• Corporate governance-linked “K-discount” makes Korea a cheap buyout market
• White knight opportunities abound in Japan as activist investors loom large
• No China buyouts in two years, but GP is positive on market in mid- to long-term

MBK Partners has reached a USD 3.5bn first close on its sixth North Asia-focused buyout fund, Michael B. Kim, a partner and co-founder of the firm said in his annual letter to investors at the end of March. He added that USD 3.6bn – including co-investment – had been deployed over the past 12 months, which is “in line with our record levels the preceding two years,” although distributions were down.

MBK launched Fund VI last August with a target of USD 7bn, having raised USD 6.5bn in the previous vintage. The first close came in the fourth quarter of 2023, according to a source close to the situation.

Kim noted that most of the capital came from existing investors. Historically, the firm has enjoyed strong support from the likes of Ontario Teachers’ Pension Plan (OTPP), Canada Pension Plan Investment Board (CPPIB), Temasek Holdings, and China Investment Corporation (CIC).

Buyout activity last year focused on Korea and Japan. In Korea, MBK contributed USD 884m in equity to a KRW 2.8trn (USD 2.3bn) buyout of dental implant maker Osstem Implant and paid USD 254m – excluding debt – for smart phone components supplier Nexflex. In Japan, it bought Unimat Retirement Community and care services provider Hitowa Holdings, committing USD 236m and USD 336m.

The USD 3.6bn includes investments made under the firm’s special situations strategy. It subscribed to USD 763m in convertible preferred shares in electric vehicle battery manufacturer SK On, committed USD 93m to domestic troubleshooting services business Japan Best Rescue Systems, and picked up USD 41.2m in deeply discounted loans issued to Marelli, an auto parts supplier controlled by KKR.

Kim said that Korea and Japan together can generate “significant and sustainable” buyout deal flow. He noted the traditional stream of chaebol divestments in Korea has been augmented by rising opportunities linked to non-chaebol founder succession. Moreover, Korean companies trade at a discount to listed peers in Japan and China due to perceived poor corporate governance involving chaebols.

“The K-discount extends to the private market. Our investments in this market were done at a 25% discount on average to the global comparables,” Kim said. “Korea is the value market of Asia.”

In a Japan context, he highlighted the impact of corporate governance reforms and shareholder activism – as well as “the cheapest acquisition financing worldwide” – in spurring PE-led corporate carve-outs and take-privates. Kim added that the role played by activist investors in Toshiba’s impending privatisation has given the impression that any company in Japan can come under attack and be sold.

“Belying its reputation for politeness, Japan is now the second most active market for shareholder activism, trailing only the US shareholder attacks, have led to a proliferation of ‘white knight’ opportunities to bail out management,” Kim said, referencing MBK-led buyouts of jewellery brand Tasaki, golf course operator Accordia Golf, and electronic components maker Kuroda Electric.

“Being a white knight to management is a salutary role to have; it gives us inside access in due diligence, the heart of what we do.”

In China, meanwhile, MBK continues to “exercise discipline in deployment,” with the buyout strategy not making any commitments over the past 24 months. Special situations opportunities are considered more attractive given the uncertain environment, and there was a USD 80m investment in senior loans of Health & Happiness, a producer of infant formula and adult and pet-focused nutrition products.

Kim observed that many of MBK’s GP peers have retrenched from China amid geopolitical and macroeconomic pressures. However, he believes China represents too large a market to ignore. “What we’re going through is a period of growing pains in a generational political-economic development story, not the end of the Great China Experiment. We are believers in China in the mid- to long term,” he said.

Addressing the limited distributions – which came to USD 413m, of which USD 169.7m came from recaps of Kuroda and beauty and spa services provider Shanghai Siyanli Industrial  – Kim said: “We see some green shoots in the liquidity channels, and we have planned a number of trade sales and initial public offerings that will test their rejuvenation.”

Tasaki ranks highest on Mergermarket’s Likely-to-Exit (LTE) algorithm* with a score of 81 out of 100. Mergermarket reported last November that bidding for the asset had entered a second round. Golfzon County and Kuroda came next, with scores above 50, followed by Lotte Card and eHi Car Services. Bloomberg reported in February that eHi was being prepped for a Hong Kong IPO.

MBK tracked a significant improvement in the health of its existing portfolio as companies moved on from the debilitating impact of COVID-19. The China, Korea, and Japan sub-portfolios appreciated in value by 44.8%, 28.6%, and 12.2%, respectively.

The firm’s five active funds were marked at a 1.9x multiple and a 20.5% IRR as of year-end 2023. Within buyouts, Fund III was at 2.3x and 17.2%, Fund IV at 2x and 18.8%, and Fund V at 1.6x and 36.3%. Within special situations, Fund I was at 2.3x and 37.1% and Fund II at 1.3x and 25%.

Nearly 80% of the USD 5.59bn of value in Fund III (2013 vintage, USD 2.7bn) is fully realised. This compares to 22% of USD 7.42bn for Fund IV (2017, USD 4.1bn). MBK claims that Fund III’s distributions to paid-in (DPI) of 1.43x exceed the top quartile benchmark – based on Asia buyout funds of more than USD 1bn in size tracked by Preqin – of 1.21x. Fund IV’s DPI of 0.37x is level with the benchmark.

Founded in 2005, MBK has USD 30bn in capital under management, has made 72 investments to date, and has over USD 6.5bn in dry powder. The firm has completed 43 realisations, distributing USD 18.7bn in proceeds. Earlier this year, it crossed the 100 threshold in terms of investment professionals.

*Mergermarket’s LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.