“The National Pension Service is for more than 20 million people in South Korea. Everybody is watching the investment managers at NPS; even minor mistakes are not tolerated.”
Young Goo Kang, better known in private real estate’s institutional circles as Andie Kang, speaks from experience, with a decade of working at the world’s third largest pension fund under his belt.
Much of that time was spent leading and growing the Korean institution’s international real estate portfolio from practically nothing to almost $11 billion by the time he left in 2015. During that time, he turned overseas real estate into the best-performing asset class in NPS’s portfolio. As a consequence, his peers have lavished him with praise: “a visionary investor,” one called him when speaking to PERE.
It has been three years since Kang decided to reverse roles. From a capital allocator at a sought-after investor like NPS, Kang now raises institutional capital on behalf of IGIS Asset Management, Korea’s biggest asset manager, with $21 billion in gross assets under management.
This is the story of how Kang helped put NPS on the global map, pushing boundaries along the way, and his own professional journey from public to private employer. As well as Kang, PERE heard from senior executives he has worked with, including Scott Kim, his replacement as NPS’s global head of real estate.
“It was not easy being a successor to Andie because he was a long-time veteran at NPS. Our global real estate AUM is over $30 billion, and Andie built it from scratch. If I had not tried my best, there was no way I would have been able to go anywhere near what he had done,” says Kim, who officially replaced Kang in 2015. “The performance we are enjoying now comes from how he designed the portfolio and the progress he made during his tenure.”
“The performance we are enjoying now comes from how he designed the portfolio and the progress he made during his tenure”
– Scott Kim
This near-reverence is evident from everyone PERE spoke to. One manager receiving NPS backing in late 2000s went so far as to call Kang the most inspirational industry figure that person has ever worked with.
“I am highly impressed by his view of the world,” says Goodwin Gaw, chairman of the Hong Kong-headquartered private equity real estate firm Gaw Capital, who has worked with Kang on several transactions. “He has an acute sense of the global real estate market and is much ahead of the curve.”
The planning years
When Kang joined NPS as an investment manager in 2004, the investor had made its first domestic real estate acquisition – a class A office in the Gangnam district of Seoul – for less than $100 million. Like many of its Korean peers, more than 90 percent of NPS’s portfolio at the time consisted of domestic fixed-income investments. Commercial real estate was not yet regarded as an attractive proposition for an institutional portfolio in the country.
Kang spent his first two years planning an overseas debut – preparing investment guidelines, consulting advisors and finding potential managers. Given the exposure to office assets locally, NPS’s senior management was familiar with the sector, making offices the natural first choice of investment for Kang, one manager who worked with NPS at the time says.
Like so many institutions, he opted for the indirect route. Kang says: “Including NPS, most public-sector investors suffer because they have limited internal resources, investment professionals and budget for due diligence. At the time, we had limited experience and knowledge about overseas markets. Domestic investment managers usually supported all sorts of procedures, so the key decision makers did not understand why we needed to hire more specialist advisors to do ‘DD’ on specific property sectors [overseas]. That is why I decided to set up more funds and separate accounts.”
The first of these mandates was won by London’s Rockspring Property Investment Managers, the pan-European London-based manager now merged with Augsburg-based Patrizia Immobilien, in 2007. NPS invested less than €50 million in the firm’s fourth TransEuropean fund.
“I couldn’t go to any industry conference, without people coming up to me and saying how fantastic it was to see a visionary investor in the market, who is willing to act when everyone else is frozen”
– Kathryn Dixon
Kathryn Dixon, who was then the firm’s global head of investor relations, says no one had ever heard of NPS at the time, since it was just getting active in international real estate.
“Andie, and NPS, was our first Asian client. The relationship grew to the extent that by the time we merged with Patrizia, NPS had become Rockspring’s largest client globally. Even though Andie is not there anymore, his legacy lives on in the team there.”
Dixon attributes the success of this partnership to Kang’s investment philosophy. “In those early days, we felt he sincerely gave us his trust and valued our judgement. It was a true partnership model. He treated us with respect and gratitude and in turn he and NPS won our total loyalty. It is human nature to go ‘above and beyond’ for those who treat you well, but at that point, it was certainly a different kind of investor relationship for me.”
