Profile: Crescendo’s Kevin Lee

Kevin Lee, founder of Korea’s Crescendo Equity Partners, got his first taste of private equity in 2006, when KKR, Bain Capital, Silver Lake Partners, Apax Partners, and AlpInvest Partners acquired Dutch semiconductor company NXP. As a consultant for McKinsey & Company, Lee was based thousands of miles away from the deal in Korea but was brought on board for his specialist industry knowledge.

“I liked what I did at McKinsey, fixing up businesses. But in private equity, you have the decision-making power to implement what is recommended. I was really impressed,” he said. “If the owners of the business don’t implement what I recommend, it goes to waste. But with these private equity sponsors, the implementation was quick, and you get to see the results. That was kind of shocking to me.”

Lee started his career as an engineer for Intel and transitioned into business by co-founding semiconductor industry supplier LNL Technologies alongside one of his university professors. Recognising holes in his business skills, he joined McKinsey in 2005. “I considered it as taking an MBA course for free,” he said.

The ability to balance the engineering and business sides of his brain has been Lee’s essential contribution to Korean private equity in the ensuing 15 years.

From the business perspective, the ways of engineers can be frustrating. Left to their devices, there is a tendency to endlessly over-specify products, adding unmarketable features or uneconomic processes to the assembly line. From the engineering perspective, the suits don’t get the trenches of technological invention. Speaking the language of both sides has made Lee an uncommonly trusted investor.

“When we first meet, we just talk about the technology and the difficulty of running an engineering company. We don’t talk numbers, P&L [profit and loss], balance sheets – that’s later. That really lowers the bar for them,” Lee said. “They’re really surprised. You feel like it’s something they’ve been looking for over a long time and no one else has been able to provide it.”

The Thiel connection

Lee’s first job as an investor was with Hong Kong’s Excelsior Capital Asia from 2007 to 2012. Although he had no investment experience – not even anything of note on a personal level – the generalist GP hired him as a Korea-focused investor, not an operations specialist. During this period, Crescendo’s thesis – which required a more localised, tech-only approach – began to form.

As arguably the only engineering PhD in the Hong Kong private equity scene in the early 2010s, Lee caught the attention of Thiel Capital, the family office of PayPal co-founder Peter Thiel. The firm was looking to repeat its US technology investment success in Asia, and duly seeded Crescendo’s first project fund, which invested in Korea-listed Hanmi Semiconductor in 2013. Hanmi currently has a market capitalisation around KRW 1.2trn (USD 900m), about 5x larger than at the entry valuation.

Crescendo built up its track record with three project vehicles before launching a debut blind pool fund in 2015. It closed a year later on KRW 74bn. The firm scaled up to KRW 450bn for Fund II in 2018 and then closed Fund III on USD 910m last December, beating a target of USD 700m. Meanwhile, there have been 10 project funds.

The LP re-up rate from vintage to vintage is said to be 100%. Historically, investors have included the likes of Korea Growth Investment Corporation, Korea Scientists & Engineers Mutual-aid Association, National Pension Service, and Korean Teachers’ Credit Union. One of the key objectives of Fund III – to attract international investors – was achieved within three months of launch.

As of the Fund III close, Crescendo claimed to have deployed more than USD 1bn, generating a 38% IRR. Lee attributes this in part to an interactive investment committee and transparent, horizontal culture that encourages inventive thinking in terms of deal structures and investment plans.

He also observes that being a technology specialist with an engineering background has allowed his firm to consistently invest on a proprietary basis. This is now considered practically essential to realising decent returns in an increasingly competitive Korean market.

“We had to be creative to continue doing proprietary deals, and one of the methods we use is buy-and-build, combining several synergistic technology pieces to make a full solution. This requires a lot of thinking, deep sector expertise, and strong partnerships with engineer founders and management.”

Much of the value-add in these deals is about understanding the technical bottlenecks to growth, correctly diagnosing and removing them. There is also a substantial element of cultural influence in terms of instilling a mindset of entrepreneurialism about aggressive expansions and new ideas.

Still, the most important advantage of domain expertise in Lee’s playbook is more about deal sourcing than operations. He highlights Hanmi as the template-setting example of a hidden local champion with potential to go global. This is a class of industrial supplier common in the ecosystems of Korea’s chaebols, but it takes an engineering eye to spot them.

“The company needs to have relevance in the global market. If it’s a product that’s working in Korea and Samsung is satisfied, but we can’t really find other global customers – that’s a hidden champion, but it can’t become a global champion,” Lee said.

Management experience and culture are also key variables. Chaebol suppliers invariably have good products, but despite a disproportionately large export economy in Korea, owners and founders are often happy staying in the domestic market. Either the opportunity is to be avoided or a step-change is necessary.

“That part is not easy, and that’s where we come in. Our job is to find globally minded managers and put them into the hidden champions,” Lee said. “They know where to take the company. They know the starting point and the ending point and how to connect the dots. That’s how we transform companies with executives.”

Confronting uncertainty

Crescendo is pursuing this strategy with its largest war chest to date at a time of uncertainty in one of its core markets. Semiconductor companies with pandemic-inflated inventories are increasingly seen as vulnerable in an expected macro downturn, with consumer-driven demand for chips already trending down globally.

Lee is confident, however, and quick to point out a string of false alarms in the industry such as the transition from PC to mobile and the advent of cryptocurrency mining. Moreover, he notes that semiconductor cycles are merely punctuations in a longer growth trend in demand for chips; McKinsey estimates the industry will be worth USD 1trn by the end of the decade.

“Every downturn and upturn, they think, ‘This time it’s different.’ We’re clearly going into a downturn, maybe we’re already in it. And a lot of investors get burned when they’re caught in the wrong direction of the cycle. But it will eventually come back. You just have to weather through this,” Lee said.

“As an investor, the best bet against inflation or any other uncontrollable macro issue is to invest in global champions with sound business. They tend to have high gross margins, which will absorb most of the raw material price fluctuations and still maintain solid financial health. Thus, our philosophy is to hold these global champions and not to worry too much about these things.”

Lee added that the long-horizon nature of private equity also helped insulate his firm from cyclicality, but his core views on the subject betray his engineering roots. Playing the cycle with knowledge can help in terms of entry and exit valuation, but the basis of the investment must be in astute deal selection, operational buildouts, and understanding what the company needs.

For Lee, the natural extension of this philosophy has been an expanded value-add toolkit. Whereas early deals focused on management support and capital provision, there is now more work in supporting synergistic acquisitions whether they be vertical or horizontal expansions.

“In a way, we are acting like big tech companies like Google in Asia Pacific,” Lee said. “Eventually, I see Crescendo providing capital and management support throughout the full capital cycle and structure of a tech company as a one-stop shop financial partner.”

Recent activity that appears to be pushing strategic boundaries include a KRW 1bn investment in e-commerce marketing software provider Biginsight that has been described as a Series A round. Other early-stage bets have been on start-ups with as little as USD 5m in revenue.

The standout deal in this vein could be a USD 50m investment in Qxpress, a Singaporean e-commerce logistics company, in 2019. Qxpress is currently planning to acquire Korea’s Tmon, an e-commerce platform backed by the likes of KKR and Anchor Equity Partners, according to local media.

“We’re not doing venture capital,” Lee said. “We’ve bought out early-stage companies and then combined them into a sizeable company. We do acquisitions based on technology, not P&L. So, it may appear to be early-stage venture, but we have a specific purpose for that acquisition.”

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• Topics
• North Asia
• GPs
• Technology
• South Korea
• Crescendo Equity Partners
• semiconductor