investment division in 2009 and started investing in private equity funds immediately following the global financial crisis. We began making direct private equity investments in 2010 and co-investments with GPs in 2011, diversifying our portfolio by region and strategy.
In 2021, the global private equity market showed significant traction in both new investments and exits, driven by increased liquidity in a growing alternative investment market, a drop in buyout financing costs due to low interest rates and an increase in valuations due to a boom in public listings.
KIC manages the KIC Venture Growth (KVG) fund to discover promising technology assets amid rapidly changing technological paradigms.
We also seize great opportunities through direct and coinvestments and work to enhance our investment analysis capabilities while strengthening partnerships with leading managers.
Going forward, KIC strives to ensure long-term stable returns by building a diversified portfolio around excellent assets for each region and strategy.
We will also expand investments in private debt, which can generate stable cash flows through loans to blue-chip companies.
Real estate is one of the main alternative asset classes that can help diversify a portfolio. KIC has been making a diverse range of direct, indirect and co-investments in real estate in North America, Europe and Asia since 2010.
In 2021, global real estate transaction volume grew significantly on investor optimism for pandemic recovery following a contraction in 2020 due to Covid-related market uncertainty. With the pandemic accelerating social and economic structural change, sectors including logistics, where structural demand is expected to rise, and life sciences and data centers saw a significant pickup in activity.
Discerning market changes early on, KIC expanded its investments in logistics facilities and data centers. To build a stable portfolio, we are actively seeking investment opportunities in sectors including offices and residential real estate and also considering investing in real estate debt, which is expected to generate stable cash flows amid interest rate hikes.
Infrastructure assets generate long-term, predictable cash flows by providing facilities and services essential to society. Since KIC’s first infrastructure investment in 2010, we have built a diversified portfolio across geographies, including North America, Europe and Asia, and sectors, including renewables, communication and transport.
Countries and companies have committed to net-zero emissions backed by action plans to counter climate change. In line with this, opportunities to invest in the energy transition – in such themes as clean energy and energy efficiency – are growing. We are also seeing strong demand for the high-speed communication networks required for online activities. Also, with the post-pandemic pick-up in business and personal travel, investments in such transportation infrastructure as airports and roads are becoming more attractive.
In 2021, in line with market trends, KIC committed to a dedicated global energy transition fund. We also invested in a North American district energy company, a U.S. waste-toenergy company and a European fiber network company.
With such diversified investments, KIC plans to maintain an infrastructure investment portfolio that can generate stable returns in the mid- to long-term.
As an asset class that pursues absolute returns, hedge funds offer a wide range of investment strategies and techniques. From a risk-return perspective, they have a relatively low correlation with economic cycles, traditional assets and other alternative assets, including private equity and real estate. KIC started investing in hedge funds in 2010. We have gradually developed our portfolio by diversifying investments across multiple hedge fund strategies to achieve stable and longterm returns in a manner complementary to other asset classes.
In 2021, economic recovery expectations combined with concerns around a resurgence of Covid-19 led to increased volatility for traditional assets, with equity markets subjected to factor and sector rotations and fixed-income markets showing heightened yield curve volatility. Still, with a hedge fund portfolio that has a low correlation to traditional assets, KIC secured opportunities to generate stable absolute returns in a rapidly changing market environment.
In 2020, the effectiveness of some strategies, including commodity trading adviser (CTA), declined due to increased market volatility resulting from the pandemic. The gap among hedge fund investment management companies broadened. In response to this polarization, KIC focused on building a foundation to generate stable, long-term returns by reducing the CTA strategy and selecting GPs with custom solution strategies.
We also established a hedge fund joint venture in 2021 with Korea’s National Agricultural Cooperative Federation and National Federation of Fisheries Cooperatives to support the overseas hedge fund investments of domestic finance companies. KIC strives to help develop the domestic finance industry through sharing its hedge-fund investment knowhow.
Going forward, we plan to build a portfolio centered on absolute return strategies that take advantage of arbitrage opportunities in the market, such as equity L/S, event-driven and fixed-income arbitrage strategies, in consideration of rising interest rates, increased market volatility and other changes in the financial environment.