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Capital commitment decreases, while number of PEFs reaches all-time high
By Anna J. Park
The amount of capital committed for fundraising by local private equity firms (PEFs) has plunged this year, amid soaring global interest rates and increasing economic uncertainty.
According to data by the Financial Supervisory Service (FSS), the amount of newly committed capital for local PEFs during the first quarter of this year stood at 2.7 trillion won ($1.94 billion), which is only about a third of the 8.19 trillion won committed during the fourth quarter of 2021.
While major PEFs are said to be struggling to solicit capital commitments from institutional investors for their private equity funds due to deteriorating external economic conditions, the number of local PEFs reached an all-time high of 1,080 as of the first quarter this year. This means the private equity sector might face a painful restructuring phase in the years to come.
Market insiders say the demand for private equity funds aimed at leveraged buyout investments, particularly tailored for institutional investors, has fallen drastically this year amid rising interest rates. Due to the drop in demand, the amount of new capital commitments for private equity funds during the second and third quarters of this year is expected to have decreased further.
One of the key factors attributed to the decreased demand for private equity funds is worsened investment returns posted during the first half of this year by major institutional investors, such as the National Pension Service (NPS) and the Korea Teachers Pension. For instance, the NPS logged an 8 percent investment loss in the first half of this year, which made it become less aggressive on future investments in private equity funds.
Some market watchers even forecast that the golden age of PEFs seen during the past few years would be ending soon. Since 2018, local PEFs have succeeded in raising capital commitments worth over 10 trillion won for their funds every year, resulting in the high growth of the private equity industry.
However, industry insiders remain positive, saying local PEFs still hold enough cash to maintain their investment activities. Furthermore, PEFs in the country are particularly forecast to find upside returns in sectors that undergo digital, energy and demographic transformations.
"The Korean economy is currently positioned to lead global digital technological transformation, and more opportunities for upside growth would be found in various sectors like bio, mobility, contents and secondary batteries," a PEF market insider pointed out.
Other market insiders stressed that PEFs have played a significant role in leading corporate restructuring in a wide range of industries in Korea during the past two decades, and thus their role will continue to thrive in the future. They say that now is a good time for local PEFs to find investment opportunities with corrected asset prices, rather than taking a defensive stance in their investments.
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