Korean rental platforms become headache for PE investors

South Korean rental platforms have become a headache for private equity firms, with their declining profits and dim business outlooks making them hard to sell.

In 2019, a handful of small-sized homegrown private equity houses snapped up domestic rental service companies for around 100 billion won ($76 billion) each to emulate MBK Partners’ eye-popping exit from the sector leader Coway Co. that produced more than a fourfold return after five years of investment.

Five years on, Cactus Private Equity and Daishin Private Equity are struggling to divest of BS On Co. a company that leases office equipment and home appliances.

Their consortium put it up for sale in September of last year, but has yet to find a new owner due to a big valuation gap with bidders, according to investment banking industry sources on Wednesday.

The two homegrown investment firms jointly acquired BS On for 100 billion won in 2019. Since then, BS On's operating profit has decreased to 11.9 billion won in 2022 and 12.1 billion won in 2021, versus 16.4 billion won in 2019.

SV Investment and AJ Capital Partners were other Seoul-based PE houses betting on rental platforms.

They took over MostX, formerly Modurental, for 100 billion won in 2019. It leases products ranging from household goods to massage devices and pet care products from some 150 brands.

Despite its diverse assortment of leasing products, the company’s operating profit more than halved to 4.2 billion won in 2022, compared to 10 billion won in 2020. Sales decreased to 65.6 billion won versus 91.5 billion won over the same period.  

AJ Capital Partners is a unit of AJ Networks and AJ Rent-A-Car and has no relation to the Tennessee-based investment firm with the same name.

In 2019, PS Alliance and Dream Security, a cybersecurity and authentication service company, acquired Korea Rental Corp. for 115.0 billion won. The rental company has been faring poorly since their purchase.

Industry observers said domestic rental platforms appear to have reached their growth limit.

They are highly dependent on manufacturers, which are now switching to directly leasing their products after building brand awareness on rental platforms.

High interest rates have taken a toll as well. Rental companies borrow money from banks or other financial institutions, offering subscription contracts with their customers as collateral. Elevated financing costs have held them back from swiftly responding to the hit product cycle.

North Asia-focused MBK Partners reaped more than a fourfold return, or over 1 trillion won, from the exit of its controlling stake in Coway, a rental company for air and water purifiers and bidets, in 2018.

Write to Jin-Eun Ha at hazzys@hankyung.com
 

Yeonhee Kim edited this article.