• Trade and sponsor sales dominate deal flow as IPO channel remains negligible
• M&A outlook improving as valuation gap narrows, deal financing terms normalise
• Strategic appetite tilts on a cocktail of size, industry, and performance variables

Morgan Stanley Private Equity Asia’s (MSPEA) confidence in the South Korean exit market is easily understood in raw numbers. Its funds have delivered distributions to paid-in (DPI) of 1.5x in total since the firm’s inception in 1993. For Korea specifically, that figure is about 1.8x.

The discrepancy is partially explainable by Korea’s nature as a more mature, buyouts-focused market. China, by contrast, has proven a more challenging exit environment. The divergence of s between these two geographies – historically representing 75% of MSPEA’s investment activity – has been exacerbated in the recent term by an erosion of global sentiment for China.

As with many firms, this trend has prompted MSPEA to more proactively explore investment around the region, especially in India. Interestingly, Korea’s general economic reliance on China does not appear to have diminished its appeal as an investment destination, so it remains a relatively active exit market. MSPEA has confirmed two exits in the past three months, both to strategic buyers.

The companies in question include Jeonju Paper, which secured MSPEA a reported 1.8x return upon its sale last month to local textile and trading conglomerate Global Sae-A Group. This followed a biomass renewable energy business buildout.

Meanwhile, in June, Indonesia’s Asia Pulp & Paper Group acquired 100% of toiletries and hygiene products maker Ssangyong C&B in a deal said to be worth KRW 420bn (USD 312m). MSPEA acquired Ssangyong C&B in 2013 for KRW 199.5bn.

“We’re feeling pretty good about the prospects of Korean companies when they focus on the basics – good cash flow, good margins, brand equity for consumer businesses, high quality assets for industrials,” said Michael Chung, MSPEA’s head of Korea. “These basic qualifications are again being appreciated and valued by buyers more than flavour-of-the-day attributes.”

Mixed signals?

Appetite for M&A in Korea is seen as improving since December thanks to interest rates being cut in half from a peak around 10% and a renewed leniency in financing terms for buyers. The consensus view is that although the market has yet to return to its peak attractiveness of 2021-2022, it is significantly more welcoming than last year.

It’s not easy to tie MSPEA’s most recent activity to this development, however. The Jeonju Paper sale was agreed in December, before market conditions had meaningfully improved. Asia Pulp & Paper had been reviewing Ssangyong C&B since last year, which suggests financing packages were not too dissuading at the time – but it is likely no coincidence the deal did not close until mid-2024.

Total proceeds from private equity exits in Korea amounted to USD 6.7bn in 2023, down 42% on the annual average for the prior five years but still on par with the more conducive environment of 2022, according to AVCJ Research. The running total for 2024 is USD 7bn suggesting potential for a substantial year-on-year bump.

Trade and sponsor sales typically account for 80%-90% of exit proceeds. In 2023, IPOs and open market transactions were less than 2%. In 2024 to date, they are less than 15%.

As buyers have been remotivated to pursue acquisitions, company sponsors have had time to rationalise their expectations for valuations and to reforecast scaling plans considering a subdued business outlook in many sectors. The result has been a meeting in the middle and a narrowing of a recently widened valuation gap.

“The economic outlook may not be that much more robust, but people have adjusted to the level of growth they should expect,” said Charles Min, head of Korea at Affinity Equity Partners.

“So, I do hear a lot of whispers about sponsor-related assets coming into the market. Is it extremely fertile ground for M&A and exits? Probably not, but it’s definitely a lot better than what we saw 12 months ago, and it does look like it should start to improve even more so.”

Affinity’s latest activity in this vein is illustrative of the mixed landscape for Korea exits. The private equity firm agreed in June to sell its stake in SSG.com, the online shopping platform unit of Shinsegae Group, by year-end. Last month, a consortium of securities firms led by NH Investment & Securities emerged as the buyer, according to local media.

The pending deal is set to be worth around KRW 1.2trn. Affinity first invested the company in 2019 alongside BRV Capital Management, with each investor building up a 15% position across two rounds amounting to KRW 1trn in total.

After an IPO was planned in 2021 and ultimately abandoned, there was concern that unresolved negotiations about the terms of a put option between Shinsegae and the private equity firms could escalate into a dispute.

