SK Group's PE-funded transformation in the spotlight

SK Group stands out from other South Korean conglomerates in making good use of private equity funds to raise money for business expansion.

The country's third-largest business group since 2018 will likely have attracted a total of 12 trillion won ($10 billion) from private equity firms through 13 stake sale transactions, including ongoing deals, according to investment banking sources on March 3.

Under its business slogan of "deep change," or a fundamental group-wide transformation, SK has been breaking away from the traditional way of fundraising: loans and bond issues.

It has been active in splitting off companies into separate ones and selling shares in the separated arms to PE firms, or listing them on the stock market.
 
Its growing reliance on PE firms as a funding source seemed to reflect the group's flexible funding approach and is being emulated by other Korean business groups such as Hanwha and CJ.

However, some market observers cast a wary eye on SK's aggressive PE funding, which they say seems excessive.

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Back in 2018, SK Planet Co., an online business operator, sold a minority stake in 11Streeet Co., an e-commerce platform, to H&Q for 500 billion won through convertible preferred stocks.

In 2021, SK E&S Co., a city gas supplier, sold 2.4 trillion won ($2 billion) in convertible preferred shares to KKR & Co. on the back of its series of acquisitions, aimed at transforming into a renewable energy provider.

In the same year, SK Innovation sold a 40% stake in SK Lubricants Co., the world’s largest lube base oil supplier, to IMM Private Equity for 1.1 trillion won.

Battery maker SK On Co., split off from SK Innovation in 2021, is currently in talks with BlackRock, The Carlyle Group, KKR and Singapore's GIC to raise up to $3.3 billion.

SK On's funding round grabbed attention because it drew several PE heavyweights, although they viewed the company's proposed investment conditions as a bit demanding, according to people with knowledge of the situation.

"Whatever its business strength, it is structurally impossible for banks and other financial institutions to arrange multitrillion won funding to a new company without collateral," said a corporate finance official at a leading South Korean bank. 

SK Pharmteco Co., a contract development and manufacturing organization, is also in the process of raising PE funding, which industry watchers said would be aimed at financing a cross-border acquisition.

ARMED WITH MONEY

The energy-to-telecom titan's PE fundraising is also in line with its shift of focus toward battery, bio and semiconductor chips to align with environmental, social and governance standards.

SK Ecoplant Co. recently raised a total of 1 trillion won ($830 million) from four domestic private equity firms, following its $1 billion purchase of Singapore-based electronic waste disposal firm TES Envirocorp Pte. Ltd.

The fundraising came after the company divested of its plant-building business to a consortium of domestic PE firms and instead acquired waste management and recycling companies, which cost over 2 trillion won.

Polyester (PET) film manufacturer SKC Ltd. also received PE funds to advance into the electric vehicle material market. Additionally, SK's new business units -- GPS app T Map Mobility Corp. and over-the-counter streaming app Wavve -- are also backed by PE firms.

"Group Chairman Chey Tae-won stressed that it would be worse to miss out on an opportunity because of a lack of money than to watch a company we acquired fare badly," said an SK Group official.

"In terms of asset securitization, PEFs became our essential partners."

Including the stalled plans to offload shares in two other unlisted arms SK Geo Centric Co. and SK Shildus Co. for multibillions of dollars, the total amount of the group's PE funding could have reached 15 trillion won. 

SPEEDY DECISION-MAKING

SK Group's efforts to reform its decision-making process, under which the board of directors at each subsidiary exerts more influence over key decisions, was another factor behind the group's active partnerships with global PE firms.

"At SK Group, there is no such thing as an abrupt change to the terms and conditions, or collapse in talks at the last minute to reflect the opinion of its holding company, the group's control tower, or its top shareholder," a partner at a global PE firm told Market Insight, the capital market news outlet of The Korea Economic Daily.  

To improve communication and deal execution with PE houses, SK Group has recruited senior investment bankers and PE managers. Recently, SK Ecoplant hired ex-Credit Suisse director Lim Seongju as vice president. 

DEBTS TO REPAY 

However, some industry insiders warn that the independent decision-making process of each SK Group subsidiary and the group's generous incentive schemes could drive it further into an expansionary mode. 

Increased PE funding leads to growing pressure for the group to help PE firms exit their investments after a certain period of time.

"Investors began to review the contractual terms (of PE funding) in more detail, rather than responding to the announcement itself that they raised huge funding," said a brokerage company analyst covering holding companies.

The cooling IPO market, an exit window for PE firms, adds to concerns about the series of SK Group's PE funding deals.

"They will receive the checks in the not too distant future. By then we will know whether they are making a profit from the (new) businesses or not." 

(Correction: The estimated sum of SK Group's PE funding was corrected to 12 trillion won ($10 billion) from 13 stake sale deals in the subhead and the second paragraph, from 11 trillion won through 12 deals.)
 
Write to Jun-Ho Cha at chacha@hankyung.com
Yeonhee Kim edited this article.