Korea PE outlook: Exit issues

The South Korean government entered 2018 gearing up for a banner year for IPOs on KOSDAQ, the local equivalent of NASDAQ. A raft of initiatives were rolled out, including tax breaks and lower qualification criteria for listing applicants. Expectations were high, thanks in no small part to strong public markets performance in 2017. This would in turn facilitate exits for PE and VC investors.

Ten months on, it all seems like wishful thinking. The KOSPI 200 Index peaked at 338 points in late January but has since fallen back to 273, the lowest level in 17 months. This volatility has played havoc with the government’s plans for KOSDAQ.

There have been 10 PE and VC-backed IPOs so far this year, down from 30 in 2017. The main board has fared slightly better, with the number of listings rising from four to 17, but overall proceeds for Korean IPOs have slumped to $703.9 million from $2.9 billion. Investors have been forced to come to terms with longer-than-expected holding periods – including ACE Equity Partners, a middle-market buyout firm that had planned to take one of its companies public this year. It is now exploring other options. 

“It came as a surprise that the public markets have underperformed, particularly in the second half of the year. Consequently, a lot of IPO plans have been put on hold,” says David Ko, founder and CEO of ACE. “Due to the changing micro and macro political and economic environment in South Korea and Asia – as well as in the US – investor appetite for new offerings has not been positive in recent months.”

The market downturn has been ill-timed for President Moon Jae-In, who swept to power last year with promises of substantial reforms. The global economic recovery was supposed to spur growth prospects for Korean export-oriented corporates, but the Sino-US trade war has disrupted this vision. 

China and the US are, respectively, Korea’s first and second-largest trading partners. Exports account for 40% of GDP and many shipments are intermediate goods that are sent to China for final assembly and then distribution in consumer markets like the US. By taking aim at China through tariffs, the US has indirectly taken aim at the country’s supply chain partners. 

This export pressure has exacerbated longer-term concerns about capital outflows from Korea as investors seek cheaper alternatives. “Similar to Japan and Taiwan, Korea is now suffering from a ‘hollowing out’ of its industrial base. ‘Made in Korea’ may become obsolete,” says Sean Darby, chief global equity strategist at Jefferies, suggesting a link between the outflows and recent moves to increase the minimum wage. 

Target sectors

Despite these questions about Korea’s industrial base, PE firms are still happy to invest in areas that they see as more defensible. To date, Crescendo Equity Partners has completed the largest fundraise of 2018 by any independent Korean GP, collecting commitments of KRW450 billion ($398 million) for a strategy that focuses on industrial technology. It targets businesses that are globally competitive.

Similarly, the largest private equity investment of the year is in a heavy industry asset. Hahn & Company secured a $3.7 billion restructuring of SK Shipping, which operates vessels that carry crude oil to SK Holdings’ refineries and then transport petroleum products to international customers. The company came unstuck investing in new capacity at the wrong point in the cycle, but Hahn & Co. is betting on the operational excellence of Korea’s shipping industry.

The SK Shipping deal has helped overall private equity investment in Korea reach $11.6 billion for the year so far, compared to $12.9 billion for 2017 in full. It is standard for one or two very large transactions to skew the headline number. Since 2013, there have been only 21 deals of $500 million or more but they account for more than 40% of total capital deployed, according to AVCJ Research.

Of the 20 largest transactions announced from 2017 onwards, about half are carve-outs from domestic conglomerates that are either in distress or under pressure to divest non-core assets. The rest are a mixture of succession deals, secondary sales, and growth capital plays. Consumer, industrials, financial services, and infrastructure are the most active sectors. 

Industry participants generally agree they haven’t seen much downward pressure on valuations. Nevertheless, there is an overriding sense of caution. “Having a cautious, disciplined approach to entry valuation is critical, given that we are entering a period of severe valuation fluctuation,” says Kevin Lee, a founding partner at Crescendo. He claims to have no preference in terms of deal type or industry, but other GPs single out segments they prefer to avoid. 

For Jason Shin, a managing partner at mid-market PE firm VIG Partners, it is cosmetics and beauty products. “The multiples have been crazy. If you buy an asset at 20x EBITDA, you cannot assume that someone’s going to buy it at 25x,” he says. “Something’s got to give, especially if there’s a shake-up or volatility in the macro economy. I think cosmetics and beauty products is going through that already to a certain extent, or it certainly will do in the near future.”

If unsustainably high multiples make it difficult for private equity to buy, these are optimal conditions for selling assets. Towards the end of last year, Bain Capital and Goldman Sachs sold cosmetics supplier Carver Korea to Unilever for an enterprise valuation of $2.7 billion. The exit came just 14 months after they acquired a majority stake in the business for $370 million. Part of the improvement thesis was supporting expansion into China, where demand for Korean beauty and lifestyle products is strong. 

The strong exits theme has continued into 2018, with announced transactions worth $17.6 billion to date, compared to $10.8 billion for the entirety of 2017. Trade and secondary sales are the most active channel, although some industry participants question whether there will be a large enough pool of prospective buyers for assets that achieve significant scale. 

Nearly 20% of the year’s exit proceeds are from a single company: MBK Partners made a partial sale of ING Life through a block trade in April and then sold the remainder of its stake to Shinhan Financial Group in September. ING Life went public in 2017, becoming the first private equity-backed company to list following a relaxation of regulatory restrictions on exits by controlling shareholders. While it is hoped that IPOs can become an attractive option for buyout investors, as with the KOSDAQ situation there’s a lack of supporting evidence.

Three out of the four offerings on the Korea Stock Exchange in 2017 involved partial exits, but only ING Life and VIG’s Samyang Optics are controlled by private equity investors – and they were restricted to selling 40% stakes. “More PE firms are starting to consider using IPOs as an exit option in Korea, but it’s difficult because there are still many restrictions,” says one domestic GP.

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

• Topics
• North Asia
• Trade sale
• IPO
• Industrials
• Technology
• Consumer
• South Korea
• Ace Equity Partners
• Crescendo Equity Partners
• VIG Partners
• TMT
• manufacturing