New Deal Fund leaves market wondering and guessing

Economy

Published: 07 Sep. 2020, 20:16

New Deal Fund leaves market wondering and guessing

Minister of Economy and Finance Hong Nam-ki explains the New Deal Fund in Sejong. [NEWS1]

The market is mixed on the New Deal fund, a 20-trillion-won ($16.8-million) pool of money that will be used to finance the building of infrastructure for President Moon Jae-in's New Deal Policy initiative. It is the biggest fund ever issued in Korea. It is also a work in progress, with many questions hanging over it.

The JoongAng Ilbo answers a few of the frequently asked questions about the fund.

1. Is this the first of its kind?

The New Deal Fund is very similar to sector funds managed by private sector companies. As the name suggests, a sector fund invests in a certain industry, or sector. Some sector funds focus on the IT industry, others focus on consumer product manufacturers. The New Deal fund invests in private projects such as green smart schools, hydrogen-charging stations, digital social overhead capital and green energy.

The New Deal Fund has a master-feeder structure, where the investment in the parent fund is by the government and investment in the target infrastructure is made directly through feeder funds, raised and managed by private operators.

State-led funds with similar structures existed in previous administrations. There was the Green Growth Fund during the Lee Myung-bak administration and the Unification Fund under Park Geun-hye. Neither outlived the administrations that created it.

2. When can we start investing in them?

The Financial Services Commission (FSC) plans to begin gathering operators to manage the feeder funds next January. It will take until the second quarter of next year for the funds to be opened for public investment, as the government needs to select a management firm to run the funds and make necessary revisions to the law.

Some analysts are worried about the sustainability of the funds, as by the time the funds are opened for public investment, it will be just months away from the next presidential elections. The FSC believes investment will likely continue beyond the election as digital and the green economy are global trends.

“The Unification Fund during ex-president Park’s administration did not have a clear identity, and the Green Fund during president Lee did not have enough investment subjects since the market for environmentally-friendly investments were at its early stages of development. However, the New Deal Fund has a clear direction,” said one anonymous high-ranking executive from a public financial institution.

“But we still don’t know if the current government will stick to its original Green New Deal initiative,” said another industry source.

3. What are the risks?

The New Deal Fund does not guarantee principal, so there is a chance for investors to suffer losses. The FSC also explained that “even though the public can invest in the funds, they should be responsible for the outcome."

The risks might be lower than other funds, since according to the fund’s structure, the government acts as a subordinate investor that absorbs risk first. This is why many people have criticized the funds as an investment that profits the rich and makes up for any losses with taxpayer money. There was also confusion over exactly how much risk the government is willing to take. On July 3, FSC Chairman Eun Sung-soo said investors are “guaranteed principal of up to 35 percent” of losses. The government changed the numbers the next day to only 10 percent.

4. How much is the return?

The conclusion, is that we do not know how much losses or yields the fund will make until they are actually up and running.

“It’s hard for the FSC to give an exact estimate of yields, since the funds' structure will be different for each project," said one official from the FSC. “For an example, investments in data centers are likely to generate more returns so we will place more private capital into those funds, while we would put more public capital into funds for wind power generators, since those project are riskier than others.”

Chairman Eun said the yields on the funds will be a little bit higher than government ten-year bonds, which are currently around 1.53 percent. But the funds may not be able to fulfill the promised 3 percent returns, according to industry experts.

"Since New Deal projects are backed by strong support from the government, it’s possible the funds could generate high returns in the short term. However, fund managers will have a hard time making aggressive investments since they will have to manage the funds under strict control from the government and under the burden of having to guarantee the principal,” said one fund manager.

5. Will it attract a lot of investment?

The New Deal Fund will continue five years. Given that the money will be tied up for a long period of time and the yields are uncertain, experts say that the fund is not all that attractive.

Of the 20 trillion won, 13 trillion won will be invested by the private sector, most of which will be through financial institutions such as banks and pension funds. The FSC also predicts the total investment from the general public will reach only about 1 trillion won, considering the uncertain nature of the New Deal and its long investment period.

Its success is hard to judge. Considering what the government has laid out for now, it would be hard for the government to fulfill its initial goal of “moving the overflowing liquidity in the market from unproductive assets like real estate to productive ones.”

Minister of Economy and Finance Hong Nam-ki predicts the funds will “function well this time."

6. Which stocks will benefit from the New Deal fund?

The government has yet to decide where it will invest the funds. Once an operating review committee gets established this year to evaluate the business performance and risks of the fund, it will review various investment destinations related to the New Deal presented by financial companies.

The New Deal Fund is heating up the market already. Shares of companies such as Unison, Hyundai Energy Solutions, Hyosung Heavy Industries and Hanwha Solutions surged after the announcement. Hana Financial Investment has selected 20 categories that might benefit from the funds.

The Korea Exchange announced Monday a "New Deal Index” with 12 companies.

BY JANG WON-SEOK [kang.jaeeun@joongang.co.kr]