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Alternative investments help KIC achieve excellent returns as a long-term investor by diversifying overall portfolio risk and capturing an illiquidity premium.
Alternative investments play a critical role in diversifying overall portfolio risk and increasing investment efficiency due to their low correlation with traditional investments.
KIC started investing in alternative assets in 2009 with private equity and steadily broadened the investment spectrum to include real estate, infrastructure and hedge funds. The result is a balanced alternative portfolio that can support efficient overall portfolio management through investments diversified by vintage, region and strategy.
KIC also continues to expand and strengthen its network with leading sovereign wealth funds, pension funds and asset managers worldwide. This has helped identify promising investment opportunities and boost returns through co-investments. From the first alternative investment in 2009 to the end of 2022, we have achieved an annualized investment return on alternative investments of 8.23%.
Private equity, which allows for illiquid, growth-oriented long-term investments within the alternative asset portfolio, is a strategy that provides a higher return than do other asset classes. KIC established its alternative investment division in 2009 and started investing in private equity funds immediately following the global financial crisis. We began making direct private equity investments in 2010 and co-investments with GPs in 2011, diversifying our portfolio by region and strategy.
Our venture investment program, the KIC Venture Growth (KVG) fund, aims to deal with industry paradigm shifts and identify excellent tech assets early on. KIC is also actively reviewing direct and co-investment opportunities based on various strategies within the private equity asset class, selecting promising investment opportunities, building investment analysis capabilities and strengthening partnerships with top managers.
In 2022, investor confidence in the global private equity market shrank from the previous year due to uncertainty in the external environment, concerns of an economic downturn and liquidity issues for major institutional investors caused by the stock market correction.
KIC’s response is to build a geographically and strategically diversified portfolio, primarily focusing on cyclical, blue-chip assets, to earn solid long-term returns. We also plan to expand our private debt investments, which can generate stable cash flows through lending to blue-chip companies.
Real estate is one of the main alternative asset classes that can help diversify our portfolio. KIC has been making a diverse range of direct, indirect and co-investments in real estate in North America, Europe and Asia since 2010.
In 2022, the real estate market saw an overall decline in transactions as well as price correction due to uncertainty in the external environment and steep rate hikes by central banks.
Among sectors, logistics and residential assets performed well thanks to solid demand, while flight-to-quality resulted in varying investment performance when it came to office facilities, depending on the location and condition of the asset.
KIC responded to changing market conditions by investing more in logistics and residential facilities, where inflationary costs can be passed on due to high demand and short lease periods. At the same time, we diversified our portfolio by expanding investments with market-leading GPs across regions.
Given the uncertain global economic outlook and continued high interest rates, KIC will review and execute investments more cautiously in each region while strengthening asset management activities. Also, with investment opportunities in distressed assets expected to grow with rising interest rates on real estate loans, KIC is considering investing selectively in these assets. We will also continue to seek private debt investment opportunities in real estate, which can generate steady cash flow.
Infrastructure assets generate long-term, predictable cash flows by providing facilities and services essential to society. They are also suitable for long-term investments due to their ability to hedge against inflation, as income generated from holdings also increases with rising prices.
Since our first infrastructure investment in 2010, we have built a portfolio diversified across geographies including North America, Europe and Asia and across sectors including renewables, communication and transportation.
Despite ongoing market uncertainty, infrastructure continues to be in demand as a defensive asset against macroeconomic pressures. Alongside the growth of the infrastructure market, fundraising amounts have increased year-on-year and funds are expanding as well.
In 2022, the global infrastructure market brought more opportunities for investments in energy transition infrastructure, in line with a strengthening of energy security and expansion of carbon reduction obligations globally. Investment opportunities have also been growing in digital infrastructure to meet growing demand for data and in healthcare infrastructure in response to demographic changes.
Considering these market changes, KIC committed to a new strategic mid-market fund in 2022 and swiftly seized new investment opportunities. We invested in healthcare infrastructure in Australia and New Zealand, where demand is expected to rise in the mid to long term, and telecommunications infrastructure in North America and Europe that generate stable sales based on long-term contracts.
KIC plans to build an infrastructure investment portfolio that can generate stable mid- to long-term returns while staying one step ahead of changes in the global market.
With hedge funds, our management strategy is to seek absolute returns by investing in assets that have a relatively low correlation with market volatility. Hedge funds also have low correlations with traditional assets as well as other alternative assets, such as private equity and real estate.
KIC started investing in hedge funds in 2010. We have gradually developed our portfolio by diversifying investments across multiple hedge fund strategies to achieve stable and long-term returns in a manner complementary to other asset classes.
Even in rapidly changing market conditions, the portfolio has generated steady absolute returns while maintaining a low correlation with traditional assets.
In 2022, KIC supported the overseas hedge fund investments of domestic financial institutions by, among other things, participating in more joint ventures with them. With our diverse hedge fund investing experience, and through showcasing our management capabilities, we are helping lead the development of the domestic finance industry.
Going forward, we plan to build a portfolio centered on absolute return strategies that take advantage of arbitrage opportunities in the market, such as equity L/S, event-driven and fixed-income arbitrage strategies, in consideration of rising interest rates, increased market volatility and other changes in the financial environment.
