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Private Equity Funds in Korea’s M&A Market

2022.03.07

Introduction 
 
The Korean M&A market enjoyed record levels of activity in 2021.  Many Korean companies continued running their businesses normally through the pandemic relatively unaffected, generating stable and consistent cash flows. 
 
Local and overseas private equity funds also played an important role in keeping the Korean M&A market active.  In 2020, private equity funds were involved in approximately 38% of the overall Korean M&A transactions.  They’ve accounted for almost half of the market’s total M&A volume and participated in more than half of the top deals in 2021.  To name a few, local private equity firm Hahn & Company acquired the in-flight catering and duty-free business of Korean Air for USD 835 million.  Affinity Equity Partners and Baring Private Equity Asia invested USD 974 million in Shinhan Financial Group’s USD 1.02 billion rights offering and acquired 3.96% and 3.62% stakes in the group respectively while also being allowed to each forward a candidate for the outside director position.  Anchor Equity Partners, a Hong Kong based private equity firm, proposed a USD 226 million investment in KakaoBank for 1 million newly issued ordinary shares of KakaoBank.  This investment was made after their previous investment in Kakao Page and Kakao M, both subsidiaries of the Kakao Group. 
 
The low interest rate combined with sufficient fund resources, pending exit transactions, amendment of the Korean Financial Investment Services and Capital Markets Act (“FISCMA”), an increased interest in the ESG agenda, and the potential easing of the COVID-19 pandemic through the widespread distribution of vaccines all served as key factors in the private equity funds’ active participation in the Korean M&A market. 
 
 
Ample Funds 
 
Private equity funds amassed significant cash resources.  Many large private equity funds have been successful in fundraising and have not yet exhausted their funds.  Therefore, it is likely that they will continue to be key players in the Korean M&A market.  Consortiums between conglomerates and private equity funds are expected to be formed in large-sized deals as was the case over the past few years (e.g., the KCC corporation-SJL Partners consortium’s acquisition of Momentive, the Woori Bank-MBK Partners consortium’s acquisition of Lotte Card, and SK and IMM’s joint investment in Vin Group). 
 
 
Pending Exit Transactions 
 
There also was a considerable number of previously delayed exit transactions by private equity and venture capital funds.  On February 2021, Coupang, Inc. made its S-1 filing with the US Securities and Exchange Commission to list its Class A common stock on the NYSE.  An IPO by one of the largest e-commerce companies in Korea (with its operations predominantly in Korea) attracted significant investor and media attention.  Given the strength of the equity markets, it is expected that there will be continuing interest in pre-IPO and PIPE (Private Investment in Public Equity) investments by various investors, including traditional buyout funds. 
 
Also, private equity funds are under growing pressure from limited partners to redeem investments before interest rates rise further, and investment bankers are now hurrying to find suitable buyers for PEF assets to close deals faster.  According to a study by Market Insight, among the Korean companies majority-owned by PE firms, slightly over USD 17 billion worth of companies are likely to change hands or be placed on the market starting from the last quarter of 2021.  One of them is Hanon Systems Corporation where Hahn & Company is in the process of selling its 70% stake in the company, in a deal worth about USD 6.7 billion.  Another is Bodyfriend Inc., a massage chair brand for which VIG Partners has agreed to sell 46.5% of its shares to Stonebridge Capital for approximately USD 600~700 million. 
 
 
FISCMA Amendments 
 
An important PEF related regulation was amended on April 20, 2021.  Previously, the FISCMA imposed a complex regulatory matrix on permitted securities investment, methods and return periods to PEFs by distinguishing them from hedge funds in the “private fund” category and allowed hedge funds to freely invest (except in the case of investments acquiring control over the target).  For example, PEFs were only allowed to invest by participating in business management through the appointment of directors or investing in 10% or more of the shares of the investment target and were prohibited from investment by way of loans.  However, the new amendment, which took effect on October 21, 2021, categorized private equity funds as “general’ private funds” or “institutional private funds” that will be allowed to invest freely with the scope of investors for institutional investors being limited to qualifying institutional investors, which includes financial companies and other listed companies that satisfy certain requirements. 
 
 
Interest Rate 
 
One factor to keep on the radar is the raising of interest rates by the Bank of Korea (Korea’s Central bank, the “BOK”).  The BOK has already raised interest rates in 2021 and will likely raise them further at least twice in 2022.  The increased financing costs for transactions stemming from higher interest rates would not only have a negative effect on the M&A market but could also widen the gap between a seller’s price tag and their buyer’s willingness to pay which in turn might lead to delays of deals. 
 
 
ESG 
 
Another factor to consider is ESG (environmental, social and governance issues), an agenda gaining more priority on CEOs’ objectives lists in Korea, which has the potential to generate a lot of deal activity going forward, as Korean companies are starting to consider the ecological footprint of their businesses and are considering decisions on purchasing, rationalizing, or divesting assets accordingly.  The primary investment target industries were manufacturing (35.6%) and IT (19.5%).  ESG goals are likely to be regarded by investors as a critical element in building a more sustainable business that can better adapt to potential market shifts. 
 
 
Conclusion 
 
Despite the ongoing pandemic, private equity funds in the M&A market have quickly adapted to the COVID-19 landscape and have been successfully continuing their activities.  It is projected that Korean conglomerates will continuously seek restructuring of their businesses by selling their existing businesses or subsidiaries and purchasing businesses or companies that can bring growth opportunities.  Smaller Korean companies, particularly those in industries that were heavily impacted such as retail, hospitality, and tourism, may be subject to voluntary or involuntary restructuring projects, which may drive even more M&A activity.  A series of megadeals from large corporations and unicorns are getting ready for listings on the IPO market as well.  Naturally, private equity funds are expected to continue playing a key role in developing the Korean M&A market as they have done over the past years.

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