Korean GPs worry about valuations, wage hikes - AVCJ Forum

"We see increasing levels of volatility in the public markets, which could be a sign pointing to the highly anticipated recession. That’s why we have always been very cautious about valuations,” said T.J. Kono,a partner at Unison Capital.

Private equity investment in the country for 2018 has already reached $13.6 billion, the second-highest annual total on record. Five deals account for more than half the capital committed, with one transaction - Hahn & Company's acquisition of SK Shipping - making up one quarter on its own. Consumer, industrials, financial services, and infrastructure are the most active sectors.

However, public markets have been weak, with the KOSPI index shedding 17% since November 2017. There are fears this could spill over into the PE market. At the same time, the Korean government plans to increase the country’s minimum wage by 10.9% in 2019, which will raise labor costs for all companies.

We started advance preparations when this proposal was announced. One of the measures we used was to replace some foreign workers in portfolio companies with more expensive but also more skilled Korean workers to improve the efficiency while saving on costs,” said Younggi Han, executive director at VIG Partners.

Meanwhile, for IMM Private Equity, automation has provided an answer to the problem. “One of our portfolio companies is a coffee shop chain and we have created robots to produce coffee. With just one press of a button, you get 10 cups of coffees, which saves a significant amount of time and labor,” said Hae-Joon Joseph Lee, a partner and CIO at IMM.

Labor intensive sectors such as manufacturing are expected to bear the brunt of the minimum wage increase, so GPs are looking to steer clear of these sectors. They remain bullish on consumer plays. "In some red-hot sectors like food and beverage, some distressed assets could also emerge. These sectors remain highly attractive to PE,” Han added.

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• Topics
• Consumer
• North Asia
• Buyouts
• Industrials
• South Korea
• manufacturing
• VIG Partners
• IMM Investment
• Unison Capital
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