Private equity funds (PEFs) are dominating the South Korean merger and acquisition (M&A) market. This is because a large amount of money which was unable to find suitable investment destinations is flowing into PEFs, while strategic investors, including conglomerates, are reluctant to make a large investment due to growing uncertainty at home and abroad.
Seven out of 12 major M&A deals were concluded by PEFs this year, according to industry sources on Sept. 10. Lotte Card Co. and Lotte Insurance Co., which were put up for sale by Lotte Group to comply with the commerce-banking separation principle under the Monopoly Regulation and Fair Trade Act, were sold to MBK Partners and JKL Partners, respectively. Bubble tea franchise Gong Cha, which was owned by a PEF, was also sold to a U.S. PEF manager.
Industry analysts say that conglomerates, which are big strategic investors, are reluctant to acquire new affiliates. They cannot readily make a large investment because of uncertainty in management conditions and an anti-business sentiment in the country. SK, Hanwha and GS groups all notified their intention not to participate in the bidding for debt-laden Asiana Airlines Inc., which is regarded as the biggest M&A deal this year, although they were considered potential buyers.
The low interest rate is another reason for large PEFs attracting funds. Limited partners (LPs), such as pension funds and mutual aid associations, invest mainly in large PEFs which post a high rate of return, allowing them to pursue M&As aggressively based on sufficient funds. In fact, Hahn & Co., which disclosed its intention to acquire SKC Kolon PI Inc., has recently launched its third blind fund worth 3 trillion won (US$2.52 billion).
However, some express concerns over PEFs dominating the M&A market. A considerable number of PEFs improved the performance of the companies they have acquired by improving managerial efficiency rather than making fresh investment in them. Therefore, they could face trouble exiting them if the industrial sectors where the acquired companies are engaged hit the growth limits. Others also point out that the M&A market itself cannot but to shrink as a result if South Korean conglomerates continue to make a passive move to investment.