[Inside Chodong]PEF, a Welcome Rain in a Drought, but Can We Handle It?

"I'm worried about how to exit (recover the investment) from all of these."

A senior official at a major domestic private equity fund (PEF) recently expressed concerns about large Korean conglomerates, struggling to raise funds, continuously tapping into PEF capital. Amid growing fears of an economic downturn, PEF funds are like a much-needed rain for companies with low credit ratings or those requiring large-scale capital. However, the problem may arise when it comes time to repay these funds. Exiting in a way that meets the PEF’s expectations may turn out to be more difficult than anticipated.

Moreover, the rapid inflow of excessive PEF capital across the entire industry cannot be viewed simply as a healthy circulation of capital. Bank loans or corporate bonds require repayment of principal and interest within a fixed period. The process of recovering PEF funds is somewhat different. It can lead to intense management pressure aimed at increasing corporate value and maximizing returns. Such concerns are being voiced by executives of large funds leading the industry.

The most representative sector is the secondary battery industry. In particular, secondary battery material companies are actively raising funds from PEF operators for facility investments. Company A, a secondary battery cathode material manufacturer, is preparing to secure about 500 billion KRW from PEFs. Company C, a subsidiary of conglomerate B, recently signed a contract with a PEF to receive investments up to a total limit of 1 trillion KRW. This company also raised over 1 trillion KRW in PEF funds in March.

PEF operators investing in secondary battery companies expect capital gains through stock sales as their portfolio companies grow. The problem is that the corporate values of secondary battery-related companies are currently overvalued. If the returns at the time of fund recovery do not meet the PEF’s expectations, pressure to boost corporate value or stock prices could escalate to painful levels. There is no such thing as a free lunch.

It is not only the secondary battery sector. Recently, alliances between major conglomerates and PEFs have become common. They are joining hands in various areas, including trillion-won scale fundraising, overseas joint investments, and mergers & acquisitions (M&A). In addition, the entry of global private debt funds (PDFs) into the domestic market is also active. Recently, Apollo, considered one of the four major U.S. asset management firms alongside Blackstone, Kohlberg Kravis Roberts (KKR), and Carlyle Group, entered the Korean PDF market. Due to economic uncertainty increasing credit burdens, the private debt market is expected to rapidly grow as a new channel for capital procurement. Private debt involves institutional investors such as pension funds pooling capital to provide loans to companies through fund managers.

Collaborating with PEFs and utilizing PDFs can be seen as a strategy for companies to save on interest expenses while proceeding with facility investments amid high interest rates. Unlike bank loans, cooperation with PEFs, which often includes strategic consulting, has its advantages. However, in a situation where liquidity from traditional financial institutions such as banks and securities firms is shrinking, the concentration of fund capital solely into key industries should be approached with caution. The fact that even within the PEF industry there are voices of concern about the skewed flow of funds indicates that this is not a healthy situation.

In fact, for companies that urgently need to raise funds for overseas market expansion and new business investments, the source of money is not important. However, from the perspective of the government and authorities who must manage this, a longer-term view is necessary. Domestic and foreign private capital is pouring into key industries that will form the foundation of the future economy under names such as asset securitization, collateral loans, acquisition financing, and structured finance. Since the domestic private investment market is still in its early stages compared to overseas, it is necessary to review institutional support measures to prevent liquidity risks in the future.

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