We increased our own-capital investments this year, including participating in pre-IPO deals, and resumed commitments to venture investment funds.
Lee Chung-hoon, head of Samsung Securities' IB1 division (vice president), said in a recent interview with ChosunBiz, "The shift from a fee-centered IB to an investment-centered IB has become clearer," adding, "How well we unearth high-growth 'rough gems' has become a new competitive edge for securities firms' IB divisions."
Samsung Securities delivered an earnings surprise in the first quarter, far beating market expectations. In addition to the inflow of retail funds and increased sales of financial products driven by a domestic stock rally, the IB institutional sector's performance (revenue) was also tallied at 71.8 billion won, up 10% from the previous quarter.
Most domestic securities firms' IBs, which help corporations with stock listings and corporate bond issuances, struggled this year. The initial public offering (IPO) market remains in a historic slump due to the Korea Exchange (KRX) toughening its listing reviews and banning duplicate listings, and the corporate bond market's issuance volume has declined under higher-rate pressure.
According to the division head, Samsung Securities' IB held up thanks to an aggressive investment strategy using its own capital. Lee explained, "After increasing our own-capital pre-IPO investments to 20 billion won last year, we executed about 15 billion won in just the first half of this year."
Lee is called a "multiplayer" leader who has worked across traditional IB areas such as corporate finance and venture support, as well as financial engineering, risk management, and real estate finance. In the past, Lee led various deals including the 5 trillion won privatization of KT. Lee also calls himself a "generalist."
Today, the IB1 division's revenue at Samsung Securities is driven by three pillars: acquisition finance, IPO and pre-IPO investments, and structured finance. Acquisition finance accounts for the largest share, but the shares of structured finance and IPO have also increased. We asked directly how Samsung Securities' IB found a way forward amid the market slump. Below is the Q&A.
- There's a lot of talk that securities firms' IBs are having a hard time these days.
"Corporate bonds have seen issuance fall by about 20% because rates have risen too much. IPOs may feel hot, but the exchange's bar is still high. To grow the KOSDAQ market into the '3000 era' and make it like Nasdaq, they only want to admit good companies.
In the past, there were so many technology evaluations centered on biotech, but not many companies did well, so the exchange feels a heavy burden. As delisting criteria have also been tightened and quality is being scrutinized, listings themselves have decreased a lot. As deals have shrunk, our role is to find alternative revenue sources."
- By alternative revenue sources, do you ultimately mean investment?
"Yes. The shift from a fee-centered IB to an investment-centered IB is clear. This change began with the introduction of short-term notes, and as securities firms' capital strength has grown and competition has intensified, the trend of recouping reduced fees through investments has strengthened. We don't have short-term notes, so from last year we focused on pre-IPO to find new revenue sources. For a company like Rznomics, our investment gains were quite large."
- What triggered the full-fledged increase in pre-IPO investments?
"We originally had a pre-IPO book but couldn't fire properly. You need the ability to source good companies, and IPO had been our weakness. Last year we led IPOs for a total of 13 corporations, and our capabilities grew. Above all, we produced results in KOSDAQ and technology exceptions.
As that happened, sourcing good companies also became possible. These days, having money doesn't mean you can invest. Relationships have to be good, and you have to go together with VCs. Last year we led investments with Samsung Venture Investment and Rebellions, and this year we have already approved about eight deals."
- In the past, securities firms' pre-IPO investments were a means to win the lead-manager mandate. Has the approach changed?
"While there is an aspect of strengthening relationships, even if you win the deal, if the company deteriorates and can't list, both sides lose. If you source good companies and support them, good investment opportunities arise, and you turn those into revenue on both sides.
Otherwise, in a situation like now with intense competition and low fees, you can't generate profitability. Even after listing, it leads to additional fundraising such as existing shareholders' block deals or convertible bonds (CB) and bonds with warrants (BW). In one case, after listing a company, we arranged 50 billion won worth of CBs and BWs."
