This article was displayed on the CHOSUNBIZ MoneyMove site on Jan. 10, 2025, at 4:40 p.m.
Private equity fund operator JKL Partners has changed the shareholder agreement with YG-1, a cutting machine company it invested in four years ago. Due to the economic downturn, the stock price has dropped since the investment, prompting what appears to be an agreement for smoother capital recovery.
According to the investment banking industry on the 10th, JKL Partners and YG-1's major shareholder, CEO Song Si-han, along with Song Ji-han, Head of Sales, have signed a revised shareholder agreement. They extended the exercise period for JKL Partners' put option from the original 5 years (December 2025) to 6 years, and removed the right for Song and others to purchase 45% of JKL Partners' equity (call option).
Instead, they added an earn-out clause stating that if JKL Partners generates profits, a portion of that profit will be shared with CEO Song and others. If JKL Partners disposes of all its equity and achieves an internal rate of return (IRR) exceeding an annual compound rate of 8%, then 35% of the excess amount will be paid equally to CEO Song and President Song.
An investment banking industry official noted, "The removal of the call option allowing the major shareholder to purchase JKL's equity at the issuance price level, in favor of inserting the earn-out clause, seems to reflect both parties' pursuit of shared interests," adding, "There is a high possibility that they will implement a shareholder return plan in line with JKL Partners' capital recovery timing to boost the stock price."
In December 2020, JKL Partners acquired redeemable convertible preferred stocks (RCPS) worth 20 billion won issued by YG-1. If all RCPS are converted to common stock, JKL Partners' equity stake will reach 10%. This follows JKL Partners' prior investment of about 27.5 billion won in 2015, with recovery completed before proceeding with additional investments. They forecast a surge in demand for cutting tools, a backward industry, if global economic recovery becomes apparent after the COVID-19 pandemic.
However, the stock price has fallen compared to when JKL Partners made its investment. The issuance price of the RCPS acquired by JKL Partners was 5,525 won, which was a 10% discount from the stock price at the time. YG-1's stock price rose from 9,000 won in 2021 to over 10,000 won but has steadily declined, closing at 5,170 won today. Given that private equity fund investments typically involve capital recovery within 4 to 5 years, an exit is nearing.
An investment banking industry official analyzed, "Given that the existing contract guaranteed a yield of only 2% per annum until five years from the issuance date, it seems that JKL Partners opted to amend the shareholder agreement to include the earn-out clause and bet on boosting the stock price instead of immediately exercising the redemption rights."
YG-1 has a respectable market share in the global cutting machine sector. Particularly, it holds the top position in the global end mill market, which acts as a cutter for milling machines. As of the end of 2023, YG-1's revenue stood at 553.1 billion won, with an operating profit of 54.6 billion won. By September of last year, the company had recorded revenues and operating profits of 430 billion won and 42 billion won, respectively.
A company official explained, "Due to the economic downturn and the stock market decline, common stock conversion has not occurred to this point, prompting a change in the shareholder agreement as the investor's put option exercise period approaches."