There have been indications that the profitability enhancement capabilities of invested companies must be backed for the growth of the domestic private equity market. Currently, domestic private equity fund (PEF) managers overly depend on revenue growth or corporate value multiples for enhancing corporate value, suggesting the need to strengthen fundamentals rather than focus on growth.
Park Yong-rin, a senior researcher at the Korea Capital Market Institute, evaluated on Nov. 11 during a seminar titled PEF 20-Year Performance and Outlook held at the Korea Securities Depository in Yeouido, Seoul, that while the domestic private equity (PE) market has grown rapidly, activities to enhance corporate value are excessively reliant on growth.
Researcher Park noted, 'An analysis of 135 cases of corporate value changes completed by domestic PEF managers from 2005 to 2023 showed that while the corporate value of invested companies increased at the time of withdrawal, their profitability appeared to decline.'
In fact, domestic PEF managers are reported to have increased the corporate value of invested companies by an average of 35% over an average of 3.8 years post-investment. However, the majority attributed this to revenue growth (73.3%) and an increase in corporate value multiples (36.2%). Cases of downward adjustments in corporate value due to declining profitability accounted for 9.5% of the total.
This contrasts with the methods used by overseas PEF managers for enhancing corporate value. In the case of U.S. PEF managers, the increase in corporate value attributed to rising profitability was reported to be about 10%. They create value evenly across sales and industry growth and improving the profitability of invested companies.
Researcher Park stated, 'Since the domestic PE system started in 2004, it is true that we lag somewhat in operational capacity compared to overseas counterparts,' adding that both operational capability enhancement for profitability improvement and utilizing market share growth and price control to achieve external expansion are necessary.
He added that diversification of investor types is also necessary for the growth of the domestic private equity market. The composition of domestic PEF investors excessively relies on a limited number of investors such as pension funds, mutual aid associations, and financial companies, which he believes restricts value enhancement methods.
Researcher Park emphasized that the currently exclusive private equity fund, which serves as a practical investment vehicle for institutional investors, somewhat narrowly defines the range of investors. He stated, 'We should view PEF managers not just as financial investors but as operational investors equipped with management capabilities.'
Finally, Researcher Park stressed that domestic PEF managers must move beyond their closed nature and begin external communication. He noted that the domestic private equity market started with the aim of creating a Korean-style PE to prevent foreign capital from entering the domestic market after the foreign exchange crisis, but now it has reached a maturity stage.
He emphasized, 'Domestic PEF managers are now evolving beyond being just restructuring partners to engaging in management rights disputes and implementing activist strategies, indicating that it is time for joint efforts in external communication with capital market participants and broader stakeholders.'