Financing is readily available in Korea. In IMM's view, does that mean private equity is at a disadvantage?
Total domestic private equity AUM was close to zero ten years ago. It’s now about $30 billion, with the bulk of that in private equity assets. There is over-liquidity and if you’re a player in mezzanine or debt instruments, it can be a competitive landscape. It can be much less competitive if you’re an equity player with risk mitigated by understanding the local market, and if you have a strong thesis for growing the business. Not many players have that experience in Korea.
It is still possible to source deals on a proprietary basis and execute deals at good valuations in Korea. We’ve done two $50 million deals in the pharmaceutical sector this year without having to go through a competitive bidding process. This was made possible because we had made investments in this sector in our first fund and have been able to develop an in-depth thesis regarding the sector. It all depends on the approach. It’s difficult to do deals purely based on availability of funding. You have to bring a value creation plan and be straightforward about how it will be implemented in order for investments to work out.
How do overseas LPs tend to view Korea?
Once the IPO markets shut down in China, and in India where there is regulatory debate, investors had questions about when exits will happen. China and India will continue to be key markets in Asia but from the point of view of risk/return and exit stability, Korea has become very interesting to international investors.
In the past, Korea was viewed mostly as a buyout market. However, when sophisticated international investors see the empirical data on deal velocity and exit returns, they understand that Korea is a big enough market where in addition to buyouts, growth capital or significant minority investments is a strategy that has strong merits.
Korea’s domestic PE industry is entering a new phase since first being allowed to operate around 2006-7. How is the domestic industry evolving?
Many local GPs started around 2006 after the implementation of new laws that ignited the growth of domestic private equity. As seven years or so have passed since then, we’re now seeing the first generation funds exiting with some funds having fully exited and dissolved. Investors are now getting the actual returns and that will be a significant determination of the direction of local GPs. Going forward, as we get concrete returns, teams will continue to grow or changes will need to be made. So you’ll see a tier-ing of the local GP base.
In terms of strategy, we’re seeing a very in-depth focus on operations and value creation. You really have to have a differentiated strategy and approach to investment to continue to source private deals. Focus on the operations will become more and more important going forward especially as we potential face very uncertain, low-growth environment in the next few years.
The third trend is about the flow of capital. About 20 percent of Korea’s GDP is linked to China trade and the link to Southeast Asian trade is also significant. Korean company revenue is increasingly coming from overseas as Asian economies integrate. We see a lot of Korean companies that have a competitive advantage in their respective segments who want to expand their footprint beyond Korea. This trend of our portfolio companies expanding offshore will drive us to look at deals outside of Korea but with a strong Korea connection. We are mindful that our core competency is Korea, but as Asia develops together, we see this cross-border trend as a significant driver in the next few years.