Scott Kim NPS

Korea’s National Pension Service is in a race against the clock. Currently, the third-biggest pension in the world, which provides a mandatory service for the majority of South Korea’s workforce, only pays out to approximately 5 million beneficiaries. At the same time, it collects contributions from about 22 million subscribers. But as Korea’s 51 million-strong population continues to age and that extreme imbalance subsides, the pressure on Jeonju-based NPS to meet its obligations will only heighten.

That is why Scott Hyunsoo Kim, the pension’s head of real estate, has been spending his time thinking of ways for his division to help it meet this future challenge. He and his senior colleagues are charged with finding effective methods to place an equity pile that today measures about 872.5 trillion won ($782 billion; €642.5 billion) making NPS the third-biggest state pension in the world. Under chief investment officer Hyo-Joon Ahn’s leadership, NPS has determined that alternatives, with real estate firmly in the mix, should constitute 15 percent of the portfolio by 2025, up from 10.8 percent as of March.

A 4.2 percent increase in four years sounds reasonable on the face of it. But the demographic predicament of the country means the pension’s coffers are ballooning. Kim is therefore in charge of a slice of an ever-growing pie. NPS had $312 billion of assets only a decade ago. They are forecast to reach $1 trillion in value by the time the target alternatives allocation is due. And the asset base will grow further still, with Kim saying it could peak at $1.8 trillion.

He explains: “With the low birth rate and aging population, right now there are significantly higher subscribers than beneficiaries. But there will come a time when the subscribers reduce dramatically and the beneficiaries increase. And they will live longer. That’s the pressure I have.” He characterizes today’s environment as a “golden time” for NPS to invest capital so it can fund retirees when their number reaches the forecasted peak. “We have to deliver for everyone to make sure they get their pensions when they retire.”

Layer on to this already seismic challenge the test of investing in a market rewired by accelerating trends brought about by the coronavirus pandemic, where certain asset classes have become toxic and others like catnip for institutional capital. NPS is a public sector entity, too, and that brings resource constraints. The real estate team has grown to 33 from around 10 when Kim inherited responsibility for the division in 2015 from the organization’s first real estate head Andie Kang. But they must manage a portfolio extending beyond $26 billion in value, according to PERE’s latest Global Investor 100 ranking, and that must be handled via 48 contracted manager relationships currently.

In Kim’s mind, 48 relationships is too many. Many were forged through commingled closed-ended fund commitments – where NPS lacks sufficient visibility and control. The scale of the pension also makes open-end fund investing difficult, as any redemption requests can have materially adverse implications on the fund’s operations. In addition, NPS has increasing difficulty executing direct investments; the pension’s processes and limited resources can make it slow to evaluate deals, sometimes rendering it unable to execute in the current marketplace.

All these factors combined make an emphasis on efficiency more pronounced than ever. With his boss Ahn’s approval, Kim’s response is a strategy centered around speed and control. Commingled closed and open-ended funds and separate accounts comprise approximately 60 percent of the pension’s total real estate assets. They will continue to feature among NPS’s new commitments – Blackstone vehicles account for about 5 percent of total assets, for instance.

But Kim is keen for the pension to add on programmatic ventures with large organizations able to provide exclusive access to today’s most promising deal pipelines – across asset classes and geographies. In exchange, NPS can commit large and discretionary checks – two major draws for most institutional managers.

Kim says: “Speed for a pension the size of NPS is difficult. It is therefore critical for us to have partners we can trust which can have that speed for us. In terms of control, commingled funds are difficult for us. So, rather than focus on these, we now try to make up more separate accounts and have control instead.”

That is a message likely to be cheered by those on the right side of an increasingly bifurcated manager universe where the biggest players are leaving the rest behind. According to the PERE 100 ranking of managers by capital raised for funds, the top 30 were responsible for 63.7 percent of the $510 billion raised in the last five years. It is a similar story with joint ventures, where an increasingly limited number of large managers are attracting most of the biggest institutional partnerships.

By Kim’s reckoning, between 30 and 35 manager relationships would be optimal for NPS right now, and the plan is to reduce the roster as existing tie-ups expire. He does not expressly exclude smaller managers when setting out the pension’s position. But NPS’s annual deployment target implies as much.

He delivers a cautionary message to any managers falling short of expectations: “We plan to make $7 billion to $10 billion in new investments every year, so new GPs with opportunities to begin relationships are always welcomed. However, we are considering the reduction of the existing GP pool by not considering re-ups if the performance is not meeting expectations or the work style, culture, ethics or chemistry do not fit well with NPS.”

Proof of concept

One relationship which is ticking all the boxes these days is with Hines. In December, the Houston-based developer and fund manager secured a $1.5 billion equity mandate to source and develop assets which can purvey the facilities demanded by today’s long-term occupiers. The mandate embodies NPS’s third layer of real estate investing, following outlays into commingled funds made in the aftermath of the global financial crisis, then generalist separate accounts midway through the last decade.

