Profile: Elevation Equity Partners’ Gordon Cho

Gordon Cho was negotiating the most important deal of his life – without a voice. It was 2018, and after nearly two decades with the same company, albeit under several different brands, Cho had decided to strike out on his own. He had a name: Elevation Equity Partners. He had a team: his Korea-based colleagues at The Rohatyn Group (TRG). And, unfortunately, he had a throat condition.

The condition was serious enough for doctors to outline the risks of permanent voice box damage. Cho underwent four surgeries and couldn’t speak for six weeks after each one. Voice communication was kept to a minimum in between. Meetings were often conducted using two laptops: Cho would type his comments into one and the person sitting opposite would read them on the other.

Discussions with TRG over the spinout mostly took place in person in Hong Kong and Seoul. Cho was reluctant to delay. The team was also overseeing a CEO-led buyback of TRG’s stake in Korean fried chicken restaurant franchisor BHC Group (Elevation contributed equity to the deal) and wanted to capitalise on the value creation story when raising money from local LPs for new investments.

“The surgeries started first, then the spinout. I gave them a heads up that there was a medical situation and it led to interesting communication during that period,” Cho said.

The BHC transaction was announced in November 2018 and the company has thrived, its valuation growing threefold. The spinout was completed two months later, and Elevation has since made two more investments on a project fund basis. Cho’s voice is weak but functional, with one more surgery required. “I can’t yell,” he noted. “My wife and kids quite like it.”

He describes the experience as humbling and ascribes the perseverance required to his religious faith. “It reminded me there are greater powers at work here, and no matter how much I try, things won’t work unless God allows it,” Cho added. “Without my faith, I don’t think I would have been able to carry it through. My faith is very important to me. I was brought up like that.”

A Korean education

Cho cut his teeth with Korean chaebols, first in the strategic planning department at Samsung Electronics and then with the M&A team at LG Group. Raised in Canada, he travelled to Seoul to explore his Korean roots and then planned to return to North America and embark on a career.

However, the late 1990s were an intriguing period as the country dealt with financial crises and much of the corporate fabric was redrawn, attracting a slew of private equity investors. Cho reasoned there was no better way to experience Korean culture than by working for a local company. Initial projects at Samsung included planning where to build semiconductor plants overseas.

“Korea was still dealing with the crisis. There was a sign in the washroom at Samsung that said, ‘Each paper towel costs one cent, use them wisely,’” Cho recalled. “But it was a case of if I didn’t go then, maybe I never would. I only wanted to stay a year or two, but I ended up staying 20.”

Private equity appeared on the agenda when Citibank decided to establish a venture capital unit in Korea in 2000. Cho was among the first recruits tasked with originating and managing balance sheet investments. He remembers it as a heady time with the dotcom bubble at its fullest.

“I would be standing in the lobby of a building and guys would come up to me saying, ‘You are part of Citi Ventures, here is my card, I have a business plan.’ Anyone with a PowerPoint presentation could get USD 5m in funding at a pre-money valuation of USD 10m,” he said. “Those were the days in Asia when people were taking helicopters from Central [in Hong Kong] to the airport.”

The Korea team completed a handful of deals, including a successful investment in a mobile handset business established by engineers from Samsung and LG. Within two years, though, the bubble had burst, Citi changed strategy, and Cho was moved to Hong Kong under a region-wide mandate.

The rationale was that having country teams operating as their own silos bred inefficiency and this was an obstacle to the sharing of best practices and investment templates. Cho was part of a 20-person Asia team – though India remained separate – that targeted deals in China, Australia, and everywhere in between.

The Korea portfolio featured KSNet, a payment solutions business that offered point-of-sale terminals and an online payment gateway. Citi Venture Capital Investment (CVCI), as Cho’s division became known, backed the company in 2007 and exited three years later with a 3x return when South Africa-listed Net 1 UEPS Technologies completed a USD 233m acquisition.

This transaction was completed using third-party capital because CVCI’s track record had become substantial enough for LPs to get interested. The firm won support for two global emerging markets funds – a USD 1.5bn vehicle in 2005 and a USD 4.3bn vehicle in 2007.

Another Korean investment came in 2013 when CVCI acquired a majority stake in BHC for around USD 100m. The company was the smaller of two fried chicken restaurant brands owned by Genesis Group, ranking sixth in the industry by revenue and 12th by brand awareness. BHC was struggling financially but CVCI thought it could rejuvenate the business by switching to a gastropub format.

“They had great hardware – the company had its own logistics, its own central kitchen – but poor software. Everything was dictated by the chairman and majority shareholder. Every time a new product came out, he would taste it and say, ‘It’s too spicy for your target market,’ and they would revise the ingredients,” said Cho. “Just changing the ownership created a lot of value.”

BHC and beyond

When CVCI invested, BHC had 730 restaurants, of which 30% were “beer zone” establishments designed to appeal to a younger generation of after-work drinkers and diners. CVCI encouraged management to double down on this strategy.

