Foreign PEFs dominate Korea's M&A market with strong dollar

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The Korea Times

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Tue, February 7, 2023 | 00:44

Markets

Foreign PEFs dominate Korea's M&A market with strong dollar

Posted : 2022-11-02 16:28

Updated : 2022-11-02 16:48

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Depreciated won and soaring interest rate become burden on local PEFs in M&A deals

By Anna J. Park

With the U.S. dollar continuing strong this year, overseas private equity firms (PEFs) are snapping up Korean companies that are up for sale on the M&A market at a cheap price, while local private equity companies find themselves being pushed behind in price competitiveness.

There have so far this year been seven major M&A deals worth over 500 billion won ($35.2 million), which were either completed or are currently in discussion, and five of the seven deals were snapped up by foreign PEFs.

In January, U.S.-headquartered private investment firm Bain Capital purchased a controlling 60.84 percent stake in the Korean medical aesthetic device maker Classys for 670 billion won. In June, the Korea-based PI Advanced Materials, which is the world's top polyimide film manufacturer, was sold to Hong Kong-based Baring Private Equity Asia (BPEA) at 1.3 trillion won. In August, Canada-headquartered Brookfield Asset Management acquired industrial gas production facilities from SK Materials Airplus for 1 trillion won.

In October, a consortium led by U.S.-based private equity giant Carlyle Group paid 3 trillion won to acquire Medit, a Korea-based 3D dental scanner maker, which is also the world's third-largest player in the industry. In the same month, Singapore-based Keppel Infrastructure acquired EMK, Korea's leading waste management company, for 770 billion won.

"The dollar's value against the won has appreciated by more than 30 percent since the start of the year. This means that overseas PEFs enjoy relative price competitiveness compared to local PEFs, when they join M&A bids," a market insider pointed out.

There is a general expectation in the industry that foreign PEFs will continue their dominance in local acquisition bidding processes. That's because most local-based PEFs finance their blind funds with won-denominated capital from major domestic institutional investors, such as the National Pension Service (NPS). In addition, increased costs for acquisition financing, due to soaring global interest rates, place too much burden on local PEFs to be aggressive enough to win a bidding competition in M&A deals.

For this reason, except for local PEFs that secure capital from overseas limited partners such as MBK Partners and Hahn & Company, most Korea-headquartered PEFs are currently wary of entering new deals for the sake of risk management.

"Many key officials from PEFs joke that it's better to take leave by the end of the year. Some actually took weeks-long vacations during the second half of this year. My workload has also much reduced lately, as we are no longer searching for new investment deals in Korea for the time being. Currently, we're just closely following earnings of previously invested portfolio companies," a senior-level employee at a mid-sized Korea-headquartered PEF told The Korea Times on condition of anonymity.

Reflecting local PEFs' cautious attitudes towards new investments, the total transactional amount of acquisition deals on managerial rights during the first three quarters this year posted 13.9 trillion won, which is nearly a 60 percent plunge compared to the same period last year.

While local PEFs have become passive in new deals, overseas PEFs have been more aggressive in the Korean market. Global PEFs are expanding businesses in Korea, aiming to snap up lucrative assets at cheap prices. U.S.-based investment giant KKR has recently increased the firm's employees at its Seoul operation, while Apollo Global Management, one of four major PEFs in the U.S., has been preparing to advance into the Korean market since summer this year.

Some market watchers warn that these global investment giants seem to be pushing ahead with strategies similar to what some foreign PEFs did during the Asian financial crisis a little over two decades ago. They aim to reap huge profits through aggressive buying of quality Korean companies at cheap prices during times of economic hardship.

However, not all local PEFs remain passive in this crucial juncture. Some local-headquartered PEFs are vying to purchase lucrative Japanese businesses, considering the financial benefits brought by the historic-low Japanese yen for Korean investors.

"PEFs are always trying to find investment opportunities everywhere. It's just the core nature of what we do; we find undervalued assets and help their businesses to be properly valued later," a market insider said.

annajpark@koreatimes.co.kr