2023 Annual Report

Alternative Assets

KIC invests in alternative assets, including private equity, real estate, infrastructure, hedge funds, and private debt.

Alternative investments help diversify overall portfolio risk and sources of return, contributing to KIC’s strong long-term performance.

Alternative assets refer to assets other than those traded in public markets, such as equities and fixed income. They are characterized by a relatively longer investment horizon and lower liquidity than traditional assets. They also capture an illiquidity premium and have a different risk-return structure than do traditional assets, resulting in a low correlation with those assets. As a result, alternative assets can lower portfolio risk and diversify sources of return.

KIC began investing in alternative assets in 2009 with private equity and later expanded into real estate, infrastructure, hedge funds, and private debt.

Since starting alternative investments, KIC has achieved an annualized return on alternative investments of 7.83% (end of 2023).

Private Equity

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 opportunities, building investment analysis capabilities, and strengthening partnerships with top managers.

In 2023, the global private equity market was characterized by sustained high interest rates and uncertainty in the external environment, which dampened investor sentiment. An unfavorable IPO environment delayed investor returns.

KIC’s response was to build a geographically and strategically diversified portfolio, primarily focusing on non-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

Real estate is one of the main alternative asset classes that can help diversify a 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 2023, lending rates remained high as central banks kept interest rates high to control inflation. Investors were reluctant to invest in leveraged real estate, and overall property prices fell, as did transactions. Investors did, however, turn to logistics facilities, where demand is expected to grow structurally, residential facilities, where demand is expected to be stable, and real estate lending strategies, where expected returns have increased in a high-interest-rate environment.

In this market, KIC sought to secure dry powder for future investments by making new commitments to managers with strong regional capabilities. We aim to seize, early on, investment opportunities that may arise from uncertainties in the financial environment. We also invested in such structural growth sectors as logistics and residential and expanded real estate financing opportunities that can generate stable returns in a high-interest-rate environment. We also strengthened our monitoring of existing holdings.

While the real estate investment environment is expected to remain unfavorable in 2024, KIC will continue to invest in sectors poised for growth to build the growth engine of our portfolio. And we will strive to build a stable portfolio through geographical and asset class diversification.

Infrastructure

Infrastructure assets generate long-term, predictable cash flows by providing facilities and services essential to society. They are also suitable for long-term investments given their natural monopoly characteristics, inflation-linked revenue stream, and low return volatility amid economic fluctuations.

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 telecom, energy, power, renewables, transportation, social, and environment.

In 2023, the macroeconomic environment brought ongoing uncertainty, with slowing global economic growth and persistently high inflation. But global trends including the energy transition, supply chain security, and digitalization continued, and related investment opportunities emerged. As the infrastructure market has matured, there has also been an increase in secondary transactions.

KIC closely monitored market conditions and proactively identified investment opportunities in regions and sectors aligned with global trends. We also examined the downside stability and resilience of infrastructure assets.

Going forward, KIC will continue to monitor global economic trends to respond nimbly to infrastructure investment opportunities and build a stable and profitable portfolio.

Hedge funds

With hedge funds, our management strategy is to seek absolute returns by investing in assets that have a relatively low correlation with the market. 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. Going forward, we plan to build a portfolio centered on absolute return strategies that take advantage of relative value-based investment opportunities in the market, such as multi strategies and fixed-income arbitrage strategies.

KIC also supports the overseas hedge fund investments of Korean financial institutions through the establishment of hedge fund joint ventures. We aim to support the development of the domestic finance industry with our diverse hedge fund investment experience.