- You said you resumed commitments to venture investment funds.
"We restarted commitments to VC blind funds for the first time in five years. We have applied to operate short-term notes, so there is also an issue of increasing risk capital. From 2017 to early 2020, we committed about 2 billion to 3 billion won each to 17 funds, totaling around 40 billion won, but our IPO capabilities were weak then, so the effect wasn't big.
No matter how much we commit and build relationships, it's useless if we can't execute listings well. Now it's different. In the promising venture-company listing institutional sector, Samsung Securities has already become a trusted house. Even today, we approved a 10 billion won commitment to a VC blind fund."
- What about commitments to private equity funds (PEFs)?
"We are broadening PEF commitments from large managers to mid-sized and overseas managers. Last year we committed to JKL Partners, and this year, for the first time, we decided on a 20 billion won commitment to H&Q Korea. We had done a lot with MBK Partners and Macquarie, but large PEFs have been sluggish lately.
Overseas PEFs, on the other hand, are strong in infrastructure. Last year we worked with KKR on Busan City Gas. With mid-sized PEFs, deals often connect not only to acquisition finance but also to IPOs of portfolio corporations. Commitments ultimately expand coverage."
- This is different from the past when you cited WM (wealth management) as your edge.
"Our new pipeline has grown. After I took office and met client companies, I asked, 'What is Samsung Securities' weakness?' and they all said 'lack of continuity.' They said coverage officers keep changing. Samsung has a slightly manufacturing-style mindset that sees rotating people rather than keeping one person in one seat as growth.
But if you look at top performers in the industry, they do IPO for 20 years and coverage for 20 years. An executive at a large company said, 'At a competitor, the person I met when I was an assistant manager is now the CEO and I'm meeting them again, but with you, we've only met for a year. All else equal, who do you think I'd give the mandate to?' That was our biggest weakness."
- So how did you change the organization?
"I actually didn't change it. I haven't done a single reorganization since taking office. Usually when a division head changes, they turn four departments into three and mix functions, but I am strongly opposed to that. It causes fatigue for employees and leaves a bad impression on clients. If you shake up coverage, all relationships are cut off.
If one team can't handle it, instead of creating a new team, we solve it by having two existing teams go in together. Resuming commitments is in the same vein. If you just commit and the officer moves, the relationship is cut. One person has to go all the way together. Ultimately, protecting employees' expertise and market value is our competitiveness."
- You are also actively pursuing domestic IPOs of overseas corporations.
"We plan to further expand overseas IPOs, where we have strengths. Last year we did TeraView Holdings, and this time we are working on the domestic listing of Ingenia, a U.S. biotech company active in licensing out. I recently went in person to BIO USA to source good companies, including Korean-owned firms.
As competition intensifies, we are also turning our eyes overseas. Korea is a capital-raising market more attractive than Europe, and ranks after Japan, Hong Kong, and the United States. Europe's stock markets are actually not that large. Among the companies we are looking at are overseas firms invested in by Nvidia, and for corporations valued at 2 trillion to 3 trillion won, the Korean market is sufficiently attractive. This trend will increase further."
- What is the sentiment like in structured finance this year?
"Structured finance is a field we have continued to grow because there is spread and we can sell it. When the listing of Lotte Global Logistics fell through last year and we had to return funds to financial investors (FIs), we solved it with PRS together with Korea Investment & Securities Co.
Until recently, corporations were chased by liquidity needs, creating many opportunities, but we did so much last year that I think it will slow somewhat starting this year. So this year we are putting more weight on IPOs."
- Ultimately, why are you putting your weight behind IPOs?
"Because IPOs connect directly to the market, they draw high media attention. If we do them well, we can break away from our reputation as a 'WM-centered company' and instill the perception that 'Samsung Securities' IB has grown strong.' It's true our competitiveness is weaker in the corporate bond market, but we plan to make up for it with IPOs and investment capital gains."