[Exclusive] KIC to Invest in US Silicon Valley

Promotion of Establishing US San Francisco Branch This Year
Plans to Expand Alternative Investments in IT Companies
Interest Since 5 Years Ago... Entry Decision Made as Profitability Recovers

[Asia Economy Reporters Kim Hyunjung, Kim Eunbyeol, Moon Chaeseok] Korea Investment Corporation (KIC) is set to actively invest in Silicon Valley, USA. As the global trend of low interest rates and low growth continues, resulting in poor returns on traditional assets, KIC has turned its attention to Silicon Valley to seek new sources of profit.

According to the Ministry of Economy and Finance and the Bank of Korea on the 21st, KIC discussed plans to open a San Francisco office at the end of last year’s Operations Committee meeting and plans to finalize this at the board meeting scheduled as early as the end of this month. A senior official from the Ministry of Economy and Finance explained, "KIC’s returns improved significantly last year," adding, "The Operations Committee has completed discussions on establishing the San Francisco office." The KIC Operations Committee includes officials from the Ministry of Economy and Finance and the Bank of Korea. Although the establishment of overseas branches is a decision made independently by the KIC board, since the Ministry and the Bank entrust foreign currency to KIC, it appears that the agenda was shared in advance.

KIC plans to expand alternative investments in IT companies located in Silicon Valley with the establishment of the San Francisco office. Leading sovereign wealth funds worldwide have already been increasing direct investments in US IT companies. According to the International Financial Center, the number of direct venture capital investments by global sovereign wealth funds surged from 76 cases during 2009-2013 to 298 cases during 2014-2018. A financial industry insider said, "Even Malaysia has dispatched 3 to 4 people to San Francisco," adding, "Korea is actually somewhat late in this regard."

A representative example of aggressive investment in Silicon Valley is the Government of Singapore Investment Corporation (GIC). GIC has recently invested in various sectors such as real estate and technology stocks to increase returns. Together with Temasek Holdings, Singapore’s state-owned investment company, GIC acquired a $1 billion stake in Alibaba Group Holding, China’s largest e-commerce company. GIC and Temasek’s venture capital investments account for 60% of the total number of deals. The Saudi Public Investment Fund (PIF) also invested $3.5 billion in Uber, a global ride-sharing company. Australia, the United Arab Emirates (UAE), and Ireland are also countries actively investing in Silicon Valley.

The reason sovereign wealth funds have turned to Silicon Valley is that it has become difficult to generate high returns from traditional assets. GIC, which increased its alternative investment ratio, recorded an annualized return of about 4% over 20 years for the fiscal year ending in March last year. Although this is the lowest return in the past three years, considering Singapore’s low borrowing costs, it is regarded as a high return. An industry insider positively evaluated, saying, "GIC contributes about 5% of its earnings to the government budget."

KIC has shown interest in investing in Silicon Valley for 4 to 5 years already but had not implemented it. There were concerns about whether establishing an additional branch was the right decision amid volatile financial markets. Instead, the proportion of alternative investments steadily increased. KIC’s alternative investment ratio, which was about 7.8% in 2011, rose to 8.0% in 2013, 14.4% in 2017, and 16.4% in 2018.

KIC, which recorded a high return of 16.42% in 2017, posted a negative return (-3.66%) in 2018 due to a difficult investment environment where asset prices of stocks, bonds, and commodities fell simultaneously. Nevertheless, the return rebounded in 2019. KIC President Choi Heenam said at the 14th anniversary ceremony in July last year, "This year’s return has recovered to the 9% range." A Ministry of Economy and Finance official also said, "This year, when returns have recovered, is judged to be the right time to establish a foothold for forming local networks." Since opening its New York office in July 2010, KIC has consecutively opened offices in London (2011) and Singapore (2017).

In the early stages of establishing the San Francisco office, KIC is expected to focus on monitoring trends and delegated management. The plan is to identify companies in Silicon Valley that are at the pre-IPO stage and then invest. An industry insider said, "Not only direct investment but also understanding the trends helps when reviewing the entire portfolio," adding, "This can also be used for long-term investment."

However, it is uncertain whether overseas alternative investments will yield expected results. A financial industry insider said, "Currently, global demand for alternative investments is rapidly increasing, so investment conditions locally may not be as favorable as expected," adding, "There is also a possibility of not seeing short-term returns in terms of profitability."

KIC was established in July 2005 to effectively invest foreign exchange reserves held by the government and the Bank of Korea. It manages entrusted foreign exchange reserves and invests in overseas assets to generate returns. As of the end of 2018, it manages $131.6 billion.