Investing Korea: Foreign Sovereign Wealth Fund

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It is now common to hear and see the news that foreign sovereign wealth funds (SWF) are being invested in Korea. The SWF, ranging from properties such as real estate to other financial instruments including bonds and equities, covers various investment objectives.

Depending on the nature of investment, a fund is classified under two categories. One is commodity fund based on exporting revenues from raw materials such as oil and gas. The other is non-commodity fund derived from capital surplus of excessive foreign reserves. Most of the Middle-East-born SWFs are considered as ‘KIA’ (Kuwait Investment Authority) commodity fund. There are some non-commodity funds from Asia, such as GIC (The Government of Singapore Investment Corp) and Temasec Holdings.

According to SWF Institute, total size of the SWF market is estimated at about US $5,118 in September, 2012. Measured in terms of economic capability, China is undoubtedly the largest investor in the world. Analyzing the statistics on a regional basis, Asian countries contribute to 40 percent of the global SWF, followed by Middle East countries’ SWF share of 35 percent.

Kuwait Investment Authoriy (KIA) is one of the well-known SWFs fueled by oil money. Currently, the fund is managing US $296 billion AUM (Assets Under Management). As the first generation of SWFs, KIA fund is recognized as a long term investment with a conservative approach. KIA used to invest in U.S. treasury bonds which are considered relatively stable and secure. However, KIA has begun to diversify its investment portfolios by investing in emerging markets since early 2000. With oil prices continuously rising, the size of KIA fund has been increasing. Middle Eastern SWFs, including KIA, are anxious about making investments in newly emerging markets, such as China and Korea. The hesitancies for investment have been even worsened so far due to a lack of information about the market condition in those regions along with cultural and religious differences.

As the major Asian SWFs, GIC (The Government of Singapore Investment Corp) and Temasek holdings hold about US $ 400 billion for investment. With the recent trend to invest in emerging markets, GIC also reduced its proportion of investment directed towards advanced economies. Instead, GIC is now putting more weight on investment in newly industrialized economies, such as China, Korea, and Brazil. This recent movement is also reflecting concerns about the U.S. recession and Euro zone financial crisis. The fund focuses on diversifying investment portfolios with a long term perspective. Despite the declining trend of investment in bonds, investment in equities and alternative investment through Private Equity Fund (PEF) have been increasing for the last decades. It is particularly well reflected in the funds invested in Korea which are mainly focused on real estates, logistics, and port facilities. Korean market has received a large amount of foreign investment, as internationally recognized that investing in Korea’s major businesses is generating a significant gain.

In order for Korean market to attract more foreign SWFs, especially a bit of estranged funds from Middle East countries, the following advices from the latest report from KOFIA (Korea Financial Investment Association) should be implemented. First, more information about Korea’s investment condition should be provided to foreign investment authorities. Also, it is critical to build human networks with them through personal relationships. This is because most of the investment decisions are made by certain members of royal families and high ranking officials in the Middle East countries. Prearranged personal relationship is absolutely necessary to successfully attract investment inflows. Second, Islamic financein consistent with Shariah law needs to be accepted in Korea, which was rejected by the Congress before. Considering the fact that oil money is more than welcome all over the world, deferring to receive the Middle-Eastern investment might lead to possible losses related to major foreign investments. Additional implementation plans are also suggested. One suggestion is inviting SWF personnel as a strategic partner. Through such an invitation, discussions are to set up certain rules and regulations regarding SWFs in Korea, and enhance globally competitive edge of securities firms to offer more global and high level financial services. Also, it is expected to influence other potentially targeted third countries.

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