Deal focus: VIG sees upside in sector that will never die

The demographic changes reshaping Korean society are building an investment case for funeral services from both a supply and demand perspective. The obvious play acknowledges that as the population ages, the need for funerals will increase. The key to unlocking value in this space, however, lies in understanding the supply end of the equation.

According to government data, the average size of the Korean household has fallen from 4.5 people in 1980 to about 2.6 today. As families decrease in size, they lose capacity to coordinate traditional funerals, which often involve three days of catered wakes and burial rituals, typically costing $3,000-10,000.

VIG Partners recognized this challenge with the acquisition of an 86% stake in domestic funeral services provider Good Sangjo for KRW85 billion ($58.6 million). It is said to be the first private equity investment in the country's funeral services industry. "These are elaborate ceremonies, receiving hundreds, sometimes thousands of guests," explains Jason Shin, managing partner at VIG. "Koreans all abide by the traditional funeral service, but they're much less equipped to do so in this day and age."

Good Sangjo offers coffin, shroud and transportation services to some 80,000 subscribers. This client base has so far generated KRW75.9 billion in accumulated prepayments - a cash flow that has increased at a compound annual growth rate of 15% since 2010. The company operates much the same as a life insurance provider except if the loss of a family member occurs within the contract period, subscribers are required to pay the balance of the service costs in a lump sum.

Value-add plans therefore draw largely from VIG's experience with Tong Yang Life Insurance. The plan is to enhance marketing and bookkeeping by bringing in Tong Yang's former sales director and chief financial officer.

This emphasis on improving back-end management reflects the often unprofessional nature of the funeral services industry, where formal corporate operators control a small fraction of the market versus widespread mom-and-pop outfits. In Korea, the two biggest companies claim only 20-30% of the market combined, while Good Sangjo and a host of independent players compete for the rest with shares of 1-5% each.

This potential for consolidation has prompted VIG to envision growth through acquisitions and an exit via trade sale. Fragmentation has also led to the industry being highly susceptible to corruption - creating a barrier to entry for competitors based on difficult deal sourcing.

"It took us a long time to be convinced we had the right target in this industry because of history of financial scandals, the reputational risk and the damage to the brands of the players over the years," Shin says. "This company is one of the few that has been free of any scandals. It has an excellent track record of servicing the client and managing money."

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• Topics
• North Asia
• Consumer
• Buyouts
• Support services
• South Korea
• VIG Partners