Hyundai Marine & Fire Insurance and Fubon Hyundai Life favor direct lending among the broader spectrum of private credit investments, as the strategy can help deliver the best risk-adjusted returns in an uncertain environment.
“Investors in Korea really like direct loans, especially investments [through] senior secure notes. They want to get leadership positions in the capital structure, low volatility, the expectation of periodic cash coupons, ”said Oh Inn-Chul, senior manager of Hyundai Marine & Fire Insurance, which has $ 31.5 billion. dollars in assets under management.
Oh Inn-Chul, Hyundai
Marine and fire insurance
The preference for this relatively “stable and boring” strategy was mainly due to the strict investment regulations that insurers and banks must adhere to, Mr Oh said, while participating in a panel focusing on private debt in AsianInvestorof World Alternatives Week: Online Event in Korea Last week.
Pension funds and credit unions have relatively less stringent regulations and can therefore target higher returns through riskier types of private credit investment, he added.
The demand for private credit financing has increased, and now is the optimal time to add this strategy to improve portfolio diversification, he added.
Wan Shun-Park, deputy managing director of Fubon Hyundai Life Insurance, who spoke on the same panel, offered similar views.
“Direct loans will be the main goal of Korean insurance companies in the future [among the different types of private debt], “he said. Fubon Hyundai Life has $ 14.5 billion in assets under management (AUM).
Many General Partners (GPs) have raised significant capital from Korean insurance companies, providing this type of structure, he said. The return on investment of direct loans varies from region to region. Park said he expects a 6.5% return for the European market and 8% for the US market this year.
“Private debt has always given investors access to higher returns coupled with lower risk compared to high yield bonds or heavily syndicated leveraged loans,” noted a report published by Mercer last month. The 10-year yield on US senior direct loans is 8.7%.
According to the report, the overall private credit market was worth $ 848 billion in the first quarter of 2020. It has more than doubled in size in the past seven years as banks face a regulatory crackdown of their lending activities after the global financial crisis, but travel restrictions amid the pandemic slowed fundraising activities in 2020.
NON-PREFERRED MEZZANINE
Many sectors in South Korean insurers favor direct lending, online survey of participants AsianInvestor The webinar revealed that subordinate capital and mezzanine finance were more popular options. This is followed by senior debt and direct loans. Distressed debts, special situations and specialized financing were the least appreciated.
Oh and Wan explained why other riskier forms of private lending strategies don’t appeal to them.
Wan Shun-Park, Fubon
Hyundai life insurance
“I’m not [currently] considering the mezzanine or special situation strategies. The main reason we invest in the direct lending and senior note business is to generate stable cash flow as an insurance company, ”said Wan.
“If we see a clear sign of a bull market again, then we will consider the mezzanine strategy, but for now, at least for this year, we are not considering the mezzanine strategy.
“A pretty similar point of view that I have… we always want to invest more capital on the mezzanine side, but we have to consider the risks,” Oh agreed.
Greg Racz, president and co-founder of MGG Investment Group, who was also in the same discussion, echoed their opinion.
“The problem with mezzanine financing is, at least in the United States, that investors are not paid enough for the level of risk they take on,” he said.
Mezzanine loans are a hybrid of debt and equity financing that give lenders, or investors, the right to convert debt into an equity stake in the business in the event of default. Although returns are generally higher than direct loans, periodic coupon payments are less certain.
NOT ASIA
Speakers believe private debt investments will continue to be popular among South Korean asset owners for years to come.
Greg Racz,
MCG Investment Group
The investment environment will remain very favorable for private investment in debt as banks continue to withdraw from the loan market. The secondary market will remain volatile in 2021, Wan said. Private debt is not subject to the same mark-to-market pressures and volatility as negotiable credit markets.
Oh and Wan said they prefer to invest overseas to gain such exposure, but they are region-selective.
“We will continue to focus on developed countries, North America and Europe [for private credit investments], Wan said. He said the insurer was in the “early stages of the learning curve” for investing in developing countries.
“I fully understand that several countries in Southeast Asia have shown resilient economic growth even during the pandemic situation. But still, it is also true that there is a lack of confidence in developing countries, ”he said.
Oh said investors are generally unwilling to participate in the Asian private credit market despite its continued development. The market is immature, lacks a track record and the uncertainties of current issuers are still quite high, he said. South Korean investors don’t want to be overly exposed to Asian private credit, he said.
