Fund focus: Glenwood gains traction with carve-out thesis

Glenwood Private Equity made the case for switching from deal-by-deal to blind pool funds – not easy when dealing with a Korean LP base – by highlighting returns foregone.

The firm made its name through two investments that were completed and exited within a three-year period from mid-2014: consumer appliances maker Tongyang Magic was acquired from struggling chaebol Tongyang Group for USD 300m and sold to SK Group for twice that sum; and Halla Cement was carved out from LafargeHolcim for USD 600m and sold to Asia Cement for USD 720m.

In each case, Glenwood participated on a project fund basis – largely relying on commitments from Korean financial institutions – and brought in a co-investor: NH Private Equity for Tongyang Magic, and Baring Private Equity Asia (BPEA) for Halla Cement. Glenwood was the largest shareholder in Halla Cement, but BPEA leveraged its superior bargaining position and took most of the upside.

“They provided common equity, and we provided mezzanine funding, and they were allowed to call our position on reaching a certain milestone. They exercised that option as soon as possible, and a few months later, they sold the business for a phenomenal return [sources told AVCJ at the time that it was a 2.4x multiple and a 70% IRR],” said Michael Chung (pictured), co-founder and CIO of Glenwood.

“We went back to our investors and said, ‘You know the deal was ours, but we brought in Baring because you wouldn’t back the whole transaction, and they enjoyed all the upside. You know what we can do, so now we’re going to raise a blind pool fund.’”

Glenwood closed Fund I on KRW 450bn and went on to make five investments, all but one of which have been exited. Distributions to paid-in (DPI) are currently 227%, while the IRR is tracking at 49%. Including the project fund deals, the firm has invested USD 2.5bn and returned USD 3bn.

This performance laid the foundations for Fund II, which closed a couple of months ago on KRW 900bn. The fundraising process took less than 18 months, and the corpus is already 20% deployed in one investment. There are likely to be around seven in total.

The LP base remains domestic – the National Pension Service (NPS) and Korean Teachers Pension are among the participants – but Glenwood is keen to broaden its reach when returning to market with Fund III. “We want to diversify our investor base to include foreign investors,” said Chung.

Space in the middle

The firm was established in 2013 by Chung, Sangho Lee, and Chan Jung. All three have Wall Street experience: Chung with Rothschild, Lee with Goldman Sachs, and Jung with Deloitte. Lee and Jung, who serve as CEO and COO, respectively, previously worked together in the finance department of Samsung Electronics. Lee’s father was formerly vice chairman of Samsung Group.

“We understand Korean culture and we have exposure to global financial markets, so we thought we could do well in Korea,” said Chung. “When we were returning, the likes of MBK Partners were becoming large while most local GPs were still small. The lower middle market was crowded but there was less competition in the upper middle space, where deals are USD 300m to USD 1bn.”

At the same time, domestic LPs were becoming more open to backing managers on a project fund basis. Chung notes that the middle market used to be dominated by Anchor Equity Partners – which raises capital from offshore LPs – but the emergence of more local players was inevitable.

The strategy is almost exclusively corporate carve-outs, from chaebols such as Tongyang and from multinationals like LafargeHolcim. Glenwood’s collaboration with BPEA on Halla Cement originated from an earlier effort to acquire Tongyang’s cement business. Lafarge was also involved in that deal and it came to nothing because of the company was bogged down by its merger with Holcim.

However, Chung avoids looking at the chaebol opportunity purely in terms of distress-driven divestments along the lines of Tongyang Group, which went into receivership in 2013. The new generation of carve-outs is driven by a new generation of leadership at the likes of Samsung, Hyundai Motor Group, LG Group, and GS Group.

“These companies used to be all over the place, with businesses ranging from semiconductors to department stores. Now they want to have a clearer focus as to where they are going. That means having a few core areas and the non-core areas should be gone,” Chung explained. “We want to invest in non-core businesses that have the potential to be core businesses for other groups.”

All Glenwood’s exits to date have been trade sales, to a combination of strategic and financial buyers. Coated glass manufacturer Hankuk Glass Industries (HanGlas) was acquired from France-based Saint-Gobain and sold to LG spinout LX Group for a 3x return. Two city gas businesses were carved out from GS and exited to Macquarie Infrastructure & Real Assets (MIRA), for 2x and 3x, respectively.

Most recently, BPEA paid a reported USD 1bn for Glenwood’s position in advanced materials specialist SKC Kolon PI. Glenwood acquired a majority stake in the business from SK affiliate SKC and Kolon Industries for USD 512m in 2020.

Room for improvement

Typically, the private equity firm targets mid-market assets with strong management teams, where businesses were previously overlooked by corporate parents, leaving plenty of capacity for business development and operational improvement. Halla Cement, for example, invested in equipment to recycle heat from its kilns and generate electricity that was sold to third parties.

“The net present value (NPV) is high, and a return is guaranteed within three years, but the idea was just sitting there because all Lafarge wanted was cash from the business,” Chung said. “In the first 100 days, you must focus on mentality. Management teams have got used to all decisions being made by headquarters, and often these decisions don’t represent the best interests of the company.”

Centralisation is a case in point. Chung noted that the benefits of economies of scale accrue to the parent, even though a subsidiary might be importing materials from overseas rather than using cheaper local sources. At the same time, whenever maintenance work is required, the parent sends in consultants – and charges subsidiaries for those services – even if there is sufficient local expertise.

Glenwood, which has an 11-person investment team and no operating partners, emphasises empowering incumbent management teams rather than parachuting in new executives. This helps in executing carve-outs from chaebols, where there is always heightened sensitivity around job preservation. Glenwood guarantees no job cuts or HR-related restructuring for five years.

“We want to maintain good relations and establish a good reputation with executives and labour unions. When we were looking at bolt-on opportunities for one of the city gas businesses, the labour union from one of the targets contacted our portfolio company’s union to ask about Glenwood and whether we were treating them fairly,” said Chung.

“Korea is a small country. If you do something wrong or break a promise, you’re in trouble.”

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• Glenwood Private Equity