NPS’ $600 mn RFP for local PE/VC funds receives tepid response

National Pension Service’s (NPS) recent invitation for investment proposals to domestic private equity and venture capital funds, which amounts to 650 billion won ($577 million), has met with a lukewarm response from fund houses, amid concerns about the $500 billion pension scheme’s losses of top talents early this year.

Longer travel time to the NPS’ head office from Seoul, the capital of South Korea, after its relocation to a provincial city in February and a high hurdle rate for performance fees were attributed to the 2:1 competition rate for its new mandates, down from the 4:1 of the past two to three years, according to investment banking sources on Oct. 15.

The world’s third-largest pension fund announced a request for proposals on Aug. 31 to select three domestic mid-cap PE funds and six VC funds.

It plans to allocate around 450 billion won in aggregate to three PE firms and an additional 200 billion won to six VC firms, according to the RFP.

By the deadline of Sept. 28, only six firms had applied for the PE mandates, and 13 to 14 firms were believed to have submitted proposals for VC funds.

NPS has been in an unprecedented leadership vacuum since ex-Chief Investment Officer Myoun-Wook Kang stepped down in July.

NPS also suffered outflows of key in-house managers before moving to Jeonju, a three-hour drive from Seoul. The welfare ministry overseeing the NPS is still in the selection process for the pension fund’s new CEO.

Further, NPS’ hurdle rate of 8% deterred outside fund houses. NPS pays performance fees of up to 20% of the returns, only if the fund’s annual IRR exceeds the hurdle rate.

“Even (state-run) Korea Development Bank (KDB) lowered the hurdle rate for PEFs to 7%, and increased management fees,” said one of the sources. “Unlike the policy institution Korea Venture Investment Corp. and KDB, NPS is not reacting flexibly to the market situation, wary of the government audit agency and parliament.”

A drop in visits to the NPS head office by global asset managers may also indicate a muted interest in NPS.

The average number of meetings with foreign investors was down to 88 per month between March and August, 2017, compared with 164.7 and 148 in the first and second half of last year, NPS data provided to a Korean lawmaker shows.

“A trip to NPS in Jeonju takes a whole day, so these days we just drop by Korea Investment Corporation in Seoul and head out to China or Japan,” a global asset management house source told the Korean Investors.

By comparison, a similar RFP by Korean Teachers’ Credit Union to award 550 billion won mandates to eight local PE and VC fund houses has attracted 28 bidding firms by the Oct. 13 deadline, according to the Maeil Business Newspaper.

For performance fees, fund houses were allowed to choose between up to 20% if the IRR exceeds 8%, or up to 30% if the IRR tops 10%, and up to 20% if the IRR comes in between 7% and 15%, or up to 30% if the IRR is over 15%.

By Chang Jae Yoo and Hugh YH Jeong

yoocool@hankyung.com