By the time of the buyback in 2018, BHC had 1,400 outlets and half fell into the beer zone category, with expanded menus, modernised store layouts, mood lighting, and craft beers. The company had become Korea’s second-largest fried chicken player by revenue and store numbers.

Tighter franchise management was also introduced, which helped BHC stop losing franchisees and start gaining them, while improvements to procurement processes strengthened bargaining power. These moves – along with bolt-on acquisitions of four separate brands that took the overall restaurant count to approximately 2,100 – contributed to a more than fivefold increase in EBITDA.

“These businesses are very cash generative. Once you build a platform, have a logistics centre, a central kitchen, a sales force recruiting franchisees, and a quality control team that can ensure quality assurance, it’s very easy to plug and play,” said Cho. “And then it’s Korean fried chicken, which is a staple, a catchphrase. The growth potential was huge because it was so non-trendy and stable.”

Long before the BHC investment closed, it became clear that CVCI would separate from Citi. The Volcker Rule, implemented in the wake of the global financial crisis, curtailed the banking industry’s exposure to alternative assets, prompting Citi to offload interests spanning hedge funds, real estate, infrastructure, special situations, and private equity. CVCI was among the last to be sold.

TRG already focused on emerging markets and viewed the acquisition of CVCI’s USD 4.3bn portfolio as a means of adding private equity to an existing hedge fund-oriented offering. However, plans to raise a new fund through a stapled secondary transaction – widely acknowledged by investors and advisors at the time – failed to materialise. Cho declined to comment on the matter.

TRG opened a Seoul office in 2016 to support local investment activities. The Korea team supported its activities, specifically bolt-on acquisitions by BHC, by raising a KRW 100bn (USD 81m) project fund. They began to consider the prospect of an independent future.

“At the time of our departure, we had shown we could raise capital from Korean LPs, and we had shown that we could add value to companies – the BHC exit was evidence of that,” said Cho. “Some Korean LPs complain that they are paying management fees to managers who don’t bring enough value-add. If you can demonstrate an ability to do this, they are more comfortable.”

Elevation’s equity contribution to the BHC buyback also came from a project fund. However, the bulk of that deal comprised debt, with MBK Partners providing a mezzanine tranche. Two years later, Ontario Teachers’ Pension Plan (OTPP) invested in the business at an enterprise value of KRW 1.8trn – the buyback was valued at KRW 600bn – facilitating a full exit for Elevation with a 2.6x return.

MBK converted its debt to equity at the same time. Then, in 2021, it raised a USD 500m continuation vehicle that acquired the position from the special situations fund that made the original investment. Partners Group, which anchored the continuation fund, noted that BHC was growing faster than its peers and the fried chicken space was growing faster than Korea’s quick service restaurant market.

Feeling elevated

Elevation still basks in some reflected glory from BHC. Last year, when pursuing a majority investment in Lumena, a Korean consumer electronics brand best known for making camping lanterns and portable fans, Elevation highlighted its consumer sector credentials. Lumena’s founder and management team called up people in their network to find out more about BHC.

“It used to be the case that nine out of 10 Korean founders would say, ‘How dare you ask to buy my company.’ Now, they are more open to selling, so the question becomes 'What do these private equity firms do?' In the last 3-5 years, we’ve noticed they have started doing reference checks,” said Cho.

“It’s a small market, so people talk. They will do a lot of due diligence on you, especially if you’re taking a 70% stake and the founder is keeping the rest. By the second meeting, they know what deals you’ve done, how you’ve worked with management, and how you’ve exited.”

Elevation was impressed by Lumena’s robust profit margins, which are underpinned by minimal marketing expenditure and reliance on word-of-mouth. Online comments are parsed thoroughly, and if the same issue comes up five times, they ask the design team to improve functionality.

The private equity firm’s value creation initiatives include strengthening the management team, establishing more offline distributor relationships to complement already strong online sales, and entering overseas markets. Cho draws comparisons between BHC, Lumena, and many other opportunities he looks at: good on product and hardware, lacking in software.

Elevation relied on project funds for the investment in Lumena and a more recent deal involving genetic testing services provider Dx&Vx. This will remain its strategy for the present. While Cho doesn’t rule out raising a blind pool fund from global LPs, he notes that conditions are tough for first-time managers. In the meantime, Korean LPs are generally supportive of deal-by-deal strategies.

He is also enjoying a second wind, with a voice returning to full health and a future that – after years spent as a small piece within a larger organisation – is finally guided solely by his own hand.

“It’s great to remove frictions that take away from the essence of what you are trying to do. You can create your own culture and enjoy it, waking up and wanting to work with people,” Cho observed. “The downside is there’s no such thing as a vacation, you are on it 24-7. It’s a huge responsibility having to take care of a team, career-wise and compensation-wise, but it’s also rewarding.”

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• Topics
• North Asia
• GPs
• Buyouts
• Consumer
• South Korea
• Elevation Equity Partners