Translation to English

“Korean institutional investors should stop investing in real estate”

Min-ho Lee for the bell
October 14, 2019

"Korean institutional investors should stop investing in alternative assets and in real estate in particular. Given the very low liquidity of alternative assets, investments in such assets for an abnormally low return are likely to strike you with huge losses at a later point in time when interest rates start to pick up."

TCKInvestment is an investment consulting company headquartered in London, the U.K. Since they opened an office in Seoul in 2012, the firm has been offering asset management services to high net value individuals.Drawing on their expertise in investment in a variety of global assets and bespoke asset management services to corporate clients as well as high net worth individuals, they were able to lure more than 800 billion Won in assets under management just through word of mouth and no official marketing. 

Chairman and CIO of TCK Investment Ohad Topor(featured in the photo) acquired a bachelor’s degree in economics at University of Tel Aviv in Israel, followed by an MBA at Stanford University in the U.S.A. Since then he has worked as an asset management specialist at Square Capital, a family-owned services firm with offices in London and Paris. In 2012, he founded TCK Investment jointly with the chairman of Oaktree Capital, Howard Max. Mr. Topor has been widely acknowledged as an expert in a variety of assets, including global equity, bonds, real estate, private equity, venture capital and hedge funds over the past two decades. 

[Photo caption] In a recent interview with The Bell, Chairman and CIO of TCK Investment Ohad Topor expressed his concerns over possibly huge losses coming from investments in the category of alternative assets.  He noted that such investments, widely favored –-sometimes to an excessive extent--by institutional investors in Korea, may incur significant losses once interest rates start an upward climb. 

"Technology Ventures in the U.S. do not have a firm foundation… They may end up becoming a trigger for another global financial crisis.” 

In a recent interview with The Bell, Chairman Topor emphasized that it would be ideal for a recession in the U.S. economy to occur within the next two years. Chairman Topor noted, “The U.S. economy has been riding a growth cycle that is one of the longest in its history, as can be seen in the continued growth in employment, for instance. Despite such an unprecedented period of growth, the U.S. government has continued its fiscal policy to pump more money into the economy, while the Fed has also maintained its low interest rate policy. These two factors are having a negative impact on the health of the economy as a whole. The global bubble in technology ventures and real estate is becoming worse due to such fiscal and monetary policies. If an economic recession does not take place within the next two years, it would deal a serious blow to other countries, but to Korea and China in particular.” 

Chairman Topor underlined that the lack of substance and health in unlisted technology venture firms is likely to trigger a domino effect leading to a global financial crisis. Global investors have funneled massive amounts of capital into such firms with an eye on financial yields. Mr. Topor pointed out that the unhealthy conditions in these firms became much more prominent in the last three months. One leading case in point is the failure of Wework in its IPO due to a low valuation after the company had drawn a great deal of interest from global investors. He also points to the stock prices of Uber, Lyft, and Slack has taken a nosedive since their IPO. 

Chairman Topor explained, “Global investors went on a buying spree of stocks in technology venture firms based on a very rosy valuation.In the process, institutional investors were lured in as the beneficiaries of the funds. But once you enter the IPO stage, the market no longer maintains its confidence in the valuation given before the listing. Even if a company can pull off its IPO, the funds that had taken on the company’s stock will start to make downward adjustments to the reference price. Institutional investors will seek to sell off their position in the secondary markets. This would lead to uneasiness among global investors and possibly trigger a domino effect that would hit Korea. The likelihood of this happening is very high.” 

He also pointed out that what is particularly worrisome for Korea is that conditions for a perfect storm could be created, with other negative factors adding onto such a blow coming from overseas. Not only is there the demographic factor that is already causing great strain on economic growth, but concerns of deflation that have recently started to raise their head and the tendency of listed companies to give low dividends were also quoted by Mr. Topor as some of the leading negative factors. Chairman Topor explained, “When there exists a safe alternative market with an appropriate remuneration structure in place for the risks involved, it would not be easy to persuade investors to go out of their way to park their money in the Korean stock market that is embroiled in a perfect storm.”  

"Institutional investors in Korea have invested an excessive amount of funds in alternative assets. This raises the risk of liquidity issues.” 

Chairman Topor is particularly concerned about the level to which investments in alternative assets have been taken on by institutional investors in Korea. As a bubble has been forming in the technology venture sector and a low interest rate trend has been going on for quite a while, investments in alternative assets are likely to hit a liquidity crisis once interest rates pick back up, leading to massive losses.  

Chairman Topor commented, “Alternative assets, and in particular, real estate, have very low liquidity which means the funds are likely to be tied down over the longer term. It appears that even institutional investors have not come around to realizing that investments made in real estate now at an abnormally low yield can come back to bite them once interest rates resume their upward move.”

His suggestion to high net worth individuals in Korea is to hedge their investments over the longer term in overseas assets. “I would recommend to objectively gauge the level of risk that you are comfortable taking on and then hedging your investments across a variety of assets, such as global equity, bonds, and foreign currency. There is no reason to hedge back into Korean Won but rather gain exposure to foreign currency while maintaining a longer term position that can withstand trends.” 

When asked of his opinion on Korean firms, Chairman Topor shared his views that rather surprisingly, this point in time presents a golden opportunity for Korean corporations to secure a new growth engine through M&As. He noted, "In the last couple of years, Chinese corporations have been acquiring a large number of venture firms that have leading technologies and products. Korean firms, too, need to leverage the abundant capital available in the market to acquire global venture firms. This would help them secure a ‘seed for innovation’ in the coming years. In fact, TCK Investment has been serving as a link to scope out such venture companies abroad for our corporate clients."

Meanwhile, Chairman Topor rated the likelihood of growth in the asset management market of Korea as low, assuming the current structure is maintained. He points out that the asset management market of Korea, currently dominated by banks and securities trading firms, has long had quick turnovers in asset managers, making it difficult for a longer term approach to asset management. The remuneration structure where fees are earned in proportion to product sales, he added, also serves as a hindrance to the market’s growth as asset management firms are pressured to continuously recommend new products to its clients, which puts pressure on the clients and make them uncomfortable. 

Chairman Topor concluded, "A specialist in asset management should analyze a wide range of global assets on a continuous basis to make an accurate call on when is a good time to make an investment in a certain asset. The role is equivalent to that of a conductor of an orchestra. One of the most important roles that TCK Investment plays as an independent investment advisor is to guard our client’s assets. Growing those assets over the longer term, over several decades, would be the second goal.”