Size matters: Korea's heavily contested buyouts

Korea's growing significance as a buyout market is well-documented. It accounted for 10% of Asian buyouts in 2012 by dollar value, 18% in 2013 and 26% in 2014. It slipped to 17% last year but only because of some sizeable infrastructure privatizations in Australia and take-private deals in China. The amount of capital committed to control transactions in Korea came to a record $10.8 billion, up from $7.7 billion the previous year.

However, 2015 also offered a telling insight into the highly concentrated nature of the market. Without the $6.4 billion acquisition supermarket retailer Homeplus, the annual total would have been far less impressive.

Of the $15.7 billion PE firms invested in Korea last year, more than half went into four deals each worth in excess of $500 million. There was a similar percentage split in 2014. AVCJ Research has records of 12 investments of $1 billion or more in Korea since 2007 and nine of those were announced in the last four years. The country will likely continue to deliver large transactions but it is difficult to envisage much more of the size of Homeplus or a buyout total as high as 2015.

It is worth noting that five of the seven largest deals on record involved divestments by foreign multinationals: Homeplus, Halla Visteon Climate Control, ADT Caps, Oriental Brewery, and ING Life Insurance Korea. The decisions to sell were either strategic or driven by financial pressure. This could not be described as a consistent source of deal flow in any Asian market. For Korea in particular, there has been steady stream of opportunities emanating from domestic conglomerates, but large-scale transactions have been relatively few in recent years.

Taken in the context of Asian private equity as a whole, this scarcity translates into a feeding frenzy. Korea, Japan and Australia are, for now, the region's only leveraged buyout markets of reasonable scale so whenever a large asset becomes available - and in the majority of cases it is an auction situation - everyone has a look. The pan-Asian managers might only see one or two such opportunities in each of these markets every year. As was the case with ADT and Homeplus, valuations were pushed ever higher.

This dynamic is only healthy as long as the investors submitting bids remain disciplined; it remains to be seen whether some of the 10 $1 billion-plus investments that have yet to be realized turn sour as market conditions put debt packages under stress or stymied value-add plans result in exit offers falling short of entry valuations.

Private equity firms should also be flexible in their approach to Korea. Affinity Equity Partners, for example, entered the bidding for Homeplus but its most recent local deal was a $180 million buyout Burger King Korea. Similarly, Bain Capital recently made its debut in Korea with a $350 million investment in cosmetics player Carver Korea in partnership with Goldman Sachs.

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• Topics
• North Asia
• Buyouts
• GPs
• South Korea