Korean PE firms struggle with fundraising on illiquidity

South Korean private equity (PE) firms are having trouble fundraising as institutional investors' capital for new investment is drying up amid interest rate hikes and market volatility.

“It is clear that 2022-2023 are good vintage years for equity investment amid private market downturns. But many limited partners (LPs) are reluctant to bet on private equity today,” a Korean PE manager said.     

Some Korean retirement funds have suspended new investments as an increasing number of pension plan members borrow money from the funds at low interest rates, avoiding the high rates of bank loans, resulting in the funds' liquidity drying up.

Also, a number of Korean institutional investors are challenged with new capital injection in alternative assets due to the “denominator effect.” The phenomenon occurs when a drastic decline in the value of one asset results in an increased percentage of other assets in the overall portfolio.        

The recent denominator effect came as the public share market’s collapse significantly cut LPs’ stock value, raising the percentage of alternative assets in their portfolio. Thus the LPs are restricted in terms of making new investments in alternative assets that are already highly allocated.

Global LPs are no exception to the phenomenon, hitting multinational PE firms’ fundraising.

The Carlyle Group raised $6 billion in fresh capital during the third quarter, less than the $10 billion raised during the second quarter, the PE giant said in the earnings call on Nov. 8.  
 
Carlyle’s total assets under management fell 2% to $369 billion in the third quarter, compared with the second quarter. Its available capital for investment during the third quarter also dropped 9% to $74 billion.

The US PE giant's earnings announcement adds to the woes of Korean PE managers.

Some major Korean PE firms, such as IMM Private Equity Inc., STIC Investments Inc. and Skylake Equity Partners Co., are raising 1 trillion to 2 trillion won of capital for their new funds, but are facing challenges as domestic and overseas LPs suffer a liquidity drought.

Write to Jun-Ho Cha at chacha@hankyung.com
Jihyun Kim edited this article.