Bargain basement buying
In 2006 and 2007, which Kang calls the pilot investment period, NPS made around 15 investments in commingled real estate funds, with check sizes varying from $20 million to $50 million.
Then came the global financial crisis. Kang says the period did not result in NPS incurring significant losses in its overseas real estate portfolio because of its prior conservative investment approach. In fact, 2009 ended up becoming a career-defining year for Kang. He became NPS’s global head of real estate and it was the bold calls he made that year, with the support of his senior management, which not only put the pension into the spotlight, but also earned him the respect of a global real estate investment community that he still enjoys today.
Starting in 2009, NPS decided to make so-called project-based investments in core assets. Rockspring was mandated to hunt for asets in London and two deals were closed within months of each other in 2009. 88 Wood Street was acquired for £183 million ($233 million; €202 million), followed by the purchase of a 50 percent stake in 40 Grosvenor Place.
“I couldn’t go to any industry conference without people coming up to me and saying how fantastic it was to see a visionary investor in the market who is willing to act when everyone else is frozen,” Dixon says.
“Being countercyclical is not unheard of. But when you are in the thick of the storm, having someone come through, quietly and calmly and – in Andie’s kind of thoughtful, unflustered way – just make things happen, was very unusual at the time.”
Later that year, NPS closed the biggest single-asset transaction in London at the time when it acquired HSBC’s landmark European headquarters in Canary Wharf, reportedly for £772.5 million. That was followed the next year with its purchase of Berlin’s Sony Center in partnership with the Houston-based real estate firm Hines, in a deal valued at €570 million. “What I like about NPS is that they have a systematic decision-making procedure. At the time, most institutional investors stopped new investments because they were afraid of continued market correction. But we decided on new investments because we felt it was the right time to buy prime assets and build a core portfolio for NPS. The market price had already gone down by more than 30 to 40 percent compared to the previous peak,” Kang says, describing his thinking at the time.
Kang’s step-by-step approach saw him take on more risk next and start value-add and opportunistic investing. Townsend Group, now part of Aon, was reportedly awarded a $300 million mandate to tap into distressed real estate fund opportunities in the US. “Starting from 2009, we made $1 billion to $2 billion in new investment every year,” Kang says. “In total from 2006 to 2015, we made about 90 investments – 30 project-based investments and 60 fund investments.”
He attributes this success to NPS’s “disciplined and consistent approach” to portfolio construction. For instance, different procedures are applied to different investment strategies. Core investments are typically made through separate accounts while non-core investments are done via commingled funds, club vehicles or joint ventures.
“For higher risk and return strategies, it is much better to rely on the specialties of investment managers and let them construct a portfolio of investments. Then, you can avoid the risk of losing 100 percent in just one specific project,” Kang says. “Whereas, core and core-plus investments are much safer, so you can invest more money in just one asset and hold it for a long time.”
Kang’s bets played out well. From 2010 to 2015, Kang says overseas real estate investments generated more than 10 percent annualized returns, excluding foreign exchange costs. When asked what he would attribute this performance to, Kang – characteristically modest – cites the real estate market and the growing relevance of Asian capital.
“Before 2008, most European and US managers relied on their own domestic clients. When the credit crisis hit the market and US pensions and endowments stopped new investments, these managers could not set up new funds because they did not have any sponsors,” he adds. “But, during that time, Asian investors had plenty of new capital to deploy in the market. That is when [managers] realized the importance of diversity in their client base and started visiting South Korea to raise capital.”
“Integrity and transparency are core parts of working at NPS. But audits were a real pressure”
– Andie Kang
The audit process at NPS is also rigorous. A 2011 OECD working paper by Woochan Kim and Fiona Stewart on its governance-cum-management reform describes this process in detail: “The day-to-day management of NPF is conducted by the Fund Management Center within NPS, under the leadership of its CIO. Internal audit is conducted by the audit department and ex-post performance evaluation is carried out every six months by the National Pension Research Institute, the in-house research institute of NPS, jointly with an outside consultant hired by the Ministry of Health and Welfare…External audit is conducted by three entities: the National Assembly, the Bureau of Audit and Inspection, and MOHW.”Nonetheless, investing close to 2.5 percent of NPS’s total funds in real estate required Kang to confront many hurdles, internally and otherwise. The pension is a mandatory scheme, which means every South Korean citizen has a stake in how the pension capital is ultimately invested.
