By Kim Da-ye
Korea should expand investment in private equity (PE) to prepare for the retirement of its aging population and the intensifying competition local companies face from China, an official from the PE industry said in an interview.
Private equity firms invest in privately-held businesses and take control of them with a view to improve their profitability and sell them at a higher price within a limited time frame.
Lone Star Funds acquired the Korea Exchange Bank in 2003, restructured it, improved its earnings and is set to reap a huge profit from selling it. More recently, the Asian PE unit of Morgan Stanley took over the privately-held restaurant chain Nolboo NBG.
As of May this year, 167 private equity funds (PEFs) with a total of 28.9 trillion won under management were registered locally with the financial watchdog.
The number of PEFs has more than doubled from 76 at the end of 2008 and so has the amount of the capital that has been or is promised to be added to the funds from 14.6 trillion won.
This year, the PE arm of Mirae Asset Financial Group acquired Acushnet, a major golf equipment company based in the United States.
Despite spectacular growth, the domestic PE industry remains a minor player on the global scale. Private equity firms globally control nearly $1 trillion in highly liquid, cash-like securities called dry powder, according to consulting firm Bain & Company2011 report.
Joshua Kahn, a Hong Kong-based director of a co-investment team at Hamilton Lane, said in an interview during his trip to Korea that the aging population has driven the growth of the pension system, but it will face challenges in meeting the demands of pensioners amid low interest rates and low public market returns.
Private equity could be an “intuitive” asset class for pension funds because if executed properly, PEFs would do well regardless of the economic situation because their strategies are independent of macroeconomic trend.
Hamilton Lane is specialized in “separate accounts” — a fund made out of a PEF for a single large client.
In addition to high returns that accompany high risks, Kahn said PEF’s participation in the management of domestic firms could help them compete better against China in the future.
Korea currently benefits from China’s growth but its neighbor’s long-term focus on value-added businesses could be threatening to the domestic industrial base, Kahn said.
“I think private equity fund managers have the ability to bring best practices to companies and to help shape them to be more productive and innovative,” he said.
Of course, not all managers are successful in improving the businesses they invest in.
Khan said that Korean managers should make long-term investments rather than seeking short-term profits although he sees them increasingly moving toward the “Western” model.
Investment in private equity tends to take 10 years. Capital is drawn from investors and channeled into companies, after which the investment takes shape and creates value then manages to sell and make profit within the scheduled time frame.
Kahn said he finds Korean managers having to show strong track records before moving onto the next engagement. That dictates the types of investments managers are willing to make.
Returns from short-term investments tend to be good, but such high returns may not be sustainable as managers will have to look for new destinations shortly.