UCK on the allure of Korea’s mid-market

This article is sponsored by UCK Partners

How has the private equity market in South Korea evolved over the years?

Soomin Kim: There was really no private equity market to speak of in South Korea before the Asian financial crisis in 1997. The economy was in financial distress and a number of large domestic companies were suffering. This attracted the interest of global investors, and their entry into the Korean market represented the beginning of the private equity market in Korea.

At that point in time, global sponsors were focused on large transactions and there were no domestic GPs. The sellers were mostly the government and large corporations and that era lasted for four to five years after the financial crisis. Sentiment towards private equity was poor because it was viewed as foreigners coming into Korea and profiting from local distress. That sentiment probably peaked in 2003 when Lone Star Funds acquired Korean Exchange Bank in a deal that sparked significant domestic debate.

Thereafter, Korean pension funds started looking to participate in domestic private equity and the first laws were enacted to allow private equity investment in 2005. At the same time, global institutional investors had observed global GPs making money in this small country in Asia and became more interested in investing in Korea as well. As there were no domestic GPs at that time, global institutional investors backed pan-Asia GPs that had scope to invest across Asia instead.

Until around 2010, major private equity players in Korea were primarily pan-Asia funds generating strong returns through executing opportunistic deals in the country. Domestic GPs sponsored by banks began to emerge and take market share, and it was at that time in 2014 that UCK Partners (formerly known as Unison Capital Korea) was established.

The year before our firm’s launch, KKR exited one of the most successful transactions in Asia when they sold Oriental Brewery to Anheuser-Busch InBev for $5.8 billion, having acquired the company in a $1.8 billion deal back in 2009. With that landmark transaction, global sponsors refocused their attention on Korea, and since then we have seen competition between large domestic GPs, pan-Asia GPs and global sponsors. Korea now has a rich and deep private equity market.

Why is the Korean mid-cap segment attractive?

SK: Korea has historically been one of the three major buyout markets in Asia, together with Japan and Australia. The rest of Asia, such as China and Southeast Asia, is traditionally seen as more of a growth equity or venture play by institutional investors.

Korea has generated consistent large-cap transactions for global players. From 2010, a number of newly established domestic GPs began to focus on smaller growth equity transactions. By and large, the Korean private equity landscape was dominated by large-cap and small-cap transactions, so the mid-cap segment has been a white space for some time – generally viewed as too small for the bigger global sponsors, and attractive, but too hard to crack, for domestic GPs that preferred more structured investments.

The Korean mid-market buyout space is highly attractive for four reasons. First, the segment is deep and consistent in terms of dealflow because the Korean economy is largely driven by mid-cap companies. There is a generational shift coming as many entrepreneurs and founders are ageing, which is creating opportunities.

Second, there tends to be more upside and valuation arbitrage in mid-cap buyout transactions than in large-caps, as there are typically no intermediaries involved and deals can be struck privately. Management structures at many of these businesses need upgrading, which presents significant value creation opportunities post-acquisition.

Third, exit options are good in the segment as mid-cap companies typically remain at a size where they are attractive for both financial and strategic buyers. Fourth, the mid-cap market is less competitive despite its attractive aspects and is rich with opportunities. We consider ourselves as the only true mid-cap buyout firm in Korea.

In a highly competitive market, how do you source proprietary deals?

Sunwha Shin: UCK has been very consistent in terms of our strategy over the past decade, focusing on mid-cap buyout transactions and on thesis-driven
proprietary deal sourcing – 13 out of the 14 deals we completed were sourced on a proprietary basis.

We have a structured origination framework focused on four key sectors, and while we have liberty to make investments in any industry, our preferred sectors are consumer, healthcare, specialised services and online platforms.

As it relates to sourcing, we conduct an extensive market mapping exercise on targeted sectors to obtain a comprehensive database of companies across the value chain. Leveraging our personal relationship networks, we directly contact owners and key stakeholders of these companies. It can take a year or more for us to convince founders to sell as these are often capable founders who are not in a rush to sell their companies. However, through that engagement process we can gain a deeper understanding of the company, which serves as an important part of our due diligence – we understand the history of the business, the key success factors, identify potential issues and, most importantly, build strong relationships based on trust.

Rather than acquiring the entire company, our preference is to acquire a 60 to 70 percent stake, forming a partnership with the founding family or entrepreneur who care deeply about the future of the company and on how it will grow sustainably long term.

SK: One of the key differentiators we have against other GPs is that we start all our conversations with a focus on the business itself, rather than deal terms.

What is UCK’s approach to portfolio company value creation initiatives?

Seungwoong Gwak: Our thesis-driven deal-sourcing strategy and relationship building process allow us to develop an in-depth understanding of companies prior to investment. In our first fund, the average deal-sourcing period was 12 months, and for the second fund it was 15 months – we spend a lot of time studying opportunities and risks and in developing our ideas.

There is no “one-size-fits-all” value creation approach, particularly for mid-cap companies. While there may be strong value creation upside, the flipside is that the issues faced by each company are very different, so we have to customise our approach.

While value creation levers might be limited in large-cap businesses, there are far more opportunities in the mid-market. One of our main themes has been engaging in inorganic growth, either to increase penetration of the domestic market or to expand the company’s global footprint.

What do you see as the key success factors for investing in the mid-cap segment?

SG: Our most recent exit was a company called Medit, a manufacturer of 3D dental scanners that we sold to MBK Partners for $1.9 billion. It was a highly successful investment due to several key factors.

First, we had been studying the healthcare sector for a long time and we like the industry tailwinds there, particularly in the dental segment where Korea is known globally for the quality of its products and services.

Second, Soomin had built a 10-year relationship with the founders, and during that course our team developed a good understanding of the business even as a limited auction process for the company was underway.

Third, a key success factor was the execution of our value creation plan. Post-investment, our first step was to upgrade the management team – there were seven key management positions and we brought in fresh talent to all but one of the positions. We then undertook an initiative to drive global marketing and improve the supply chain, and addressed some outstanding IP issues by recruiting experienced legal talent to resolve any legal disputes.

Finally, the mid-cap segment is very active in terms of exit opportunities and Medit was no exception, attracting global financial sponsors as well as strategic buyers in the sale process. The deal, which was signed in December, is expected to generate a strong return.
qWhat are the challenges and opportunities for UCK in the coming year?

SK: The positive mid-market fundamentals are not going to change – strong dealflow, value creation opportunities, buoyant exit markets and limited competition. However, as more people see the investment results, it is inevitable that there will be new entrants.

We expect to see more competitors focusing on mid-market deals, but we welcome that – it is a challenge, not a threat. We have been very consistent in our approach to transactions, how we select and recruit talent and how we interact with entrepreneurs and founders. Even as newcomers arrive, we are confident that our approach will continue to serve us well.

All three UCK partners are now spending time transferring our experience, expertise and investment philosophy to our junior professionals. We believe it is our job to mentor the next generation of leaders to consistently execute our strategy over the long term.

What efforts are Korean GPs making to address diversity and inclusion? Are steps being taken to develop female private equity talent?

Sunwha Shin: The private equity industry in Korea has long been male-dominated, but there are more GPs working to attract female professionals. We are perhaps the only GP that has actively sought to attract female talent since inception and have good gender representation within the team. I believe I am the only female private equity investment partner working in Korea, so there are more improvements to be made in the industry.

We want to see more diversity and inclusion in Korea and that can take many forms beyond gender, including nationality, education, background and professional experience. Bringing in those diverse perspectives can really benefit the firm’s investment processes.

Soomin Kim, Sunwha Shin and Seungwoong Gwak are partners at UCK Partners