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PEFs urged to strengthen ESG, operating capabilities to match global peers
By Anna J. Park
As the private equity fund (PEF) market has shown slowed growth since late last year, market experts are advising PEFs to diversify their investment portfolios by discovering new growth engines in overseas markets as well as in high-tech sectors.
According to the latest report by Samil PwC's research institute, about 31 percent of local PEFs invest in the overseas market ― 19 percent in Asia, 8 percent in America and 4 percent in Europe ― as of the end of last year.
This means that 69 percent of local PEFs invest only within the country. Considering the general slowed growth rate of local companies, it is paramount for PEFs to make inroads into overseas markets. Yet, private equity investment requires a sophisticated understanding of a country's industries and unique features of the markets, and a close-knit network is necessary to find and build investment opportunities overseas.
By sector, nearly half ― 43 percent ― of investments are focused on the manufacturing sector, while only about 15 percent are invested in the information technology (IT) sector. This is a stark contrast to global PEFs, which put some 50 percent of their investments into IT on average.
"The global private equity market has marked an average of 22 percent annual growth over the past five years, and the local private equity market has also witnessed rapid growth during the period. While Korea's private equity market has grown fast over the past two decades in terms of market size as well as qualitative operation of funds, now is the time to shift its operation to make another leap," Samil PwC's Deal Leader Park Dae-joon said.
Park stressed that as the focal point of private equity investment has been put more on increasing invested corporations' fundamental values, it is advised for local PEFs to seek a high-risk, high-return strategy by investing in new, emerging sectors.
As opposed to the past when PEFs emphasized creating value through effective leveraging strategies, generating value by operational improvement at invested corporations is now deemed key to the success of PEFs. In this regard, the report states the importance of securing corporate officials with broad expertise.
Local legal frameworks are also subject to streamlining for clear operation of PEF industries, the report went on. The Korean private equity market's legal regulations are spread across various acts, ranging from acts on venture capital to the capital market, while authorities are also present across many ministries. A more consistent legal structure would facilitate a more favorable environment for local PEFs.
Local PEF, meanwhile, stressed the need to improve their own capabilities to reach global standards.
"For a local PEF to attract foreign limited partners in competition with global PEFs, the first priority is, of course, to have a good investment track record. When the first condition is met, then general partners, who are responsible for operating the funds' investments, should also be globally competent," a market insider of local PEF industry told The Korea Times, Monday, on condition of anonymity.
The market insider said local PEFs, in particular, tend to have a shallower understanding of the importance of environmental, social and corporate governance (ESG) principles. In addition to the named areas, ESG also covers various issues such as diversity, equity, cybersecurity, health, data privacy and anti-corruption.
Local PEFs still lack systemic corporate support and internal cohesion. Compared to their global peers, which have a well-established support system of middle and back offices as well as a variety of professional expertise in finance, legal, tax and compliance issues, only a fraction of local general partners can afford a well-structured system of operation, due to their small size. A lack of professional expertise could be a potential risk factor, impairing the local PEF sector's future growth.
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