Korean IPOs: The public eye

Last year’s IPO of ING Life Insurance marked a turning point for South Korea’s private equity industry – but it almost didn’t happen. The company’s private equity owner MBK Partners, which had acquired it from ING Group for $1.65 billion four years earlier, had originally planned on a trade sale, but couldn’t reach an agreement with the buyer on the valuation.

MBK then turned to its plan B, a listing on the Korea Exchange (KRX). While Korea’s buyout firms had traditionally viewed a domestic IPO as a last resort due to regulatory restrictions on exits by controlling shareholders, those rules had recently been loosened, and MBK felt that even in the still tightly-controlled market it could bring in a significant reward.

This faith turned out to be justified, as ING Life’s offering took in KRW1.1 billion ($972 million), all for shares held by MBK. Though listing rules required the insurer remain under MBK’s control, the partial exit has already helped the firm book handsome returns for its LPs.

“Once they decided on an IPO, they realized they could reduce their stake and refinance their acquisition vehicle,” says Howard Lee, a managing director in the Seoul office of BDA Partners who advised MBK on the acquisition of ING Life. “So even before divesting the remainder of their stake, they’ve already recouped the principal through the IPO and the refinancing. Whatever else they get from the final exit is all upside.”

The ING Life IPO was the first by a private equity-owned company in Korea, and it was quickly followed by VIG Partners’ KRW66.8 billion listing of camera lens manufacturer Samyang Optics. Now a number of other buyout firms are reportedly hoping to repeat these GPs’ successes, and market observers believe managers that can meet the unique demands of the market will find the path rewarding.

Philosophical change

The decision in 2017 to allow IPOs by companies with PE owners in South Korea represented a significant change in regulator’s attitude toward the public market, which had previously been marked by an almost paternalistic concern for protecting small shareholders. The prevailing view was that PE firms were focused on fast exits and posed an inherent risk to retail investors in companies they controlled. 

Consequently, buyout firms were effectively barred from listings – though companies with minority PE shareholders could still pursue IPOs, since regulators believed growth investors’ exits would not negatively affect management.

“They have two key factors when they review companies: one is the sustainability of the management, and the second is the protection of the minority shareholders that come in through the listing,” says Hoeboong Kim, director of the IPO team at Mirae Asset Daewoo, who worked on the Samyang and ING Life IPOs. “Historically the KRX has been concerned about PE firms selling all their shares and getting out.”

Opening up listings to a wider variety of companies was intended to encourage more IPOs, as was the announcement that secondary share sales would be allowed in these offerings. This had the effect of making an IPO more attractive for controlling shareholders, since they would be able to realize an immediate return on their investments rather than having to wait for the lockup period to expire.

The relaxation on secondary sales was accompanied by a major caveat, however, in that a majority shareholder must maintain a controlling stake for at least six months following the offering. As a result, MBK and VIG only sold 40% of their shares in the ING Life and Samyang IPOs, respectively.

Restricting secondary sales is another method of protecting minority investors from the loss of direction that regulators fear may accompany the exit of a controlling shareholder. But many market participants feel this concern is misguided and reflects a misunderstanding about the nature of corporate governance that has long held back South Korean companies.

“A fundamental challenge for Korean management and corporate governance is the notion of having an owner,” says Richard Lee, a senior partner at McKinsey & Company. “Most companies have a controlling shareholder, and that shareholder tends to have nearly absolute control. So the board of directors in most Korean companies won’t have the kind of power they would in a Western company.”

Some GPs believe the restrictions present an opportunity to change this attitude by showcasing the benefits a PE investor can bring to a company’s management. VIG, for example, has emphasized transparent and professional governance during the lockup period for Samyang, hoping to demonstrate how management has prepared the company for a future that doesn’t include private equity.

“If you look at the US and Western Europe, a lot of highly efficient, well-managed companies are public companies that are in the hands of professional management and a professional board of directors,” says Jason Shin, a managing partner at VIG. “Having a controlling shareholder isn’t always necessary to protect minority shareholders – I actually think that having a company in the hands of experienced industry professionals who have to answer to the public market is the better way.”

Bridging the gap

PE-owned companies are currently a small part of the pipeline – Mirae’s Kim estimates that of around 80 businesses preparing to list in South Korea, five are controlled by private equity firms – but market observers are confident this cohort will continue to grow as regulators become more comfortable with the idea of companies without a single voice that dominates decision-making.

Buyout firms must also come to terms with the unique requirements of listing in Korea, and prepare a suitable operational strategy following the IPO. A properly prepared GP can reap the best of both worlds.

“We may see upside coming up in two to three years because of certain R&D events or geographical expansion, and therefore it’s too early to sell the entire company, but we still want to return capital to LPs,” says VIG’s Shin. “An IPO is a great way to bridge that gap and return capital while still retaining the ability to add strategic value to the underlying company.”   

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• IPO
• GPs
• Regulation
• South Korea
• Exit
• VIG Partners