KDB's asset arm offers fund of private-equity funds

Forsyth Partners, a Dubai-based specialist in funds of funds, will sub-advise a South Korean fund management company's upcoming private-equity offering.

KDB Asset Management is about to introduce an onshore, won-denominated fund that invests in private-equity funds and private-equity managers. This is the first such product to be made available in the Korean market, says Suh Ki-won, executive director and head of KDB AM's global investment division.

This product launch is part of KDB AM's drive to become a major domestic fund-management company. The company got its start in 1996 as Seoul Investment Trust, in which Daewoo Securities was the dominant shareholder. Although it enjoyed AUM as high as W15 trillion in the late 1990s, the company was nearly destroyed when Daewoo Group was revealed to be insolvent.

Seoul Investment Trust was rescued by the Korean Development Bank in 2004 and renamed KDB AM (although Daewoo Securities retains a 29% stake). As Seoul Investment Trust, it had pursued two lines of business: money-market funds, and investing in long-term projects in areas such as infrastructure that were backed by KDB, a government-owned policy bank designed to help small- and mid-sized enterprises.

Now as KDB AM, the group has a mandate to double its asset size from today's $5 billion and increase profitability in the next five years. To that end it is orienting its business toward higher-margin products, particularly international funds in niche areas. Today about 12% of AUM derives from international products and it is developing a domestic equity business.

Suh joined two years ago, originally to lead marketing. His background is both managing money as well as institutional sales, having done marketing for Woori Asset Management and the former Hyundai Investment Trust (now Prudential Financial) as well as run international outsourcing at the National Pension Corporation for two years.

One of KDB AM's weaknesses is its lack of strong retail distribution power. Daewoo Securities is its main channel but this is not a top-tier distributor in Korea. On the other hand it can position itself as an independent manager, unaffiliated with big securities firms or banks, and has been able to establish itself as a provider to channels such as the private banks at Woori and Shinhan, and securities firms such as KITC.

To that end, the firm has built a domestic alternative-investments team that invests in areas such as infrastructure and real estate, often in conjunction with KDB's own activities in this area.

It introduced its first international products earlier this year, a pair of life settlement investments managed by US- and Cayman Islands-based trusts. Then, in April, it launched a trio of index funds tracking thematic indices (infrastructure, water and clean energy) developed by Standard & Poor's.

Now it is looking at hedge funds and single-country funds. Suh had invested previously in Forsyth funds of hedge funds when he had been at the NPC, and the two came up with the private equity concept.

"Since the Lone Star case there has been interest in private equity among Korean investors," says David Kim, regional director at Forsyth and its Seoul-based representative for institutional business. The Forsyth product's back-tested history offers returns of 10-20% but with volatility lower than long-only equities; returns are affected by rising or falling interest rates and the cost of funding for PE firms.

The problem was liquidity. KDB AM will offer a version of this product for institutional investors, but also wants to target retail investors, and they don't like locking up money. So the portfolio will target listed securities of private-equity firms or private-equity funds. Suh says this universe is around 300 names, of which around 70 are sufficiently liquid to offer KDB AM's investors the ability to trade the fund daily.

Forsyth has been active in Korea for over two years, primarily marketing funds of funds to institutions. This remains its core clientele but Kim says the firm was interested in diversifying into retail. It does so via sub-advisory arrangements, including a deal last year to sell fund of hedge funds via Korea Investment Trust.