South Korea turns up the heat in Asian buyouts – McKinsey report

Private equity buyouts in South Korea produced the most attractive returns across a range of deal sizes, according to a report by McKinsey.

Big buyout deals in South Korea are a draw for domestic and global private equity firms, due to their attractive returns, according to McKinsey & Company.

Buyout investments generated more attractive returns than non-buyout transaction iwhen they were bigger than $50 million, according to the consultancy firm’s The continued rise of South Korean private equity. In deal sizes greater than $500 million, buyouts generated twice the returns of non-buyout deals: 22 percent compared with 11 percent.

Recent buyout deals in the country include MBK Partners’ $1.7 billion purchase of DaeSung Industrial Gases and the $325 million buyout of cosmetics maker Carver Korea by a consortium led by Bain Capital and Goldman Sachs.

Private equity firms that want to succeed need to identify more proprietary deals, expand investment strategies beyond buyouts, develop sector-specific expertise, execute real turnarounds and find additional sources of growth for their portfolio companies, the report noted.

“There’s a healthy exit record and investments are providing robust returns to investors, but to succeed in today’s competitive market, firms must evolve their investment strategies and models,” Richard Lee, a senior partner at McKinsey, noted in the report.

From 2005 to 2017, private equity was a stable source of capital with domestic and global private equity firms investing close to $90 billion of capital into over 870 companies in the country. In 2015 alone, private equity investment hit a record $17.6 billion, mainly in buyouts.

Jason Shin, managing partner of Seoul-based mid-market firm VIG Partners, told Private Equity International that founder-led family businesses are warming to private equity sales.

“A lot of the chaebols and smaller family-owned groups are increasingly thinking that private equity funds are the good guys, and because of that awareness a lot of the family owners and corporate owners are eager to engage with private equity firms,” Shin said.

Korean private equity has also seen high returns. Of the approximately $53 billion worth of deals from 2005 to 2014, $34 billion have been exited at a value of $47 billion. Exit multiples of money have also been consistent at 1.3x to 1.5x with a holding period of about three and a half years.

Private equity investments outperform the domestic public equity market, generating returns of around 20 percent, against between 1 and 3 percent annual returns in the Korea Composite Stock Price Index over the last 5 years. The report also revealed that returns have been even higher (up to 35 percent) if exits were completed within three years, or if the investments were in the industrial or consumer sectors, which delivered average returns of around 25 percent each).

Increased competition for assets in South Korea among domestic and global private equity firms, however, has driven up EBITDA multiples.

Global firms Carlyle, KKR and TPG have established offices in the country and continue to bolster their investment teams.