[PE Towel Passing]② Is the Korean Market Narrow for PEF... Causing Separation of Industry and Capital?

20 Years of PEF System Operation: Reflecting on the Role of Private Equity Funds
Positive Role in Preventing National Wealth Outflow Against Foreign PEFs
Strong Monitoring by LPs Needed, Regulatory Authorities' Role Also Important

If mergers and acquisitions (M&A) transactions circulate only among private equity funds (PEFs) and become the conventional exit (capital recovery) method, opportunities for companies to connect and generate synergies may be undermined, causing losses from an overall industry perspective. From the PEF standpoint, transactions between PEs are merely a self-help measure to recover funds in a timely manner, not a preferred transaction method. Since all parties are experts in the field, it is difficult to create better transaction conditions such as higher prices or options. However, driven by the fierce growth of the domestic PEF industry, which has grown from a total asset size of over 100 trillion won to approaching 200 trillion won, the trillion-won scale deals these funds produce have become difficult for general domestic corporate groups to absorb. The phenomenon of capital growing alone and not being absorbed into the industry's gears but circulating on the surface like oil is PE-to-PE transactions.

Side Effects of PE-to-PE Transactions... Difficult Industrial Synergy and Tight Price Conditions

Park Yong-rin, Senior Research Fellow at the Financial Industry Office of the Korea Capital Market Institute, said, "When strategic investors (SIs), which are general companies, conduct M&A, they consider synergies with their existing businesses, so they can exert greater utility from an industrial perspective. However, PEFs inevitably focus more on returns than industrial harmony or synergy." He explained, "In terms of price, transactions between PEs and companies can include a synergy premium, but PE-to-PE transactions must proceed with basic, tight conditions. Also, since PEs are experts among themselves, prices and transaction conditions become tight when buying and selling."

Of course, PE-to-PE transactions are not without advantages. Since each PE house has different value-up methods to increase corporate value, a company A can fill in the gaps it lacked by circulating among several PE houses. However, this is an ideal scenario; if company A circulates among several PE houses and its trade secrets or weaknesses are all disclosed, it tends to become an unattractive asset. Park pointed out, "In extreme cases of 'hot potato' passing, the PE that finally acquires company A after multiple handovers may find it difficult to generate returns."

A chief investment officer (CIO) of institution A said, "If the core of the PE business is defined as a strategy to increase the value of undervalued companies and resell them, then consider whether value creation is possible each time ownership changes to a different PEF. The answer is obvious."

20 Years of PEF System Operation... Most Major Corporate Restructuring Has Been Absorbed

The domestic PEF system has played a central role in the domestic capital market for 20 years to counter foreign PEFs that monopolized the domestic M&A market after the foreign exchange crisis, foster domestic capital, and prevent national wealth outflow. There has clearly been a positive role in supporting corporate growth, management improvement, and restructuring processes.

However, now that 20 years have passed since the system's operation, experts believe it is necessary to reconsider the role of the PEF industry. Capital market experts analyze that most of the large-scale M&A volumes involving large corporations, unlisted companies, and mid-sized companies have been absorbed domestically. There are also concerns that focusing solely on the domestic market in the future may cause various problems in deal sourcing.

In fact, voices of self-reflection are emerging within the PEF industry, emphasizing the need to actively expand overseas deal sourcing beyond the narrow Korean market. The role of limited partners (LPs), such as pension funds and mutual aid associations that invest capital in PEFs, is also highlighted. They should provide appropriate guidance through the growth of general partners (GPs) and monitoring after investment.

Professor Lee Chang-min of Hanyang University’s Business Administration Department said, "The rapid increase in the number and scale of private equity funds has led to excessive competition and the side effects that arise within it. LPs need to monitor strongly, and regulatory authorities need to properly manage entry regulations and exits."

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