PERE understands that NPS managers are not government employees per se but are employed on a performance-linked contract basis. Such an arrangement was made so NPS could employ qualified investment specialists on a higher wage scale than that of typical public officials. Subsequently, the scrutiny on returns is intense as the more expensive arrangement needs constant justification.
“Usually, it is a three-year contract. If your performance is poor for more than three consecutive years, your contract can be terminated. If you’ve performed well, the contract can be extended to, say, five years,” says one senior Korean executive.
Some of Kang’s decisions over the years indicate the need to book strong performances. One that, on the surface, confounded many people was the decision to sell the HSBC building to Qatar Investment Authority in 2014 in a £1-billion plus deal. But in doing so, Kang proved to both his domestic skeptics, and the wider market, that even the biggest institutions will trade at good market timing – even though the common objective of the market’s largest investors is to buy and hold for long-dated income purposes.
Not that Kang initially expected to be at the pension by that point. “When I first joined NPS in 2004, I had planned to work for about three years and go back to the private market. But it took much longer than I anticipated because I had no one to take on the role.” Kang finally decided to take the plunge in 2014 and appointed Kim as his successor, eventually going on to join IGIS Asset Management as co-chief executive and head of global real estate investment in 2015.
Under Kim’s tenure, NPS so far has made two successful exits of iconic assets Kang had acquired. Kang and Kim were both part of the selling process of the HSBC building in London in 2014, and more recently, in October 2017, NPS sold the Sony Center in Berlin reportedly for €1.1 billion to Oxford Properties – crystalizing another flattering margin. Kim says Kang helped him prepare for the role for about a year. “NPS is a very different organization from the private companies like GE Real Estate and Credit Suisse, where I worked before. Andie let me get used to the public sector by giving me a lot of discretion. He taught me how to lead the team by delegating a lot of responsibilities, including hiring people, to me. Instead of directing, he let me drive the car.”
The overseas real estate investing team at NPS continues to follow Kang’s investment philosophy of focusing on core assets that generate long-term stability and returns. However, Kim realizes his job has a different complexion to his predecessors given the wider market environment.
“I am in a different position now, compared to Andie when he took over the leadership in 2006-07,” agrees Kim. “I don’t have luxury of sitting on the sidelines and not investing, as the market is late in the cycle. My job is to find opportunities and deploy the capital in the right places, while at the same time, prepare for the next downturn. What I am doing is trying to make the portfolio a bit more defensive.”
“The performance we are enjoying now comes from how he designed the portfolio and the progress he made during his tenure”
– Scott Kim
Public to private
Since 2015, Kang has continued his vision of growing Korean capital’s prominence globally, albeit from the private side. With co-chief executive Joseph Lee, Kang has helped IGIS Asset Management, the Seoul-headquartered real estate firm founded in 2010, become the biggest asset manager in Korea, both in terms of AUM and the total capital raised.
IGIS has been part of some trailblazing initiatives. Last October, the firm raised 400 billion won ($360 million; €310 million) for South Korea’s first-ever discretionary blind-pool commingled fund, paving the way for a fund-driven business model in a country where real estate investments were mostly done on a deal-by-deal basis.
The firm has also actively invested across the risk spectrum. Last year, IGIS teamed up with NPS and New York-based private equity giant KKR to acquire a mixed-use, under-construction site in Seoul for $730 million in equity. IGIS led the largest property deal in 2017, when it acquired Signature Tower in the city for $635 million on behalf of a core mandate given by NPS and the Ministry of Employment and Labour Fund.
Overseas real estate, which Kang heads up, forms about a quarter of IGIS’s total gross AUM, and the firm has plans of expanding its international foothold. It will imminently be opening a New York office and has also appointed a consulting firm to assess potential locations in Europe.
