Korean political crises present PE opportunities

Industry participants speaking at the Hong Kong Venture Capital & Private Equity Association’s (HKVCA) Asia Forum concluded that the election of a new government last year in South Korea has had an important impact on the business environment. This was contextualized as following closely on two episodes of high political volatility: the impeachment of President Park Geun-hye and a diplomatic fallout with China over the THAAD missile defense system.

Michael Chung, head of Korea and managing director at Morgan Stanley Private Equity Asia, said that the new administration under President Moon Jae-in introduced business challenges related to fair trade, labor rules, minimum wages and taxes. However, Chung identified opportunities in new energy and public housing policies that could be a boon to the renewables and construction sectors, respectively. He also indicated that new regulatory headwinds could help drive M&A activity.

“When continuing to manage your business becomes more challenging, you will be more receptive to swapping equity for cash, and that is what we began to see in the second half of last year,” said Chung, noting ongoing challenges for GPs around high local enterprise valuations. “When you see double-digit EBITDA multiples being paid for similar businesses, you’re less receptive to receiving a bid at a single digit. But with these changes of risk appetite in the market, I think deal flow will enhance this year.”

South Korean investors agreed that the recently chilled relations with China could be the most severe consequence of ongoing tensions with North Korea. The installation of THAAD, whose radar covers China, precipitated a number of embargos, especially in Korean cultural exports. In other sectors such as technology, Korean companies dependent on Chinese customers have been incentivized to partner with private equity, according to Jenhao Han, CEO at KCA Capital Partners,

“For those companies, it is a must – it’s not a choice – to be able to do more business in China,” said Han. “So in that kind of situation, with some of the negative political development around THAAD, for us to talk to some of these companies, it created a more favorable reception for them to consider us as an investor. For Korean companies, it was very important to have an investor that could help them navigate through that kind of situation.”

The panel observed that although broader geopolitical concerns about the North did not appear to discourage investment activity, economic confidence in the face of intense saber-rattling could be a symptom of problematic market complacency. This perspective was set against a long-term assessment of the new political regime in the South that suggested a future of continued uncertainty.

“The heart of their policy is trying to recognize that Korea is not going to grow at 5-10% anymore, so all the policies are geared toward growing at the maximum potential that the economy has,” said Jaewoo Shim, managing director at Clearwater Capital Partners. “This is probably going to be a multi-year journey, and it’s probably not going to be a smooth ride.”

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• Topics
• North Asia
• GPs
• Regulation
• South Korea
• HKVCA
• Morgan Stanley Private Equity Asia
• Clearwater Capital Partners