Shinsegae, Affinity, and BRV agreed to extinguish the put option by selling the GPs’ combined 30% position to a third party. The deal with NH is expected to be structured as a total return swap that will essentially allow Shinsegae to acquire the stake via a loan-like arrangement with the NH consortium.

Paths to liquidity

Messiness in exits is not unique to Korea in the current macro environment and not widely viewed as a sign that the market is failing to deliver for investors. In this light, even a groundswell of dividend recaps for companies in exit-stage limbo – aimed at providing distributions for LP – is perceived with patience.

“We’ve seen some GPs providing distributions from leveraged recaps, and some are doing that because they think exits are hard, but I don’t think it’s necessarily a symptom of a difficult exit market,” said Sung Park, a managing director at Asia Alternatives.

“The financing market in Korea is pretty supportive and well developed, so dividend recaps have been there for many years.”

Hahn & Company has made dividends a feature of its overall exit strategy. A significant portion of the distributions to date from the private equity firm’s third fund – 2018 vintage, USD 3.2bn corpus – were generated via recaps on the likes of in-flight meal company Korea Air C&D Services and bulk logistics player H-Line Shipping.

“We have a couple of businesses that we hold long term and take dividends from. In 2023, we accounted for about 85% of dividends paid out to private equity firms in the Korean market,” said Scott Hahn, a former CIO of MSPEA, who established Hahn & Co in 2010.

The comments coincided with the closing of Hahn & Co’s fourth fund in July on USD 3.4bn, buoyed by DPIs of 1.7x, 1.2x, and 0.3x for Funds I, II, and III, respectively. This performance does not include the sale of a 50% interest in auto parts maker Hanon Systems in May at cost to co-investor Hankook Tire.

Last week, Hahn & Co put two subsidiaries of cement company Ssangyong C&E up for sale, according to local media. The firm initially invested the company in 2012 via its first fund, which exited to Fund II in 2016. The company was then transferred to a USD 1.5bn single-asset continuation vehicle in 2022. It was privatised earlier this year at a market capitalisation of about USD 2.5bn.

At this scale, establishing industry leadership is crucial to exit planning. “No Korean strategic – and I think these are still the best exit route – wants to buy a business that’s number five in the market,” Hahn said.

Part of the long hold in this instance is about strategy: Hahn & Co needs time to reposition Ssangyong C&E as an environmental services company. Part of it comes down to the cyclical, commodities-related challenges of cement.

There is also the question – raised by several industry participants – of cement’s impracticality as an export product and the likelihood that a foreign cement company will commit billions to a Korean expansion. Baring a sponsor-to-sponsor exit, that leaves a limited universe of local strategic buyers that could afford the asset, let alone be interested.

“The guys who could digest USD 2bn-USD 3bn acquisitions are going to be the top-10 chaebols, maybe the top 20,” said one industry participant. “There used to be global strategics that could do that, but they’re not coming to Korea anymore. In the US, there would be thousands of buyers like that [targeting domestic US assets], but we just live in a smaller country.”

The view is not universal. Carolyn Lee, a director at KPMG Korea, points to MBK Partners’ acquisition last year of dentistry technology provider Medit from UCK Partners for KRW 2.5trn as recent evidence that sponsor-to-sponsor exits can be achieved in the USD 2bn range.

As for strategic appetite, she observes that although domestic corporates hoping to expand outside China’s economic orbit are more likely to pursue M&A overseas, their foreign counterparts are often looking for ways to get in.

“I’m encountering inbound opportunities where global strategic investors see Korea as a key hub for their expansion in Asia,” Lee said. “According to my clients, which are mostly technology-based companies, Korea has more of the advanced technology and management capabilities they need, so it’s a good starting point for a new business.”

Selective buyers

The ability to exit assets at the larger end of the market appears to be as much about industry as performance. Industries with a profile for stable earnings and high visibility on earnings will be favoured by strategic and financial buyers alike.

The standout case-study here is the gas industry, which has historically enjoyed healthy large-cap deal flow and continues to do so in the current market. Recent action includes BlackRock acquiring a 30% stake in AirFirst from IMM Private Equity last June for KRW 1.1trn.

Korea’s electric vehicle (EV) space has also been heavily invested by private equity but is currently in wait-and-see mode. The main question is how the Inflation Reduction Act (IRA) in the US will be implemented following the upcoming presidential election. The law is seen as having potential to shut down Chinese EV exports to the US, thereby opening doors for Korean operators.

