South Korean institutional lenders are branching out for a piece of the offshore private debt fund market, which has gained popularity in recent years as an alternative funding means for mergers and acquisitions activities, for greater returns and diversification to alternative investments.

According to finance industry sources on Thursday, Korean institutional investors invested a total of 870 billion won ($787.8 million) in foreign private debt funds. Starting June this year, local institutional investors including Public Officials Benefit Association, Teachers’ Pension, Government Employees Pension Service, and Police Mutual Aid Association have appointed or about to select asset managers in the United States or Europe to arrange and manage their funds for overseas M&A deals. Such investment is estimated to top 1 trillion won by the end of the year.

Investment in private debt fund generates profits by lending funds to firms seeking M&A deals backed by bond obligations. The returns are less than the private equity funds as they are collateralized, but are safer and redeemable within three years.

Private debt funds emerged as alternative lenders to companies having trouble seeking funds for their M&A deals from banks and other traditional lenders. They typically charge more than bankers but can be more flexible in lending terms.

The Korean institutional investors lately have expanded their investment in foreign private debt funds in a move to secure more stable returns on investment and search for better investment opportunities in the overseas M&A market.

The domestic debt fund market also is expected to be vitalized next year. The Financial Services Commission in July announced that it will introduce a policy to promote the private debt fund to accelerate M&A deals. It will revise the capital market law to allow private equity fund firms to lend up to 50 percent of their liquid assets and hedge fund invest their entire funds in companies or M&A deals.

So far local asset managers took indirect measures for operating private debt funds by borrowing funds for acquisitions through a special purpose company set up for deals or purchasing bonds from banks designed for acquisition financing because there had not be regulations allowing private debt funding.

By Song Gwang-sup

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