When Ark & Partners closed its debut blind pool fund this month on KRW 200bn (USD 150m), it said much about the maturation of South Korea’s unique private equity space.

A massive ecosystem of deal-by-deal investors has gradually fostered a small but more institutionalized subset of middle-market fund managers. The caveat is that it’s not a very repeatable story. Part of the problem is that the transition from single-asset project funds to blind pool funds is being increasingly conflated with a transition from domestic to international LPs.

Seven industry professionals contacted for this story described Korea’s domestic LP base for private equity as limited and contracting. International participation in the local industry is increasing, but it will do little to advance the project fund space.

Ark, which has raised at least three project funds in the past five years, described its debut blind pool as equally comprised of domestic and foreign LPs. This is thanks to the firm’s origins as a spinout from VIG Partners, a longstanding local GP that has latterly raised capital onshore and offshore.

Sungmin Kim, Ark’s co-founder, managing partner and CEO, leveraged relationships with Federated Hermes and Axiom Asia. Both fund-of-funds backed the debut blind pool and were instrumental in facilitating introductions to institutions such as Temasek Holdings-backed Pavilion Capital.

Despite chalking up Ark’s relationships to luck, Kim believes other GPs would struggle to navigate the path to institutionalization without it. Those with entirely domestic LP bases will have few inroads to forge such ties. It might be the same for Korean spinouts from global firms, where founding partners are likely to be deal team members unconnected to their former parent’s fundraising apparatus.

As for domestic LPs, there is a sense that they are less engaged, especially where managers are limited to project fund track records. Industry participants variously highlight factors such as a universal flight to quality and cornerstone institutions pausing their investment activity due to internal issues.

“When we started in 2021, Korean LPs were willing to invest in project funds. Nowadays, they’re really focused on mostly deploying their money to blind pool fund GPs,” Kim said. “So, it’s going to be pretty hard for new managers to start with project funds and benchmark our strategy.”

Survival instincts?

Kim downplayed declining appetite for PE among domestic LPs as an impetus for Ark to enter the blind pool space. But for the broader industry, it’s easy to see how graduating to comingled funds and international capital is as much about survival as scaling ambition.

Part of the challenge is regulatory. Revisions to Korea’s Capital Markets Act in October 2021 effectively rendered locally based unlisted corporates and high net worth individuals as ineligible to participate as LPs in private equity funds.

One deal-by-deal manager estimated there are now as few as 50 institutional investors in Korea positioned to invest in private equity and that the bank-related groups among them have clipped their exposure in the past year as they adopt Basel III rules requiring higher capital adequacy ratios.

“The law change has been a challenge. The LP pool for small to mid-size GPs has significantly shrunk,” the manager said. “Korea is different from the US, where there are many LP types and family offices.”

A second manager, with several blind pool funds, all comprising local LPs, singled out Shinhan Capital, a unit of Shinhan Financial Group with KRW 12.5trn in total assets, as an example of an LP retreating from private equity due to Basel III. The manager, who focuses on growth equity, added that international LP support remained mostly limited to large buyout firms and those with foreign marketing capabilities.

Shorter-term impediments include a string of financial scandals at Korea Federation of Community Credit Cooperatives (KFCC), a mainstay anchor of projects funds, and recent management shake-ups at National Pension Service (NPS), a linchpin of more experienced managers.

Meanwhile, the collapse of big-box retailer Homeplus looms in the background. This was never a mid-market deal: MBK Partners bought the company for USD 6.4bn in 2015, using a fund backed by overseas LPs. And the conditions surrounding its demise are idiosyncratic: After years of underperformance, Homeplus filed for bankruptcy protection days after a bond issuance, prompting a criminal investigation.

Yet it is regarded as a potent but intangible spectre around sentiment, the questions being asked about MBK’s stewardship of the business stoking broader concerns about risk-taking in private equity.

These clouds may pass. Sungwon Yoon, Bain & Company’s head of PE in Korea, like several investors interviewed for this story, believes Homeplus and the internal issues of individual LPs are temporary and the drags on middle-market fundraising will be minimal.

The more significant factor is the idea that private equity dominates Korea’s M&A market. Yoon noted that 18 or 19 of the top 20 deals in any given timeframe feature either a PE buyer or seller, suggesting the industry is critical to the overall economy and therefore relatively insulated from the reputational damage of any specific incident.

A narrower market

Long-term stability in fundraising support is likewise implied by the mostly sovereign or quasi-sovereign nature of the Korean LP universe. This includes NPS and other pensions, as well as Korea Development Bank (KDB), arguably the go-to anchor for most first-time project funds.

“In their policies, they try to allocate across blind funds and project funds,” Yoon said, referring generally to leading LPs with state-linked agendas. “There is also a tendency to allocate across small, mid, and large cap, and to new and existing funds, so they can maintain, in policy, a healthy GP ecosystem.”

He concedes, however, that an overarching flight to quality, prompted by a weak liquidity environment, is darkening the outlook for unproven managers.

Bain estimates about 250 new GPs were established in Korea in the past year, of which some 200 were seeking capital for project funds. Although this figure is on par with recent years, the proportion of new managers that successfully close a fund has declined since the pandemic.

Official data help bear out the observation. The Financial Services Commission (FSC) tracked strong double-digit growth in the number of active private equity funds until 2021, when the pace decelerated to 4.6%. As of 2024, there were 1,137 PE funds in Korea, up only 1% versus the prior year.

The rise in cumulative capital in these funds has not decelerated as quickly. Total commitments increased at a rate of 15%-20% per annum from 2017 to 2021, after which growth slowed to around 10% year-on-year, according to FSC. Total commitments for the funds recorded as active in 2024 amounted to KRW 153.6trn, up 12.6% on the prior year.