The largest chaebols are expected to prioritise innovation, sometimes to the point of assessing acquisitions of venture-oriented technology companies. In the past decade this tendency has evolved from advanced display screed technology, to EV, to artificial intelligence.

Smaller, single-industry chaebols and mid-size corporates will be less exploratory but not necessarily less acquisitive. The trick is to identify them.

“As long as your portfolio company is competitive and generating healthy cash flow, there are going to be a 10-15 names out there – many of which foreigners may not have heard of – that are either looking for synergistic acquisitions in the same industry or looking for related cash flow-rich companies that they can just add on,” said Jason Shin, a senior partner at VIG Partners.

“Those are the strategic buyers you need to reach out to.”

VIG’s key asset, Preed Life, a funeral services provider valued at KRW 1trn, has attracted offers from both financial and strategic buyers, according to Shin. The GP, which has an 80% stake in the company, initially planned to sell its entire position but has shifted to selling partial stakes due to market conditions. In July, it offloaded 20% to KKR for KRW 200bn.

Shin’s point about under-the-radar corporate appetite for M&A was better illustrated by the sale of restaurant ingredients and logistics supplier Foodist last June to Sajo Group, a small agri-food chaebol, at a valuation of KRW 285bn. This set up an expected a 2.2x return for VIG.

Foodist is also interesting as a showcase of how Korean private equity firms are exiting companies in ostensibly less acquisitive industries by playing alternative angles.

Three investors contacted for this story cited restaurant chains as a particularly difficult to exit segment in Korea. The idea is that post-private equity, expansion efforts tend to take restaurant chains to the point of near saturation in a country of only 50m consumers. This leaves little upside for would-be buyers, whether they be financial or strategic.

“Everyone went into restaurants because it was easy to grow, and then they tried to sell them and nobody was interested,” said one investor. “It’s not because the industry is unattractive. The assets being sold have just reached maximum growth already.”

As a B2B supplier, Foodist effectively accesses the restaurant industry’s growth potential without the footprint limits perceived to contain otherwise fast-rising B2C brands.

In such cases, digitalisation can be of outsized importance in the overall value-add plan. For Foodist, this was a matter of shifting restaurant owners from sourcing their ingredients in-person at logistical hypermarkets or via call-in catalogues to next-day online orders.

Happy meal?

Affinity aims to resolve the restaurant chain exit dilemma by taking the company beyond Korea’s borders.

The GP acquired Burger King Korea from VIG in 2016 for KRW 210bn; VIG had acquired it four years earlier for KRW 110bn, including debt. Affinity bought Burger King Japan the following year, its first direct investment in the country, reportedly investing as little as KRW 10bn with immediate plans to build out the business to 200 locations locally.

Affinity began efforts to sell both companies in tandem in late 2021. Initial bids were placed, with most estimates for the combined company’s value falling in a range of KRW 700bn-KRW 1trn.

However, the process was shelved as operational costs increased following the outbreak of war in Ukraine. Investors were also rattled by a flurry of statements from global fast-food companies, including Burger King, saying they would consider pulling out of Russia.

A three-asset continuation vehicle was subsequently considered, bundling Burger King Korea, Burger King Japan, and fellow Affinity portfolio company ServeOne, a Korea-based business services provider. Lazard was hired to explore the option, but it was never launched. Historically, the challenge with continuation vehicles is finding an anchor investor.

It’s unclear if Burger King Korea-Japan can be sold as a unified asset in a single transaction. The Japan business is seen as a viable target for local strategics, but the Korea business, given its larger size, will likely have to depend on a less visible sponsor exit.

Again, the digitalisation piece is hoped to be a deciding factor. Affinity claims that Burger King Korea has the number-two retail app in the country, behind only Starbucks, and that 96%-97% of orders are done on a digital basis. In theory, that layer of data value transcends the business beyond its presumed growth limits as a mere restaurant chain.

“Because we spent the last seven years building out that data and building out the capabilities to go through the customized marketing and customized couponing, we’re able to tailor our promotions and communications with each customer,” Affinity’s Min said.

“That becomes a huge differentiating factor versus companies running costly promotions without knowing if it’s something the customer wants.”