This article was published on Jan. 2, 2025, at 2:17 p.m. on the CHOSUNBIZ Money Move (MM) website.
It has been 20 years since the private equity fund (PEF) market was established in South Korea. Since the introduction of PEFs with the amendment of the Indirect Investment Asset Management Act in December 2004, several revisions have occurred, leading to the formation of the current private equity funds.
In the meantime, our private equity fund market has grown exponentially. As of the end of 2023, the total assets under management for domestic institutional-only private equity funds reached 136 trillion won. Over the past 10 years, it has increased by an average of 12% annually. The funds that are not being invested but are sitting idle total 37.5 trillion won.
Last year, a significant turning point was reached as the private equity fund industry welcomed Im Yu-cheol, a 'first-generation' veteran, as the 8th chairman of the council. The new PEF Operators Council chairman began his term on Nov. 1 last year. As of Jan. 1, it has just been two months.
On the 26th of last month, I met Chairman Im at the headquarters of CHOSUNBIZ in Jung-gu, Seoul. After just two months in office, Chairman Im has managed a busy schedule, including a meeting with the Financial Supervisory Service. He spent an hour and a half discussing serious issues and challenges facing the private equity fund sector.
“It has already been two months since I became chairman on Nov. 1. I understand you have been busy during this time.”
“The council was established in 2005 with the goal of creating a communication channel between private equity funds and financial authorities, with major funds forming an executive body and taking turns as the chair for a one-year term. The primary role of the council chairman is to attend meetings with the Financial Supervisory Service or the Ministry of Strategy and Finance and to represent the industry's voice. It acts as a communication channel between the government and the industry.”
“On the 12th of last month, the FSS held a meeting inviting representatives from 12 private equity funds, and I am curious about what was discussed.”
“We discussed issues related to the management rights dispute of Korea Zinc, the voluntary delisting of Ostem Implant, the conflict between DB HiTek and KCGI, and the court battle involving Namyang Dairy. We also talked about the realism of introducing mandatory public offers. Moreover, it was a space where industry officials voiced many opinions they had wanted to express. Compared to previous meetings, I think industry officials spoke honestly about their feelings. People often think private equity funds focus solely on short-term buyouts and are engaging in 'eating and running.' However, private equity funds focus on managing companies for at least 5-7 years to enhance their value. Ultimately, we can say that our private equity funds align best with the intention of the Financial Supervisory Service's 'Value-Up Program.'”
“Since last month, FSS Chairman Lee Bok-hyun has stated in reference to the Korea Zinc management rights dispute that we need to think about the negative effects of 'financial capital dominating industrial capital', and the so-called 'new separation of finance and industry' concept is gaining attention.”
“I understand the concerns of the supervisory authorities and government. However, I believe that if we observe it a bit longer, we will realize that these are just worries. The period during which private equity funds acquire and manage companies is at most 10 years. The essential role of a private equity fund is to enhance corporate value during this limited time and find a new owner to take over management rights. Therefore, the possibility of 'finance dominating industry' is realistically very low.
Additionally, it is impossible for private equity funds to engage in deals that would raise concerns in the industry due to existing contracts and regulations with their fund investors (LPs). In the case of Korea Zinc, the situation is exceptional as the second-largest shareholder holds management rights, making it difficult to classify the involvement of the private equity fund (MBK Partners) as a 'hostile M&A.'”
“Wasn't the management rights dispute surrounding Korea Zinc the biggest issue in the domestic M&A industry last year? How should this matter be understood?”
“The perspective on corporate governance in society seems to have changed significantly compared to the past. I believe the Korea Zinc incident has provided an opportunity to seriously consider the role of private equity funds within the conflict surrounding governance.”
However, I believe it is practically difficult for domestic private equity funds to engage in hostile M&A. This is particularly true for funds heavily invested by public institutions. The same goes for overseas markets. Even abroad, activist funds that primarily engage in hostile M&A are distinct from buyout funds. Funds that have private capital, such as family offices, are mainly the ones involved in hostile M&A.”
“What discussions are taking place regarding the mandatory public offer system, and what is the official position of the council?”
“During the last National Assembly session, there was a discussion about including all ownership up to 50% and 1 share as mandatory public offer targets. However, the recent proposal has changed to a requirement to buy 100%. There has also been talk that even purchasing only the second-largest shareholder's stake would require a mandatory public offer. In response, the Financial Services Commission has indicated that when 'the largest shareholder's shares held are above 25%', it can be sufficient to acquire '50% + 1 share,' but this matter is currently on hold due to the impeachment situation. The council's position is '50% + 1 share.' If the requirement is to acquire 100%, it could hinder the activation of the M&A market. We have submitted opinions in that direction, which is a stance maintained even by the previous chairman, Lee Min-sang of Praxis Capital. We plan to continue expressing our views moving forward.”
“I am curious about how the inception of Donald Trump’s second administration will affect the domestic M&A market and the overall industry.”
“The policies, interest rates, exchange rates, and tariff issues of the Trump administration are affecting the investment environment. The shipbuilding industry is likely to benefit, the automotive industry must overcome challenges, and the secondary battery sector is likely to struggle further. These factors will have direct and indirect impacts on the investment portfolios of each management company and will be significant considerations in future investment decisions. However, private equity funds are long-term investors, not short-term investors. They can withstand short-term shocks.”
“Given the current political chaos in Korea, it seems that foreign investors (LPs) are tending to postpone their investments in Korea.”
“It seems there is a mood to hold back rather than saying they won’t invest at all. This is due to uncertainties. However, if political uncertainties are resolved to some extent in the second half of this year, the inflow of foreign capital into the domestic market will inevitably continue. In particular, it is true that U.S. financial investors (FIs), having avoided investments in China, have nowhere else to invest in Asia except for Korea, Japan, and India.”
“Is there another pressing issue that the Korean private equity fund industry is currently facing?”
“As our private equity funds have grown and expanded, we have reached a point where we must consider social responsibility and public perception to some extent when making investments. It is no longer possible to think only from a commercial perspective. Although we cannot satisfy all stakeholders, it is necessary to consider their interests broadly.
Secondly, considering the scale of the economy in our country, it is time to contemplate whether the private equity fund market can continue to grow. It has grown rapidly over the past 20 years, but will it continue to do so each year? I believe that will be difficult. It is likely to reach a point of saturation where growth stabilizes or occurs only incrementally. Looking at the larger domestic LPs, they are increasing their overseas investment ratios more than domestic ones. The overseas markets are simply much larger. It is realistically difficult for blind funds targeting the Korean market to exceed a subscription amount of 1.5 trillion won. Consequently, it has become more challenging for latecomers to enter the market and compete.”
“Some smaller and mid-sized operators are criticizing the council for only representing the positions of large firms.”
“That is a valid point. Issues like mandatory public offerings tend to be of primary concern to larger firms. Currently, the executive committee is composed only of large management companies, so I believe it is necessary to change the governance to hear the views of smaller firms. The committee has already initiated discussions on that matter. For example, it would be beneficial to allow management companies that do not meet a certain fund size to have a voice in the executive committee.”
“Is there a special event planned to commemorate the 20th anniversary?”
“Various opinions have emerged on what we should do in early January. Suggestions included engaging in volunteer work or holding a large event together. Regardless, I do not want to let it pass by unnoticed. I also want to express gratitude for the support provided by the financial authorities during this time.