Contribution Securities law revisions to spur buyouts in Korea

gettyimagesbank

Buyout opportunities in promising sectors to increase next year

Valerie Kor

By Valerie Kor

Korea's private equity industry has been accelerating in recent years. Assets under management (AUM) have grown at a compound annual growth rate (CAGR) of 29 percent from 2010 to a record $120 billion as of March 2021, and $39 billion of dry powder is waiting to be deployed, according to data from Preqin.

Buyout strategies make up a significant 38 percent of total AUM, a considerably higher proportion than the 13 percent across the entire Asia-Pacific region.

But growth stalled in 2021, with buyout funds raising just $5 billion in the first 11 months of the year, a substantial drop from the record high figure of $17 billion raised in 2020. However, the reduction of restrictions on fundraising in Korea's Capital Market Law, particularly a raising of the limit on the number of “professional” investors from 49 to 100, is expected to help reboot the fundraising market.

A number of fund managers are reported to be gearing up to take advantage of the new regulations, with Korean private equity firms such as MBK Partners, IMM Private Equity and STIC Investments setting fundraising targets more than twice as high as their predecessor funds, according to Pulse News.

That said, interest rate hikes may pose challenges to fundraising especially for those deploying leveraged buyout strategies, partly because of the impact of higher rates on the economics of buyouts, and partly because other investments will be relatively more attractive, or at least relatively less unattractive. South Korea's central bank raised interest rates by 25 basis points to 1 percent in November and is expected to do so again next year before the March presidential election.

More capital will only be good for Korea's private equity industry if it can be deployed effectively, but there are reasons to be optimistic. The chaebol (family conglomerates) are likely to divest non-core assets to focus on core businesses and to avoid antitrust penalties, while there has been an increase in private equity funds partnering with retiring smaller business owners as part of their succession planning.

Private equity already plays a big role in mergers and acquisitions (M&As) in South Korea. Private equity-backed transactions accounted for 53 percent of the country's total M&A turnover in the first three quarters of the year, up from 42 percent in 2018, 45 percent in 2019 and 49 percent in 2020 according to global consultant Bain & Company.

International private equity firms such as The Carlyle Group, KKR and Bain Capital, as well as domestic buyout firms such as MBK Partners and Hahn & Company have been able to acquire controlling stakes in target companies in recent years and exit their investments.

Multiple growth sectors

Private equity investors completed a record 117 buyouts in 2020, with an aggregate transaction value of $18 billion in 2020. Although the number of deals fell to 88 as of Dec. 20, the aggregate deal value of $16 billion may yet catch up to 2020's level. Average deal size increased from $178 million in 2020 to $261 million in 2021.

Business support services, financial services, industrial machinery, logistics & distribution and travel industries were the most active sectors for private equity buyers from 2018 to 2021. In the past year, food, consumer products and software industries saw the most deals completed, while semiconductor and consumer products contributed the most to the aggregate deal value.

Korea's leading semiconductor industry will continue to expand amid rising global demand, but heightened U.S.-China tensions may be a barrier for dealmakers.

This was seen in the attempted acquisition of Korean chipmaker MagnaChip by China-based global private equity group Wise Road Capital in March. The $1.4 billion takeover was stopped by the U.S. Committee on Foreign Investment (CFIUS) on account of national security risks and both companies terminated the agreement this month, with the bidder agreeing to pay a $70 million termination fee.

MagnaChip is incorporated in the U.S. state of Delaware and listed on the New York Stock Exchange, but its manufacturing lines and research centers are based in South Korea. A rival but unsolicited $1.7 billion tabled in June from an investment group led by U.K.-based Cornucopia Capital, which included a number of Chinese investors, did not proceed.

Renewable energy is another sector that will see more buyout deals in the coming years, especially since South Korea has pledged to achieve carbon neutrality by 2050.

In August, U.S. private equity firm KKR acquired $2 billion worth of newly issued shares from gas supplier SK E&S, which currently runs seven city gas subsidiaries across Korea. SK E&S will use the funds to expand its hydrogen and renewable energy business. The investment was made from KKR's Asia-Pacific Infrastructure Fund, which raised $3.9 billion at final close in January 2021.

Secondary market expands

The number of buyout exits in Korea reached record levels in 2020, where 61 exits amounting to an aggregate value of $6.6 billion were completed.

In 2021 to date, 42 buyout exits amounting to $10 billion have been recorded. Activity has been secondary buyouts, where both buyer and seller are private equity funds.

In December 2019, MBK Partners sold Daesung Industrial Gases to Macquarie Infrastructure and Real Assets (MIRA) for $2.1 billion in December, and in 2018, Carlyle Group sold domestic security systems company ADT Caps for $2.8 billion to MIRA. Most recently in August, Bain Capital sold Korea's largest Botox maker Hugel Inc. for $1.5 billion to a consortium led by Singapore private equity group CBC Group and Korean conglomerate GS Holdings.

Whilst secondary buyouts are often viewed with skepticism, they are an established and important feature in mature markets such as North America and Europe.

Korea's maturing private equity industry will continue to benefit from favorable regulations and an R&D edge in semiconductor, smartphone and electric vehicle technologies. The need for corporate restructuring and succession planning will also push M&A activity forward in the coming year.

The writer is a financial writer and senior associate at Preqin.