[K-INVESTORS]⑪ Ramin Sang PEF Council Chairman Company Representative Reflects on 20 Years of Korean PEF

This year marks the 20th anniversary of the introduction of the domestic private equity fund (PEF) system in Korea. As Korea's industrial sector has developed dramatically, the financial industry, the lifeblood of industry, has also advanced alongside it. Over time, society's perception of PEFs has gradually shifted from viewing them as 'corporate raiders' to recognizing them as 'game changers.' PEFs have played a role in acquiring companies based on capital and information power, streamlining management, and jointly considering future growth engines to enhance corporate value. Our society has come to acknowledge PEFs as key players in the market. Asia Economy met with Ramin Sang, CEO of Praxis Capital, the chair company of the 7th PEF Operators Council, to discuss the progressive role of Korean PEFs amid changing industrial structures.

President Ramin Sang of Praxis Capital, the chairman company of the PEF Operators Council. Photo by Younghan Heo younghan@

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- It has been about three months since you became the chair company CEO. What is this year’s mission for the council?

The most important task is related to system reform. This includes the mandatory tender offer system, the insider trading pre-disclosure system, and the scope of tax benefits for affiliated companies. We are closely monitoring how these systems will impact the industry and aim to ensure they positively influence market development. Over the 20 years that the PEF industry has existed, regulations have rarely moved against the industry's growth. Generally, authorities agree that this industry needs to grow. When laws are amended, players like us provide expert advice to ensure the changes align well with reality. Another important point is that when one law changes, there is often a cascading effect. For example, if the Capital Markets Act is amended, the Restriction of Special Taxation Act and Corporate Tax Act must also be revised. There are issues that can only be caught through actual business experience. We quietly play that role.

- This year is significant as it marks 20 years since the PEF system was introduced with the amendment of the Capital Markets Act.

Excluding foreign funds, it has been 20 years since Korean PEFs began operating. The PEF market has grown substantially. The committed capital is now about 150 trillion KRW, and there are around 1,000 registered general partners (GPs). There has been quantitative growth, and each operator has established its own identity and foundation to thrive. In the past, the mindset was somewhat like 'as long as we make money, anything goes,' but now it is different. House A specializes in mid-cap (medium and small enterprises), House B prefers consumer goods and is a large-cap buyout house, House C focuses on restructuring, and House D is a credit (mezzanine and loans) house. These distinctions have become clear. Specialization and differentiation are progressing well. However, problems sometimes occur. The government’s basic stance is that activities should be conducted under self-regulation, and this principle is necessary. The problem is that the regulatory entry barrier is low, so some come in and cause trouble. These are not investment losses but legal violations. Although very rare, when such incidents happen, they become major issues and damage the overall image of the PEF market.

- What new challenges do you see?

Establishing an ethical infrastructure for management. This can be seen as a guide for PEFs to operate without incidents under self-regulation. Compliance, risk management, and fund management ethics among PEF operators are important topics. Therefore, upgrading the operational infrastructure is necessary. It is a basic qualification to step into the PEF ring. We are collecting best practices mainly from large firms. It is not easy. We want to compile and disseminate them to the industry. This cannot be done by law. It is a guideline on how employees handle investment scopes and resolve conflicts or conflicts of interest in practice. Large firms have very strict systems in these areas. We plan to organize and share these through seminars at the council level with member companies. I want to actively promote this during my term and, if possible, collaborate with authorities to do so.

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- The PEF industry has faced difficulties for a while. How is the current situation?

There has been a downturn for about two years. More precisely, since May two years ago, interest rate hikes, exchange rate increases, and inflation issues have occurred, increasing cost burdens. The first impact was a decline in valuation. We invest with clients’ (LPs’) money. When valuations fall, pension funds suffer greater losses, reducing their investment capacity. Especially as valuations and losses in stocks and bonds sharply declined, the share of alternative investments like PEFs decreased. This shrinking wallet was the first-year scenario. We wondered if this atmosphere would last long, but it persisted for quite a while. Investors’ pockets thinned, so they became stricter. As redemption amounts decreased, investment amounts also declined until last year. Now, rather than the market loosening, it is more that after about two years of this situation, people are adapting. Expectations are lowering. LPs are reconsidering how to act in this market and are restarting investments that had paused. It is not as good as before yet. The cycle probably needs to continue a bit more. Operators are also building skills and becoming more resilient, reflecting deeply during this time.

- Apart from the downturn, does the growth of PEF align well with changes in Korea’s industrial structure?

From a global perspective, Korean PEFs are indeed developing. Quantitatively, Korea’s PEF or alternative investment ratio relative to economic size is high. It is somewhat lower than the U.S. but higher than Japan. Quantitatively, it has developed a lot relative to economic size. However, qualitatively, there is still a long way to go. For example, in governance. Looking at the history of joint-stock companies and corporate group control, more evolution is needed. In global companies in the U.S. and Europe, founders or their families rarely control companies anymore. Over time, this has become a natural trend. Although this may be an unwanted outcome for founders, the probability that the founder’s children or grandchildren have the same capabilities is low. It is natural for ownership structures to change over time. Then the question remains: who will manage a company without an owner?

- Who will take responsibility for management in the next phase?

The question arises: who will take responsible management and represent the majority shareholders? There is talk of the board of directors and CEOs, but when asked who puts in their own money and takes responsibility, PEFs are seen as fulfilling that role. In the 1970s and 1980s, CEOs of widely held companies in the U.S. were corrupt. In ownerless companies, CEOs acted as if they were owners, flying private jets and forming boards centered on themselves. They engaged in activities to extend their terms, which became problematic. At this time, PEFs emerged and changed governance. Hostile M&As and activism also appeared in this context.

