The Bank of Korea Analyzes the Status and Risks of Overseas Alternative Investments
Amid ongoing concerns about overseas commercial real estate, an analysis has emerged highlighting the need for a comprehensive review of profitability and post-management of overseas alternative investments by major pension funds and mutual aid associations, including the National Pension Service.
On the 6th, the Bank of Korea stated in its inspection report titled "Status and Risks of Overseas Alternative Investments by Major Pension Funds and Mutual Aid Associations" that "due to information asymmetry and low liquidity in overseas alternative investments, investors find it difficult to respond proactively, which may lead to underestimation or delayed reflection of risks, potentially resulting in inadequate management of default risks."
According to the report, as of the end of June, the outstanding balance of overseas alternative investments by major pension funds and mutual aid associations was $115.3 billion, with the National Pension Service holding $97.3 billion and other pension funds and mutual aid associations holding $18 billion. By investment target, special assets (infrastructure and private equity) amounted to $73.7 billion, approximately twice the $41.6 billion invested in real estate.
Looking at each sector, within investment targets, commercial real estate accounts for 45% of real estate investments, and including mixed-use real estate, this rises to 73%. Approximately 82% of special assets are private equity investments.
Regarding investment regions, both real estate and special assets have high proportions in North America (49%) and Europe (28%). In terms of repayment priority, most investments are mezzanine and subordinated, which have lower recovery prospects and higher investment risks, with 60% of remaining maturities exceeding five years.
Park Gi-deok, head of the Foreign Exchange Analysis System Improvement Team at the Bank of Korea's International Department, explained, "Concerns about U.S. commercial real estate persist, and following COVID-19, remote work has expanded mainly in the U.S. and Europe, increasing office vacancy rates. Since domestic pension funds and mutual aid associations have high investment proportions in these regions and many mezzanine and subordinated investments, it is necessary to review the overall profitability of overseas alternative investments and strengthen management."
However, the Bank of Korea judged that considering the expected default scale of major pension funds and mutual aid associations, funding structures, and current reserve accumulation levels, the impact of overseas alternative investment defaults on financial stability and the foreign exchange sector would be limited.
From a financial stability perspective, pension funds differ from financial institutions in that contributions are mandatory, so defaults in overseas alternative investments have a relatively small impact on the overall financial stability of pension funds. Currently, mutual aid associations have reserve accumulation ratios, a financial stability indicator, exceeding 100% (the standard ratio) for all major mutual aid associations. It is projected that the reserve accumulation ratio will remain above 100% until overseas alternative asset prices decline by 26?55% compared to the end of the month.
The Bank of Korea added, "Regarding the impact on the foreign exchange sector, liquidation of foreign exchange hedge positions due to sharp declines in overseas alternative asset prices may reduce forward foreign exchange sell positions (increase spot foreign exchange purchases), which could exert partial upward pressure on exchange rates. However, since the National Pension Service, which holds an overwhelming share of overseas alternative investments, maintains a foreign exchange open strategy, the short-term impact on the spot foreign exchange market is expected to be limited."
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