Now is the time for PEFs to show their art of exit

Leading private equity firms, including Bain Capital, KKR & Co. and MBK Partners, appeared to have turned to an exit mode in South Korea this year, cashing out their long-held assets at decent valuations, or slightly below their optimal prices.

This week, Bain Capital sold its 46.9% stake in South Korea's top botox maker Hugel Inc. to a consortium led by the country's energy-to-construction conglomerate GS Group for 1.7 trillion won ($1.5 billion).

The US private equity house has exited the botox and dermal filler brand for about double its acquisition price in four years. But the industry sources said Bain could have fetched a higher price if it had waited until Hugel's botox exports to China hit their stride.

Rather than taking time to maximize its return, Bain appeared to have focused on closing the divestiture, according to investment banking sources. The deal was signed on Aug. 24, just two days before the Bank of Korea raised its base rate by 25 basis points from a record-low 0.5%, signaling the liquidity party is over.

"It is meaningless now to ask around if company A is put on the market," said a senior official of a global investment bank.

"Now is the time to sell and cash out of assets for whatever reason. If you are a smart PEF, it's time to pack up and go home before the party is over." 

Putting an end to its 15-month ultra-easy monetary stance, Bank of Korea Governor Lee Ju-yeol on Thursday told a news conference that the rate increase was the first step taken by the central bank to normalize its monetary policy, hinting at additional rate hikes within the year.

Its rate increase comes as the US Federal Reserve is expected to cut back on its bond-buying programs in the near future to contain inflationary pressures.

Higher interest rates could prod pension funds and institutional investors, major sources of capital to PEFs, to tighten their pursestrings on M&A deals in search of other investment options. 

"If money dries up in the market, PEFs may need to take another two to three years to cash them out," another investment banker told Market Insight.

"Now seems to be the time for PEFs to take decisive action to cash out even slightly below their desired price." He added that PEFs need to make the most of the remaining market liquidity to show "their art of exit."

In the first half of this year, PEFs make up almost half of M&A transactions involving South Korean companies in terms of value. On the buy-side, however, top players including KKR, TPG and MBK hardly made it to the final round of billion-dollar deals such as eBay Inc.'s South Korean operations and Hugel.

Higher valuations, triggered by the aggressive pricing by strategic bidders, held them back from participating in high-profile buyout transactions. They were also outmaneuvered by smaller domestic competitors, armed with new money from small-sized Korean companies and low-profile institutional investors.

Instead of bidding up the price for new targets, big-name PEFs switched into minority stake purchases and selling their long-held assets to cash-rich medium-sized conglomerates which brought additional liquidity to the country's M&A market this year.

MBK PARTNERS

In his annual newsletter dated on Mar. 12, MBK founder and Chairman Michael ByungJu Kim said his firm saw a "golden window of opportunity" opening across North Asian markets this year, adding: "This is the time to make investments."

But the investment firm with $24 billion in assets has not yet opened its wallet this year. It has dropped out of the race for eBay Korea, of which the country's retail giant Shinsegae Corp. in June acquired a majority stake for 3.44 trillion won.

Instead, MBK has exited two investments in China and South Korea for handsome returns. This month, it sold Doosan Machine Tools Co. at $2.1 billion to DTR Automotive Co., a Korean automotive components maker.

Earlier this year, the PEF unloaded Apex International Corp., a Chinese air freight company, for an undisclosed sum.

Now it is seeking to divest Japan's largest golf course operator Accordia Next Golf which has drawn about 10 preliminary bidders, according to sources with knowledge of the matter.

Its rival PEFs cynically said MBK Chairman Kim's remarks about new investment opportunities in the March newsletter might be just "bluffing." 

KKR, TPG

KKR is understood to have not been chasing new buyout targets in South Korea since taking a 646-billion-won stake in Hyundai Global Service Co., the aftersales service arm of Hyundai Heavy Industries Holdings Co. in February of this year. 

The US PEF has been focused instead on infrastructure deals since the launch of its inaugural $3.9 billion Asia infrastructure fund earlier this year. Meanwhile, its exit plan for Korean e-commerce platform TMON Inc. has been further delayed, after it postponed the IPO plans. It had acquired TMON jointly with Anchor Equity Partners back in 2015.

For TPG Capital, it has shifted its focus into growth-stage investing, including pre-IPO share purchases of KakaoBank and Kakao Mobility Corp.

Last April, both KKR and TPG lost to South Korea-based EastBridge Partners in the bidding for the country's waste treatment firm YIDO, in a deal worth around 260 billion won.

DELTA VARIANT HELPS SAVE TIME

Some bankers say the fast spread of the Delta variant of COVID-19 has saved time for PEFs to exit their assets, forcing the US Fed to push back the timing of its tapering of asset purchases.

Now that Fed officials spoke up about its tapering sooner than the market had expected, PEFs are likely to step up their efforts for divestments.

Seoul-based Hahn & Co. is in the process of selling its 70% stake in Hanon Systems Corp., the country's leading heat pump systems supplier for carmakers. The stake sale is expected to fetch over 6 trillion won ($5.1 billion), in what would be this year's largest acquisition deal in South Korea.  

Write to Jun-ho Cha at chacha@hankyung.com
Yeonhee Kim edited this article.