S.Korea’s PE fundraising may fall after two-year growth

The National Pension Service will reduce the amount of its new capital commitment to domestic private equity firms by 17% to 500 billion won ($400 million) from the year previous. It will select PE management firms for the new commitment this month.

SK On Co., a South Korean battery maker, has been experiencing a delay in its pre-IPO fundraising for 4 trillion won. Last month, it had to borrow short-term loans.

South Korean private equity firms are struggling to raise funds as institutions turned cautious about private equity investments, after suffering big losses in listed stocks and bonds this year.

Fundraising by domestic private equity firms is likely to fall for the first time in three years.

“Institutional investors say they have no money for private equity investments. The delayed fundraising reflects such a situation,” a domestic institutional investor told Market Insight, the capital market news provider of The Korea Economic Daily.

“Amid concerns over private equity valuations that are likely to follow listed stocks lower, their increased proportion of alternative investments make it difficult for them to invest additionally in PE funds,” a domestic PE firm’s head said.

Globally, PE funds took a longer period of time to complete fundraising in the first quarter of this year than the previous quarters, according to Preqin, a data provider.

Only 9% of PE funds completed their fundraising within six months in the first quarter, compared with the average 29% for a quarter over the past five years.

Global PE funds raised a combined $116 billion during the first quarter of this year, down 10% on-quarter. On-year, the first-quarter fundraising was also down 38%, maintaining its declining trend since the third quarter of 2021, when interest rates began to rise sharply.

“Investment sentiment toward PE investment had been strong until the second quarter of last year, but it turned cold,” Shinhan Investment Corp.’s real asset analyst Han Se-won said.

“It’s because rising inflation and higher interest rates in developed countries increased capital costs.”

Accumulated PE commitments to domestic funds reached 116.1 trillion won as of end-2021, up 20.1% from the year previous, according to the Financial Supervisory Service (FSS). Of the total, 87.4 trillion won has been deployed, up 24.5% on-year.

Some PE firms recently dropped out of talks to invest in Kakao Entertainment Corp. since the subdued IPO market dented the attractiveness of the company.

Even the secondary PE market found it difficult to lure buyers.

“Whatever the discount rate is, they seem to believe they can buy them at a cheaper price if they wait longer,” a European PE firm’s sales executive said.

“Many institutions believe private equity valuations are too high.”

A chief investment officer of a Korean retirement fund agreed that some private equity investments are substantially overvalued. He said that institutional investors had continued to increase their PE investments, pushing PE valuations higher.

PE fundraising raised by South Korean institutions increased sharply in both 2020 and 2021, according to the FSS. It reached a record 23.4 trillion won in 2021, up 31% from the 17.9 trillion won a year before.

In 2019, however, domestic PE fundraising dropped 5% on-year to 15.6 trillion won.

PE firms accounted for 85% of top M&A deals executed in South Korea in 2021.

Write to Tae-Ho Lee at thlee@hankyung.com
Yeonhee Kim edited this article