[2023 Alternative Investment Forum] Jeong Il-bu IMM CEO "Global Secondary Fund Trends and Exit Strategies"

The Role of the Secondary Market in PE Exit Strategies
Growth of the PE Market and Expansion of Secondary Market Utilization
Continued Growth of the Secondary Market... $500 Billion by 2030

The secondary market is expected to continue growing. Although the PE (Private Equity) secondary market size is still overwhelmingly large, the VC (Venture Capital) secondary market is also expanding. On the 4th, Jeong Il-bu, CEO of IMM Investment, made this forecast during a presentation on 'Secondary Market Trends' at the '1st Asia Economy Alternative Investment Forum' held at the Conrad Hotel in Yeouido, under the theme of 'Global Alternative Investment Issues and Asset Allocation Strategies.'

Jung Il-bu, CEO of IMM Investment, is giving a presentation on the topic of 'Global & Korea Secondaries Market' at the 1st Asia Economy Alternative Investment Forum held on the 4th at the Conrad Hotel in Yeouido, Seoul. Photo by Hyunmin Kim kimhyun81@

The PE secondary market achieved the highest transaction volumes year-over-year in both 2021 and the first half of 2022. In the second half of 2022, while the public market declined due to rapid interest rate hikes and macroeconomic uncertainties, these effects had not yet been reflected in private asset values, causing a mismatch in transaction prices between secondary buyers and sellers, which led to a slight decrease in transaction volume. CEO Jeong stated, "Nevertheless, driven by the growth of the PE market and the expanded utilization of the secondary market, it is expected to grow to approximately $500 billion by 2030," adding, "In particular, the secondary market tends to be undercapitalized due to imbalances in supply and demand, and the capital depletion rate of secondary funds is also relatively fast." He noted that the current dry powder (unspent capital within funds) in the secondary market is about $125 billion, which is a volume that can be absorbed by the secondary market transactions within 1 to 2 years.

CEO Jeong emphasized the role of the secondary market as an exit strategy for PE. He said, "Due to instability and liquidity shortages in the public market, equity transactions and IPO-based exits by PEFs have shrunk, and capital flows are not smooth. From the GP's perspective, fundraising and portfolio management (such as continuation funds) through the fund secondary market are growing as alternatives," emphasizing, "Especially when a company's intrinsic value is solid but assets are undervalued due to market conditions, the secondary market can be used to secure funds and time to continue managing without forced sales."

Regarding the VC secondary market, it has been traded only as a limited part of PE secondary funds (less than 10% of PE secondary fund exposure). Nevertheless, it has grown about threefold in assets under management (AUM) over the past three years, and pure-play VC funds have begun to launch, which he highlighted as significant. CEO Jeong noted, "Like PE secondary, the VC secondary market also requires alternatives for liquidity provision, extension of management periods, or exit strategies in the current market, so it is expected to expand broadly, including fund equity secondaries."

The benefits of secondary investment include mitigating the J-Curve effect, diversification benefits for portfolios with confirmed growth potential, discounted purchases, and superior risk-adjusted returns. CEO Jeong explained, "Typically, secondary investors purchase stakes in PEF funds nearing the end of their investment periods, thus benefiting from the mitigation of the J-Curve caused by early-stage management fees and expenses," adding, "Additionally, risks (Blind Pool Risk) decrease, and immediate diversification across investee companies, industries, regions, investment strategies, investment stages, fund vintages, and GPs is possible, providing diversification benefits." He further stated, "Discounted purchases are possible depending on the seller's needs, the buyer's ability to provide solutions, supply and demand, and quantitative and qualitative evaluations of underlying funds and their GPs."

The domestic PE secondary market is also expected to grow. CEO Jeong forecasted, "With the increase in domestic PE fund formation and the expansion of overseas GPs' investments in Korea, the domestic PE secondary market is expected to grow centered on trade sales," adding, "Also, as companies invested in by VCs grow significantly, cases where PE acquires VC stakes will increase." He continued, "Continuation funds, which transfer existing fund assets to new funds within the same GP, will increase due to various advantages," but cautioned, "However, issues such as company valuation need to be addressed, requiring efforts from GPs to overcome them."

The VC secondary market size was estimated to be up to 1 trillion KRW. CEO Jeong said, "The domestic secondary venture fund market, focused on pre-IPO, began to form in earnest from 2010, and as of 2022, the secondary venture fund formation amount accounts for about 7.5% of the total venture fund formation amount," noting, "Considering that secondary investments usually accompany new venture funds (within about 20% of the committed amount), the secondary VC market is estimated to be between 500 billion and 1 trillion KRW."

The VC secondary venture fund market size has been continuously increasing recently. Especially, many project funds have been established due to the IPO market activation in recent years. CEO Jeong predicted, "Due to the contraction of the funding market, the secondary market will be formed mainly around secondary blind funds ranging from 50 billion to 200 billion KRW for the time being," adding, "In particular, with the maturity of VC funds formed between 2015 and 2018, the contraction of the IPO market, and the increase in the unlisted period of investee companies, the domestic VC secondary market size will expand significantly this year and next."

At the 1st Asia Economy Alternative Investment Forum held on the 4th at Conrad Hotel Yeouido, Seoul, attendees including Hyeonsangsun, Chairman of Asia Economy, are taking a commemorative photo. Photo by Hyunmin Kim kimhyun81@

Meanwhile, about 150 financial investment industry stakeholders, including Seo Yoo-seok, Chairman of the Korea Financial Investment Association; Ha Young-gu, Chairman of Blackstone Korea; Kim Gyo-tae, Chairman of Samjong KPMG; Yoo Woong-hwan, CEO of Korea Venture Investment Corp.; Kang Min-gyun, Chairman of the Private Equity Fund (PEF) Management Council; and Yoon Geon-su, Chairman of the Korea Venture Capital Association, as well as representatives from securities firms, asset management companies, private equity funds, and VCs, attended the forum in full attendance. Professor Kim Jang-hyun of Sungkyunkwan University's School of Global Convergence gave a special lecture titled 'Essentials You Must Know in the AI Era,' and Cho Beom-rin, Senior Deputy Director of the Alternative Investment Division at Korea Investment Corporation (KIC), presented on 'Global Alternative Investment Trends and KIC's Asset Allocation Strategy in a High-Interest-Rate Era,' while Joo Yong-guk, Head of IB2 Division at Mirae Asset Securities, gave a presentation on 'Real Estate Alternative Investment Opportunities Amid High Interest Rates.'

*Secondary funds are funds that purchase shares (old shares) or stakes held by venture capitalists or angels (individual investors), rather than directly investing in venture companies. Simply put, they invest in old shares. Venture capitalists can recover investment funds when the invested company goes public (IPO) on KOSDAQ or through mergers and acquisitions (M&A), but in Korea, M&A is not active, and it takes a long time for new venture companies to go public, so there are many cases where investment recovery is not smooth. If investment funds cannot be recovered by the fund's maturity, venture capitalists either acquire the assets themselves or handle non-performing assets, which leads to venture capitalists avoiding investments due to this burden, creating a vicious cycle where venture companies find it difficult to receive investments. Therefore, secondary funds serve as a means to support venture capitalists struggling with fund dissolution pressure due to prolonged investment periods, helping to facilitate active reinvestment. Venture capitalists can recover investment funds through secondary funds without waiting for company listings. For venture companies, there is the advantage of not needing separate investments, and for those purchasing shares held by venture capitalists, the investment period can be shortened compared to initial company investments. Ultimately, secondary investment can be used as one of the intermediate exit methods.

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