- Were there problems in PEF responsible management as well?

One scholar explained it as financial engineering, operational engineering, and governance engineering. Financial engineering emphasizes improving investment returns. Operational engineering refers to increasing corporate value, a recent focus. Governance engineering involves taking responsibility for and correcting distorted governance to make companies successful. PEFs like KKR have entered companies, taken responsible management, and corrected governance. However, during this process, they were criticized for layoffs, heavy borrowing that burdened companies, and various activities to maximize profits.

- What are the advantages of PEF management?

PEFs are performance-oriented. They may apply strict standards to company employees but are much bolder in sharing rewards when performance is achieved. In large companies, even if an individual achieves tremendous results, there is a cap on compensation. However, if a company is owned by a PEF, individuals can receive bold rewards, sometimes amounting to hundreds of billions of KRW. Large companies started as industrial capital, while PEFs began as financial capital, so their starting points differ. Industrial capital involves owners risking and investing their own capital. Companies and factories were built on foundations created by risking their lives. Therefore, owner companies tend to be stingy with professional managers’ compensation, undervaluing their sweat. In contrast, PEFs have separate LPs who provide capital. PEFs manage investments, and the CEO’s contribution is separate. Each role is recognized and rewarded accordingly.

- Are there characteristics unique to Korean PEFs?

Trust and intensity can be said to characterize them. It is impossible to do a quick 'hit-and-run' or 'eat-and-run.' In a small market, people must see each other for a long time. The same people keep interacting, and LPs overlap. I have been involved in Korean PEFs for 15 years out of their 20-year history. Another observation is that Korean PEFs learn very quickly. Most first-generation PEF founders in Korea had experience with foreign PEFs. Despite the short history, Korean operators seem to evolve very rapidly. Foreign top funds have headquarters in Hong Kong or Singapore and invest in Korea, but they cannot keep up with Korean PEFs. There is already a skill gap. Of course, this is partly due to a better understanding of the local market, but there is also a fierce survival instinct. They learn fast, are tough, and creative.

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- What are the weaknesses?

The weakness is overseas investment. Raising capital from overseas institutions is now done to some extent. The bravest overseas deal by Korean PEFs was the acquisition of TaylorMade. Currently, this is a limitation for Korean PEFs. Korean funds focus on gathering top domestic LPs first, then, if capable, raise funds overseas. Overseas LPs tend to dislike Korean funds investing outside Korea. For example, if investing in Southeast Asia, they prefer to give it to EQT Partners; for U.S. investments, to Carlyle. Therefore, they sometimes impose restrictions on overseas investment proportions when committing capital. Overseas investment is a problem the next generation of PEFs must solve.

- Is there anything the government or financial authorities can do to help?

The authorities are making great efforts. They have long injected money into investments to enable PEFs and VCs to play their roles. Authorities favor VCs most because they nurture youth industries. When moving to PEFs, pension funds like the National Pension Service entrust investment management to expand pension finances. Institutions like the Korea Development Bank, Korea Growth Investment Corporation, and Korea Venture Investment Corporation create and allocate separate funds to foster specific industries. This has continued from the Lee Myung-bak administration to the current government. Experience has accumulated to ensure money flows well in ways that meet policy goals without losses. Initially, it seemed artificial, but in hindsight, it was not. We have learned to use funds as tools to foster industries, and current results are not bad.

President Ramin Sang of Praxis Capital, the chairman company of the PEF Operators Council. Photo by Younghan Heo younghan@

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- What advice would you give for the healthy development of Korean PEFs?

The reason for creating the PEF system with institution-only funds was to prevent incidents. It means not to accept money from individuals but only from institutions. In return, regulations are relaxed. It was a desperate measure but welcomed by the industry. However, new small funds that have raised a lot of individual investment struggle. Because general investment is blocked by institution-only rules, costs have risen as they create new technology partnerships as a balloon effect. If PEFs regain market trust, they could move to the next step of accepting individual funds. Overseas have gone through these stages. Pension funds and other institutional investors eventually lowered the threshold for qualified investors and allowed individual investments. Going further, PEFs even acquire insurance companies and manage those funds. I believe Korea will gradually move to the next stage like overseas cases.

- What is the weight and investment philosophy of PEF fund management?

There seems to be a uniquely Korean characteristic. When investing in or acquiring companies, Korean PEFs take unlimited responsibility. Behind us are clients (LPs), and we have infinite responsibility toward them. Recently, some overseas managers’ real estate funds have experienced defaults, and overseas managers sometimes do not answer calls or pretend not to know. But Korean PEFs do not do that. Even if the remaining amount of an investment becomes zero, they attend meetings and act responsibly until the end. They take responsibility even if there is nothing to salvage. This is why foreign funds find it relatively difficult to operate actively in Korea. In fact, PEF management is really tough work. It requires tremendous patience and perseverance. It is different from fund managers or hedge fund managers who buy and sell liquid stocks. Therefore, Korean PEFs rarely incur principal losses. When things get tough, they go to the provinces, rent inns next to troubled companies, and stay there to save them somehow. Looking back at 20 years of Korean PEF investment history, the list of losses is very small. They always turn companies around. They endure with responsibility until the end.

◇ Ramin Sang, CEO of Praxis Capital = He graduated from Seoul National University and earned an MBA from Duke University in the U.S. He previously worked at global consulting firm Bain & Company and founded Praxis Capital in 2013. Over the past decade, he has invested in 25 companies, including the secondhand trading platform Bungaejangter and music copyright management company Beyond Music. In October last year, he was appointed CEO of the chair company of the 7th PEF Operators Council.

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