It illustrates the bifurcation underway. Many project fund managers can keep the lights on for years with less than USD 50m. However, the tenor of each vintage is shorter than in the blind pool space, which implies a faster velocity of capital. As weaker players fail to keep pace and fade, the gradually rising mountain of capital gravitates to fewer, larger, and more professional organizations.

This is not an unwelcome development, even among project funds. A second deal-by-deal manager observed that best-of-breed managers in the project fund space are more likely to find LPs receptive to blind pool offerings. Getting traction with blind pool funds backed by local investors can, in turn, help middle-market players edge toward the large-cap space as they attract foreign LPs.

“That’s all great for us because it makes the middle market less competitive,” the second deal-by-deal manager said.

“Instead of putting USD 10m in five funds, Korean LPs are putting USD 25m in two funds. It’s not a dramatic reduction in terms of money going to domestic GPs, but it’s a slow shift toward GPs that have built up expertise. There are so many GPs in Korea, if anything there needs to be a culling.”

Strategic clarity

The transition from project funds to comingled funds is a natural evolution. However, there is some concern that as domestic LPs increasingly look overseas and set a higher bar for performance, a more competitive field of project fund managers are vying for their limited attention, causing the presumed pathway to institutionalization to narrow.

Pressure on this paradigm also stems from the difficulties of graduating from domestic to international LPs, even among successful middle-market managers. Here, the challenges multiply in terms of satisfying LP requirements around fund commitment ticket size, operational capabilities, and environmental, social, and governance (ESG) standards.

Glenwood Private Equity is the latest success story in this area, having closed its third Korea-focused fund on USD 1.1bn with USD 450m coming from global LPs, as reported by AVCJ earlier this month. It is the first time the firm has raised international capital. Investors include Pavillion, Canada Pension Plan Investment Board, Manulife Asset Management, and AlpInvest Partners.

Strategic clarity is key to this outcome. In Glenwood’s case, this meant establishing its credentials as a middle-market corporate carve-out specialist. For Ark, it’s about remaining focused on mid-cap buyouts. As the likes of VIG have pushed into the upper realms of the middle market, part of Ark’s pitch is that it concentrates on the relatively underserved sub-USD 200m deal size space.

“Overseas LPs don’t want to deploy their money to GPs with mixed strategies. You have to stick to either growth or buyout. You have to decide which one will be your main strategy,” Ark’s Kim said.

A mixed strategy mandate is often evoked as the reason that some Korean GPs with respected track records and histories of raising large comingled funds have yet to attract global capital.

Premier Partners and Praxis Capital Partners have engaged placement agents or otherwise advanced plans to securing their first international LPs, according to two sources, including one citing senior management at Praxis. These efforts are considered experimental and not expected to attract as much global attention as Glenwood.

Premier closed its sixth blind pool fund on KRW 940bn last month and Praxis closed its fourth on KRW 800bn in May. AVCJ Research cited only domestic LPs for both vehicles. Neither firm had responded to a request for comment as of the time of publication.

Thinking bigger

Gaining traction with global LPs will be to some extent about demonstrating capacity to do larger deals with co-investment. This was part of the equation for UCK Partners, formerly a Korean affiliate of Japan’s Unison Capital. The firm closed its third mid-market buyout fund – and first as an independent manager – last year on KRW 1.1trn, including KRW 250bn from international LPs.

The standout deal in UCK’s track record is the KRW 320bn acquisition of dental industry supplier Medit in 2019 at a valuation of KRW 600bn. The investment was made from the firm’s KRW 500bn second fund and therefore required significant co-investment. Medit was sold to MBK in late 2022 at a valuation of KRW 2.4trn, generating UCK a 5.8x return on its 50% stake.

International participation in Fund III came largely from fund-of-funds in Hong Kong and Singapore, although North American and European investors also featured. Familiarity with outcomes such as Medit played a significant role, but Soomin Kim, a partner and CEO at UCK, also emphasized the importance of thinking big without straying from the mid-cap buyout thesis.

“A lot of domestic GPs will say they do buyout or growth depending on where the opportunity is because being multi-strategy minimizes the risk of not deploying capital and missing deals. That works quite well with domestic LPs, but it doesn’t fly with foreign LPs,” he said.

“I think domestic GPs have been tamed by domestic LP appetite. Many Korean LPs want low to mid-teens IRR with some downside protection structure, so that’s what GPs give them. But when I talk to foreign LPs, they want 2.5x and 25%. Historically, if a domestic GP said they were shooting for that, the Korean LPs would say it’s too risky.”

Orchestra Private Equity, which invests on a deal-by-deal basis, plans to raise USD 300m, including co-investment, for its first comingled fund next year by leveraging a unique mandate covering small to mid-sized deals across developed North Asia. The fund is envisioned as being 30% Korea, 70% Japan.

Citing a limited LP pool in Korea, the firm has sought largely international LP support for its project funds to date, including those raised for KFC Korea and Japanese construction industry supplier Stack. Domiciled in the Cayman Islands to assuage any concerns about Korea’s relatively aggressive capital gains tax regime, they were supported entirely by a mix of US, European, and Australian investors.

It is hoped the same LPs will participate in the planned comingled fund, but Jay Kim, a Singapore-based managing director at Orchestra, said incumbent investors have not yet been asked about commitments.

An exit process for KFC Korea is underway and Kim would like to notch a couple more before formally launching fundraising. It speaks to the difficulty of this transition even when the necessary relationships are in place. Orchestra’s debut blind fund has been in the planning stages since at least 2Q23.

“We’ll see fewer project funds in Korea, and the established comingled funds getting bigger and doing more deals,” Kim said. “But I think there will be more participation from international LPs in the Korean scene because the deals will be good. Prices are coming down, and there will be ample opportunity because we’re going to see fewer project funds forming. It’s a transition process.”