Kang’s decision to join IGIS was influenced by the untapped potential in Korea’s relatively young asset management industry. Kang says it was mostly dominated by equity and fixed income managers, so he wanted to leverage the opportunity for domestic managers like IGIS to help investors execute cross-border investments. “Most Korean managers do not have core functions like property management. IGIS is the only fully integrated company with fund management, portfolio management, asset management and property management functions. I believe the role of investment managers will become quite important, especially in finding creative ways to secure tenants given the changing use of space,” he adds.
Kang seems at ease in his current role, so it would be hard to have guessed IGIS had to wait for about two years before he made his final decision to join. But hiring him has, predictably, been worth it. Undeniably, a key asset is his insight into the mind of NPS. NPS is a major investor with IGIS, having invested around $2 billion in eight years across different domestic strategies, although this relationship extends further than when Kang came on board.
This does raise potential conflict of interest issues, but the IGIS position is those were all tackled. When Kang joined IGIS, there was a one-year trading restriction put between the two firms as a compliance measure, for example. All NPS investments with IGIS so far have only been domestically, while Kang handles overseas investments. “I am really concerned about the conflict of interest issue, which is why I never participate in any presentations,” says Kang.
The benefits of his decade-long association with the pension fund are more subtle and strategic. Lee says when he makes corporate introductions, along with the firm’s track record, seeing someone like Andie being part of the company adds credibility and makes clients more comfortable in working with them. Another ‘soft’ benefit comes in pitching deals to NPS in the proposal stage, or something as minor as word selection in documents, says Kyung W Paik, managing director at IGIS.
“I know what they want and what keeps them up at night,” agrees Kang. And this knowledge also helps Kang in challenging some misconceptions people have about NPS and other public institutions.
“Most investment managers think internal managers at NPS are demanding and request a lot of unnecessary procedures. That is not true. A lot of government entities request NPS managers to maintain transparency and integrity,” he explains. “What large LPs like NPS, Korea Investment Corporation and Korea Teachers’ Credit Union are doing is good for the overall Korean alternative investment industry because we have a short history. Alternative investment only started after the Asian financial crisis, so many newcomers do not have defined procedures yet.”
Kang may not be dealing with as much public scrutiny in his latest role, but trust and transparency remain the bedrock of his investment philosophy. And that matters greatly in an industry that thrives on network and relationships.
“Most Korean LPs are under pressure. They do not get compensated by stellar performance or by having double-digit internal rates of return. But if they make small mistakes or lose money in deals, they can get penalized,” he says. “That is why I tell all my managers to not think about making a huge performance or fees. You just shouldn’t lose money.”
The career-defining deal
HSBC’s tower in London made the headlines, both when it was bought and sold
In November 2009, right in the thick of the global financial crisis, NPS agreed to buy HSBC’s London headquarters for $1.3 billion in a sale and leaseback deal. It was a landmark deal during a landmark moment in history. But while many investors would think of this trophy asset as a long-term hold, Kang and his successor Kim decided to trade the asset just four years later. In December 2014, NPS sold the Canary Wharf building to Qatar Investment Authority for £1.1 billion, ending up with around $800 million in investment gains and dividends.
This profit was nevertheless hard-earned. People familiar with the situation describe to PERE the internal challenges Kang faced in convincing NPS’s senior management to agree to selling the asset. It was understood to be generating a 6 percent dividend yield at the time and many believed holding such a prime asset for several more years was the right choice. Kang’s call was based on analyzing the ‘fundamentals’ of the asset. When the building was acquired, HSBC had around 17.5 years left as the tenant and was paying £46 million a year in rent. According to one person, the financial institution was paying around 30-40 percent higher than market rent. So even though around 13 years were still left in HSBC’s lease when the building was sold, the question running in Kang’s mind was what would happen once HSBC decided to leave. If HSBC agreed to stay on once that current lease expired, there were chances it might ask for concessions to renew the lease. If it opted out, the question was whether the building could be re-leased with multiple tenants.
Back then, close to 85 percent of the buildings in the Canary Wharf district, the person explains, were single-tenant buildings, making the forecast for a multi-tenancy unlikely: “Below 10 years is a ticking time bomb for an asset of that size with a single tenant. Ultimately it was a wise decision to dispose the asset and manage NPS’s risk exposure and take profits along the way.”