Korea's small PE firms putting fundraising plans off to 2023

South Korea’s small and mid-sized private equity firms are increasingly postponing fundraising schedules for their project-based funds to the next year.

Due to rising rates of acquisition loans and reduction in institutional investors’ capital commitments, smaller PE firms have suspended fundraising and are watching the market conditions.

The smaller PE firms are pressured by acquisition loan rates today, which jumped to the 7% range in the first half of 2022 from 3-4% last year.

The interest rate is expected to further increase to the 8% range in the second half, offsetting the minimum internal rate of return that Korean limited partners typically require domestic PE firms to generate.     

Some PE firms managing blind pool funds are also struggling with rate hikes. As blind pool funds are bound to a certain period of investment, the PE firms have to invest all the capital of the funds in target companies within the period, despite the high rates for loans.   

Smaller PE firms are further pressured as some large fund managers are rushing for super-sized fundraising. Big names such as IMM Private Equity, STIC Investments, SkyLake Equity Partners and Stonebridge Capital are creating funds, each with millions or billions of dollars.

GAPS WIDEN BETWEEN SMALL AND LARGE FUND MANAGERS 

Some Korean institutional investors are not planning to make new investments this year, worsening smaller PE firms’ fundraising.

“Our mutual-aid members are increasingly borrowing capital from us due to stricter regulations on bank loans implemented since the last year,” a major mutual-aid association’s CIO said.

“We prioritize capital lending for members, then set up investment plans with the remaining. For the rest of this year, we can’t afford to execute additional investment with the balance,” the CIO added.

Some major limited partners are still considering investments in blind pool funds, but not in project-based funds.

“Korean Federation of Community Credit Cooperatives (KFCC), which has proactively invested in smaller PE funds, is said to not plan for project-based funds,” a PE source said. “Many PE firms are rescheduling their fundraising to 2023,” the source added.   

This widens investment performance gaps between small and large PE firms, which have ample amount of capital and don’t need bank loans for investments.

“The gaps will increase as more LPs are eyeing longer-tenure fund managers with excellent track records. But some smaller PE firms also have great investment opportunities – more institutional investors should consider hiring them,” an IB source said.

Write to Si-Eun Park at seeker@hankyung.com
Jihyun Kim edited this article.