The ratio of overseas alternative investments to total investment by eight large South Korean securities companies increased nearly by three times over the last three years. In recent years, financial authorities eased capital regulations against securities firms, which increased their capacity to invest. Armed with enough capital resources, they looked for lucrative overseas alternative investment opportunities.
The combined amount of overseas alternative investment, such as investment in aircraft and vessel, social overhead capital (SOS) infrastructure and real estate, by eight mega investment banks (IBs) soared from 3.70 trillion won (US$3.08 billion) at the end of 2017 to 13.90 trillion won (US$11.55 billion) at the end of June this year, according to IB industry sources on Sept. 29. It is worth noting that subordinated investment, which pursues a high return despite greater risk, accounts for 62 percent of the total.
An official from the alternative investment division at a securities firm under a financial holding company, said, “Since overseas deals require a large amount of capital, it is better to work with banks with large capital assets. Securities companies are usually in charge of subordinated investment, as they are deal makers and need to earn a high return. Banks invest in unsubordinated debts as they want to withdraw money whenever they have to, though the interest rate is low.”
The problem is snowballing unsold products of securities firms. Lee Jae-woo, a senior analyst from the financial structuralization evaluation unit at Korea Investors Service Co., said, “The stock of products handled for sell-down started piling up and the amount of the products unsold for over six months came to 1.30 trillion won (US$1.08 billion) as of the end of June. This was because of expansion of unsold risks from excessive competition. It the current trend continues, it can lead to liquidity and investment risks for securities firms.”
In particular, South Korea’s major credit rating agencies expressed mixed opinions on the fact that Mirae Asset Global Investments signed an agreement to acquire 15 hotels in major cities in the United States with an investment of 7 trillion won (US$5.83 billion) on Sept. 9.
Some positively viewed the company’s decision to boost its profitability by diversifying investment destinations, while others concerned that the firm would face a crisis if it is exposed to external risk factors in terms of economic cycle with the massive amount of investment.