Private Equity in South Korea
Updated: Feb 6
By Claire Song, Analyst at King's Private Equity Club
Brief History and Development of Private Equity in Korea
Though public markets had previously served as the largest sources of equity capital in South Korea, the economic recession in 2012 has allowed private equity investments to become a strong source. South Korea’s private equity market only opened in 2005, when government regulations allowed private equity funds to be set up. Since then, the market has shown steady growth for the past decade. Although considered immature to its Asian counterparts in Hong Kong and China, investment firms like MBK Partners have $22 billion assets under management (AUM) a near 37% increase from the previous year, followed by STIC investments have $4.5 billion AUM, boasting a near 45% increase from the previous year.
Overview of Investment Activity
Seoul-headquartered firms have a wide range of investments across industries within the nation: 66% of the deals by value in 2019 focused on domestic funds. Investments in domestic companies tend to be populated in consumer and retail, industrials, and financial institutions. Large PEFs, however, are also involved in Pan-Asian investments across China and Southeast Asia.
In 2019, there was 66 PEF-backed acquisition deals worth a total of around $8.9 billion USD. South Korean private equity firms have a healthy average internal rate of return of 20%, and buyouts have shown the most attractive rate of return. Buyouts account for over 70% of the deals; such deals increased over six-fold in 2019. Buyout and majority stake transactions have a total of $7 billion USD in deal value. Buyouts are followed by growth equity accounting for 25% of acquisitions, a slight decrease since the previous year. public-to-private transactions are extremely rare in Korea, with only four transactions recorded since 2007.
Exit trends are also worth noting. Until 2018, trade sales were a popular exiting method for PEFs, but 2019 showed a sharp increase in secondary sale exits. Currently, trade sales have $1.92 billion USD deal value, while secondary sales have $1.94 billion USD deal value. IPOs are not rare but only account for around 10% of the total market.
Venture capital unicorns are also notably strong in the country, as Korea is one of the worlds leading technology hubs, after China, America, and India, based on the countries with the most startup unicorns. Hugely successful examples include Coupang, an e-commerce platform valued at $9 billion USD, and Bluehole, a game developer company valued at $5 billion USD. Attracting investors like Blackrock, Sequoia, IMM Investments, and Wellington Management, Korean startup businesses have caught the eyes of both international and domestic venture capital investors alike.
Trends and Limitations of the Market
Private equity firms in Korea have been increasing its range of investments, mirroring the management strategies of US private equity. Rather than developing specialist areas of investments, firms are generally increasing the sizes of funds to penetrate diverse industries. Total commitment to PEFs increased from $74.5 trillion KRW to $81.54 trillion KRW in just three quarters, and one can expect continued growth in the future.
One interesting limitation that both the South Korean private equity market as well as the nation's economy face is the driving force of Korean 'chaebols' - massive industrial conglomerates run by families. While family members of Korean chaebols may not be enthusiastic about relinquishing management to private equity firms, there have been increased questions around chaebols' corporate governance, and private equity may be the answer. Large conglomerates have been selling their affiliate businesses to private equity firms mostly due to regulatory shifts as well as management issues. For example, in 2018, J&W Partners acquired a controlling stake in SK Securities for 51.5B KRW, marking SK Securities' first separation in 25 years of the company from the SK Group, the third-largest conglomerate in Korea. STIC Investments also acquired Hanwha S&C, an IT Solutions company, from the Hanwha Group, the eighth largest conglomerate. These deals perhaps mark a shift in the ownership mentality of Korean conglomerates. As owners explore ways to expand and sustain their businesses, raising capital through selling a stake in their affiliates to private equity firms have shown to be an attractive option.
Another factor that successful family businesses may consider is the tax efficiency of utilizing private equity; as South Korea has one of the highest inheritance taxes in the world at 50%, private equity may be an excellent option for owners when contemplating the succession of the businesses.
Private equity in South Korea has shown promising growth. As the government is also showing enthusiasm for committing some of the nation’s pension funds into fixed assets, investment activity in the nation will grow stronger in the coming years. With increased transparency and stable regulations, South Korean PEFs can expect to expand their investments and deal value.
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