Global Lockdowns Halt Business Trips... IB Industry Growing Anxious

[Asia Economy Reporter Oh Ju-yeon] "To make new deals, we need to go on overseas business trips and attend meetings, but with border closures happening one after another, it can only be limited. We really don’t know how long this situation will last, so we are deeply concerned about how to generate profits this year."

An official from a securities firm said that investment banking (IB) operations have been paralyzed due to the spread of the novel coronavirus infection (COVID-19). The IB sector, which led securities firms to record-breaking profits last year, is now facing growing concerns that not only new investments but also existing transactions could be disrupted this year. Amid rising fears of a global economic recession, all areas including overseas real estate investment, infrastructure investment, and alternative investments have turned on the emergency lights.

According to the securities industry on the 24th, although the overseas alternative investment market size has increased by nearly 40% annually due to the recent sustained low-interest-rate trend, it is uncertain whether this growth can continue this year. A securities industry official said, "We are closely monitoring market developments including risks from COVID-19 and exchange rate fluctuations, and are selectively approaching new deals."

According to Korea Credit Rating’s analysis of investment scale through alternative investment funds, the domestic alternative investment market has grown at an average annual rate of 23% over the past 10 years, and if limited to overseas alternative investments, the average annual growth rate reached 38%. Overseas alternative investments chosen by domestic securities firms are mainly concentrated in real estate and infrastructure. By asset class, real estate (48%) and infrastructure (34%) are dominant, with hotels and resorts following offices as a large portion of real estate investments.

The problem is that as the scale grows, the inventory of sell-downs (selling shares after acquisition) is also increasing proportionally. The remaining sell-down volume, which was 500 billion KRW in Q4 2018, increased to 1.4 trillion KRW in Q1 2019 and 1.9 trillion KRW in Q2 2019. Also, by elapsed period, the volume unsold even after 6 months was 1.3 trillion KRW. Securities firms generally consider 6 months as the appropriate sell-down period. If it takes too long, investors tend to be reluctant to take the shares. These figures reflect only 30% of the total scale, so the actual unsold volume is expected to be larger.

In this atmosphere, last year’s overseas hotel acquisition by Mirae Asset Financial Group, the largest ever among domestic financial companies’ alternative investments, is drawing renewed attention. In September last year, Mirae Asset signed a contract to acquire 15 hotels and resorts in 9 major cities including New York, Chicago, and San Francisco in the U.S. from China’s Anbang Insurance for 6.9 trillion KRW. Mirae Asset’s total purchase amount was 2.6 trillion KRW, with the remainder planned to be financed through local IB loans. However, with border closures continuing due to COVID-19 and increasing orders to suspend operations at business sites by state within the U.S., concerns are emerging.

The market is speculating that since the travel industry has been hit hard by COVID-19 and there is little chance of improvement in the near future, it might be better to forfeit the deposit. A securities industry official said, "If the economy worsens, sell-downs could also become difficult."

Regarding this, Mirae Asset stated, "There are some concerns along with last year’s acquisition of Asiana Airlines, but everything is proceeding as planned," and added, "Sell-down is a stage after acquisition, so it is too early to discuss success or failure now."

This content was produced with the assistance of AI translation services.