In the Korean capital market, private equity funds (PEFs) are no longer “meoktwi,” or eat-and-run capital, or corporate raiders. They have become a major player in the Korean capital market and are changing the nation's industrial landscape.
The domestic PEF market has steadily grown since the Korean financial authorities introduced the management participation-type PEF system in 2004. It reached some 330 trillion won (US$291.91 billion) in 2018, a whopping 14.3 percent growth compared to a year earlier.
The Korean PEF market grew not only in size but in influence. PEFs have become a good problem solver in the rapidly changing industrial environment in South Korea.
This was especially true last year. PEFs made their presence felt as the government toughened regulations on inter-affiliate sweetheart deals of big business groups and accelerated corporate governance reform. A case in point was Hahn & Co. SK Group sold SK Shipping Co. to Hahn & Co. in order to get around the regulations on unfair business practices. Hahn & Co. also acquired a stake in SK D&D Co. In addition, Hahn & Co. bought CJ Group’s car rental business unit Joy Rent A Car Co. in March last year, believing that it can create a synergy with other companies it has acquired.
It is in this same vein that Hong Kong-based PE firm Affinity Equity Partners Ltd. is pushing to acquire LG Group’s maintenance, repair and operations (MRO) division under its subsidiary Serveone Co. The PE division of Mirae Asset Daewoo Co. acquired LG Group’s entire stake in its logistics subsidiary Pantos Co. PE firms IMM Investment Corp. and JKL Partners Inc. bought GS ITM Co., a system integration (SI) subsidiary of GS Group. GS ITM was put up for sale but could not find a buyer for a long time.
Domestic PEFs have also acquired foreign companies by forming a consortium with conglomerates. SJL Partners Co. joined hands with KCC and Wonik Group and bought U.S.-based Momentive Performance Materials Inc. for 3.37 trillion won (US$2.98 billion) in September last year. It was the largest M&A in South Korea last year. Woongjin Group also joined hands with PE firm STIC Investments Inc. to buy Coway Co. back.
PEFs also play a role as a catalyst in the process of readjusting the industrial structure. H&Q Korea Co. bet 500 billion won (US$442.28 million) in online shopping mall 11st.com, a spin-off from SK Group which sought to become a Korean version of “Amazon.” Affinity Equity Partners and BlueRun Ventures Co. invested 1 trillion won (US$884.56 million) in Shinsegae Group’s e-commerce unit SSG.Com. MBK Partners Co. and IMM Investment participated in K bank, the country's first internet-only bank, as a major stockholder, becoming a driver for change.
PEFs are also buying small and mid-size car component producers, which have been put up for sale due to a crisis in the automobile industry, as well as companies that seek new owners because of the inheritance tax burden. SkyLake Investment Co., which is led by Jin Dae-jae, a former minister of information and communication, acquired auto parts manufacturer KDA Co.
In addition, PEFs help companies which are in financial difficulties despite their high brand awareness in the global market. VIG Partners Co. signed a deal to become the largest shareholder of Korean food restaurant chain Bonchon International Co. Bonchon does not have stores in South Korea but it is well known for Facebook Founder & CEO Mark Zuckerberg’s fried chicken. Currently, the company operates 325 stores in eight countries across the world, including 85 stores in the United States and 245 in Asia. VIG is planning to improve the company’s financial structure and strengthen business.
PEFs go beyond simply improving the financial structure of acquired companies. They raise corporate value through business restructuring. A case in point is Youngtoys Inc. acquired by Hong Kong-based investment firm PAG Asia Capital Ltd. Youngtoys posted 77.10 billion won (US$68.20 million) in sales and 6.30 billion won (US$5.57 million) in operating profit in 2015 when PAG bought the company. However, it ranked top in the industry with sales of 156.40 billion won (US$138.35 million) and operating profit of 30 billion won (US$26.54 million) in 2017.
PEFs also actively make their voice heard to reform corporate governance. Korea Corporate Governance Improvement Ltd. (KCGI), a management participation-type PE firm, acquired a 10.71 percent stake in Hanjin KAL Corp., the holding company of Hanjin Group, and an 8.03 percent in Hanjin Transportation Co. last year, pressuring the group’s owner family to improve its governance structure.
An activated PEF market tends to increase the profits of a considerable number of pension fund subscribers and mutual aid association members. This is because most of PEF funds receive investment from institutional investors and return earnings to them. In advanced countries, PEF investors are diverse, including pension funds, school foundations, funds of funds and family offices. However, in Korea, the National Pension Service (NPS) is the key investor. PEFs can help the NPS improve the rate of returns. An official from the investment banking (IB) industry said, “PEFs will play an increasingly bigger role in Korea as it is undergoing a shift from the traditional manufacturing industry to the state-of-the-art information technology (IT) industry.”