The South Korean private equity fund (PEF) market, which had started at 310 billion won (US$269.5 million) 12 years ago, continued to grow to reach 60.3 trillion won (US$52.4 billion) in the first half of this year.
According to the Financial Supervisory Service (FSS), however, only 41.2 trillion won (US$35.8 billion) out of the total has been actually invested until the end of June, which means about one-third of the total has yet to find an investment destination. In this context, FSS chairman Jin Woong-seop met with major PEF managers in June and asked them to take a bigger role in corporate restructuring so that the floating funds can be smoothly supplied to the domestic capital market. Their response was lukewarm though.
This is because of the difficulty of withdrawal. In 2007, MBK Partners invested 2.2 trillion won (US$1.9 billion) in D’Live, which was C&M at that time, but failed to dispose of the system operator and then lenders recently initiated debt-equity swap and debt restructuring. This has to do with a PEF, by nature, having to sell management rights at a price higher than an acquisition price and within a fixed period of time even if the value of an acquired company drops for adverse business conditions.
This is why experts are advocating the necessity of a larger secondary fund market for the partial sale of corporate shares owned by PEFs and investment risk reduction in cooperation with limited partners. At present, SK Securities and Daishin Private Equity are about to have their secondary funds worth a total of 204 billion won (US$177 million) registered with the financial authorities.
The South Korean government is working on the growth of the domestic secondary market as well. For instance, the Korea Growth Investment Corporation is working on a 180 billion-won (US$156 million) secondary fund to be run by two PEF managers based on a 90 billion-won (US$78 million) investment by the corporation. The purpose of this secondary fund is to help investors ensure liquidity before the disposal of a company they invest in.
It is also said that PEF managers need to become better at corporate management instead of concentrating only on fundraising. “South Korean PEF managers have been rather lax in corporate performance improvement and focused heavily on reputation management in most cases,” said Park Yong-rin, head of the Office of Financial Services Industry of the Korea Capital Market Institute, adding, “Now is the time they need to focus more on corporate value maximization by means of professional management organizations similar to those of major foreign PEFs.”