NPS and real estate: 17 years, three strategies and two leaders in

1987: South Korea establishes the National Pension Corporation

1988: Country establishes a national pension system for workplaces with 10 or more employees

1999: Compulsory coverage extends to the majority of the country’s population

1999: Country launches the National Pension Fund Management Center

2004: Andie Kang joins the pension as investment manager

2004: NPFM completes first domestic real estate deal: an office in Seoul for approximately $100m

2007: Organization renames as National Pension Service

2007: Launches international real estate portfolio under leadership of Kang

2007: First indirect mandate awarded to London-based manager Rockspring Property Investment Managers

2009: Starts investing directly with outlays in London, including HSBC Tower for £772m

2010: Buys Sony Center in Berlin with Hines for €570m

2013: Scott Kim joins as senior portfolio manager

2014: Sells HSBC Tower to Qatar Investment Authority in £1bn-plus deal, making a profit of more than $800m

2015: Kang leaves NPS for Seoul-based IGIS Asset Management, Kim appointed successor

2015: NPS relocates to Jeonju, the 16th largest city in South Korea

2016: Invests in first development project, CIBC Square in Toronto, alongside Hines and Ivanhoé Cambridge

2017: Sells Sony Center to Oxford Properties for €1.1bn, almost twice its purchase price

2019: Agrees $2.3bn Asia fund with Allianz Real Estate

2020: Awards Hines $1.5bn develop-to-core mandate

It also follows 10 years of investing together, starting with the €570 million purchase of the Sony Center office in Berlin in 2010. Investment joint ventures graduated to project-specific development projects such as for CIBC Square, a 2.9 million square-foot, two-tower development in Toronto, and One Vanderbilt, a 67-storey skyscraper in Manhattan. These provided Kim with the proof of concept he needed to secure internal backing to award a discretionary development account of this size. It is NPS’s biggest single real estate mandate awarded so far. “It didn’t happen overnight,” Kim points out. “But by building up internal trust over three to four years delivering what we promised.”

That scale gave NPS the bargaining power for exclusivity on the strategy with Hines’ build-to-core services until the venture is 80 percent deployed. Kim says: “We wanted to avoid competing mandates with Hines, but have capital ready for great opportunities in the market. I think they are very understanding and see a long-term relationship.”

Chris Hughes, Hines’ capital markets chief executive officer and the ‘point person’ for NPS, confirms Kim’s comments. “We were very willing to say let’s do something that allows us to pursue the highest quality developments available which might not have been possible with just Hines trying to secure something and then find the capital.”

The venture was 20 percent committed at launch and is expected to herald “several more commitments this year.” Indeed, Hines has already reviewed 60 developments in 2021, representing more than $20 billion in gross development value. “We were more than willing to evolve what we both saw as being strategically important,” says Hughes.

Another example of NPS’s current strategy came in its backing of German insurance platform Allianz Real Estate’s first third-party equity fund, the $2.3 billion Allianz Real Estate Asia-Pacific Core I, last June. The vehicle, which with leverage has firepower of $4.6 billion, has been established to aggregate a diversified portfolio of standing prime, income-producing properties across Asia.

Chief executive François Trausch says NPS is a rare example of a state fund able to use its size to its advantage. “When you have money to deploy, the key is to increase the sandbox in which you can play. NPS has done this very well.” Among the fund’s deals was January’s purchase of two office assets, in Singapore and Shanghai, for a combined value of $786 million.

As with Hines, Allianz believes theirs is a relationship set for growth. “I am confident if we do a good job by them, we can do a second Asia fund. This is a relationship that can be scaled. It is an upfront investment, but one with room to grow,” Trausch adds.

Kim wants that, too, and more scalable unions are in the offing. He says NPS is in talks with other big institutional-level investors and managers and expects the four $1 billion-plus ventures up and running – the other two are REIT mandates with Seattle-based Russell Investments – will be joined by another two soon. “One is in Europe, the other in the US,” he confirms. “They will be executed sometime this year.”

24-hour call-back service

With such hefty checks on the table, the competition for NPS’s affections is predictably high – despite its current requirements seemingly rendering certain organizations’ offerings less relevant. In fact, Kim says NPS has current discussions with more than 100 managers. “There aren’t many who haven’t reached out to us,” he admits. Each will at the least hear back from the pension, too. In fact, swift and reliable communication is a culture priority for Kim. “NPS has a unique system which we introduced a few years ago: whatever is introduced to our personnel must be circulated within our division within 24 hours.”

This approach follows feedback Kim drew from partners keen to know where they stood on propositions sooner. “We cannot give an investment decision in 24 hours. But we can say if something is interesting and we will revert further. If there’s nothing to say, I still ask my people to say thank you for introducing us to this opportunity.” In the past, NPS staff were required to write lengthy reports on each opportunity for internal consumption, regardless of whether NPS actioned anything. “We changed all that,” Kim says.

He adds that effort is part of a crusade to be the investor of choice for big capital managers. To achieve that status, Kim and his team have been tailoring their processes to get them higher up in pecking orders all around the world. “I want this advice so I can compete with my peers,” he says. “So when managers pick up the phone, I get the first call.” Given NPS’s current strategy, such prioritization by those groups able to assist its outlay of up to $10 billion a year, could be the critical differentiator in a marketplace impeded with multiple headwinds. It is a different approach to the past.

Indeed, the investor has evolved since the days of committing swathes of small equity tickets to numerous commingled funds as it was finding its feet following the global financial crisis, or when it was picking off single assets directly at heavily discounted prices as the competition was reeling in the crisis’s aftermath. Those strategies provided NPS with plenty of education, including insights into what assets will require serious investment to stay relevant in a post-covid environment. Large profits were booked from the sales of HSBC Tower in London and Sony Center in Berlin when it became clear they would require remedial attention.

Exits like those have contributed to a real estate program that has returned approximately 10 percent on average for the last five years – against 7 percent requirements. But nowadays, Korea’s pre-eminent pension investor must achieve its target returns on meaningfully bigger scale and, for that requirement, Kim has implemented a third way of investing.

Ultimately, NPS will be reducing the number of partners that will benefit from its current approach. But Kim is sure it will be worth it for those managers it does work with. “Most of the mandates out in the market are where the manager needs approvals for each deal. For us, it takes longer for NPS to select a manager. But when we gain full trust and assign a managed account, we try to give full discretion so they can go and do what they do well.”