Korea buyouts: Local edge

KKR’s $940 million investment in two divisions of LS Group last year – a partial spin-out of an auto components manufacturer and a full spin-out of a copper foil and laminate business – was positioned as a breakthrough for the private equity firm in Korea. It marked the GP’s first deal with a chaebol group and one of few secured by a global sponsor that wasn’t a forced distressed sale.

There was also a sense, prior to this transaction, that KKR had yet to crack Korea. The firm had made one of the country’s most successful exits from Oriental Brewery, but its peers were seen as getting the best deals. KKR’s stated aim is to make each local team among the leading players in its market. In Korea, though, buyouts were synonymous with two indigenous Asian GPs, Affinity Equity Partners and MBK Partners.

It is too soon to say whether the LS Group investment in fact represents a new dawn or a false dawn. What can be asserted with greater certainty is that getting Korea right can really pay off and global and regional sponsors are throwing more resources at the market in search of their own breakthrough deals.

A study published last month by McKinsey & Company found that private equity deals in Korea had delivered an average annualized IRR in excess of 20% since 2005, with returns sitting steadily in the 21-25% range over the past five years. Of the approximately $53 billion invested between 2005 and 2014, approximately $34 billion has been exited at an exit-to-entry valuation multiple of 1.4x.

Most of the action – in dollar terms – has been at the big end of town. Transactions of $500 million or more routinely account for over one-third of the capital deployed in any one year, rising to two-thirds in 2015, when an MBK-consortium’s $6.4 billion acquisition of Homeplus from Tesco tipped the balance. The $500 million-and-up club has also generated some of the best returns. The average annualized IRR for 2005-2017 is 22% versus 17% for deals in the $101-500 million bracket.

McKinsey outlines four key reasons for the rise of private equity in Korea, each one familiar territory for AVCJ: underperforming public markets and the slowdown in IPOs and secondary offerings, which allowed PE investments to become the primary source of equity capital; succession planning opportunities created by the retirement of first-generation owners; divestments of non-core assets by chaebol groups; and multinationals selling their local businesses and exiting Korea.

AVCJ Research has records of 18 transactions of $500 million and above since 2014. They include six chaebol divestments, four sales by multinationals, two purchases of stakes from founders, two private equity-to-private equity buyouts, and a sprinkling of growth-oriented and distress-driven deals.

The challenge is that success breeds competition. As pan-regional private equity players raise ever larger funds, any that don’t have a meaningful presence in Korea are in hiring mode – alongside Japan and Australia, it is one of few genuine leveraged buyout markets in Asia. But they are not the only investors with large checkbooks. Only half of those 18 deals were done by global or regional PE firms; interestingly, two of the others involved Hahn & Co, a country GP that is scaling up.

Indeed, neither of the two assets targeted by the usual suspects in 2018 ended up in their portfolios. First, CJ HealthCare went to Kolmar Korea and then SK Telecom picked up ADT Caps from The Carlyle Group. Several local GPs participated in the CJ HealthCare deal on a minority basis, and Macquarie did the same for ADT Caps, but these were essentially acquisitions by strategic investors.

As with any large-cap buyout in Asia’s current climate of elevated valuations, investors must pursue opportunities with conviction – acting with the belief that they can do something so transformative to a company that it justifies the asking price. Domain expertise, higher levels of due diligence, and operational involvement all play a role, but the real test of a deal team in Korea is in its ability to hone in on assets outside of auction processes. It is all about having the right people on the ground.

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• Topics
• North Asia
• GPs
• Buyouts
• South Korea
• M&A
• KKR
• Affinity Equity Partners
• MBK Partners
• The Carlyle Group