Investors Losing 3 Trillion Won in Kakao Face Emergency Fund Recovery... Restructuring Inevitable

Kakao Group Faces Consecutive Setbacks, Financial Investors in Kakao Struggle
Kakao Management Focused on Capital Accumulation Over Core Business Innovation, Investors Riding Along
Painful Exit Processes Inevitably Follow

As a series of major setbacks hit the Kakao Group, red flags have been raised over the exit (investment recovery) plans of financial investors (FIs) who invested in Kakao's unlisted affiliates such as Kakao Entertainment and Kakao Mobility. With the initial public offerings (IPOs) of key affiliates indefinitely postponed, various scenarios are emerging in the investment industry, including preparing stronger capital recovery mechanisms and attracting new investors.

However, since a smooth exit is realistically difficult, concerns are also being raised that disputes between Kakao and investors, similar to the cases of Kyobo Life Insurance and Affinity Equity Partners, may be inevitable. In particular, criticism has emerged that the crisis of the Kakao Group has revealed the dark side of corporate groups focusing on capital accumulation rather than core business innovation, and the investment capital riding on it.

Risk of Splitting Affiliates for IPO Becomes Reality

The essence of the Kakao Group's crisis lies in its management approach of accumulating capital through splitting affiliates for IPOs rather than providing innovative platform services. So far, Kakao's major affiliates have been a "capital market money sink" absorbing over 3 trillion won in liquidity. Kakao's key unlisted affiliates such as Kakao Entertainment, Kakao Mobility, and Kakao Japan have attracted investments exceeding 3 trillion won from 2016 to this year.

Kakao Entertainment received a total investment of 1.154 trillion won from Saudi Arabia's Public Investment Fund (PIF) and Singapore's Government Investment Corporation (GIC) through a third-party allotment rights offering in January. Prior to that, the Hong Kong-based private equity fund (PEF) Anchor PE invested 334.8 billion won in both 2016 and 2021. Kakao Mobility also received 500 billion won from the TPG consortium in 2017. In 2021, it attracted investments of 220 billion won from Carlyle, 56.5 billion won from Google, and 140 billion won from the TPG consortium and the National Pension Service. In the same year, LG invested 100 billion won and GS Group 95 billion won. Kakao Japan, Kakao's Japanese webtoon subsidiary, also received 600 billion won from Anchor PE in 2021.

Following the successful IPOs of Kakao Pay and Kakao Bank, expectations for the IPOs of the remaining affiliates grew. Both the invested companies and the investing funds had high hopes of profiting from the IPOs. However, the capital market did not move in the direction they desired. After the COVID-19 pandemic, the liquidity that had been abundant sharply declined, shrinking the capital market and reducing the value of unlisted companies.

To make matters worse, the prosecution began investigating Kakao Entertainment on allegations of market manipulation during its acquisition of SM Entertainment. Additionally, the accounting fraud controversy surrounding Kakao Mobility surfaced, making the IPO prospects of the other Kakao affiliates virtually uncertain. With the capital recovery channels blocked, investors who invested in Kakao have become increasingly anxious.

Kakao, once recognized as a unique and innovative company in the domestic IT industry, has lost the trust of the capital market. A chief investment officer at a domestic A institution explained, "Just as it is said that it is difficult for a company to last 100 years, innovative companies also face crises. They must manage their business portfolios flexibly to close underperforming businesses and start promising ones at any time. The single listing structure of a holding company is a structure that can respond flexibly to crises and opportunities."

Under a listed holding company, unlisted affiliates can be distributed flexibly, allowing free entry and exit from new businesses. This flexibility lowers the risk for investors exposed to specific business portfolios. The chief investment officer at institution A added, "It is unfortunate that Korean groups and owners repeatedly show cases where they are more interested in raising money from the capital market through splitting affiliates for IPOs rather than nurturing innovative companies."

Investor Misjudgment That Low-Interest Rate Environment Would Continue... Painful Adjustment Process Needed

Institutional investors and the fund industry also find it difficult to avoid criticism for riding on Kakao's splitting IPO strategy based on the misjudgment that the low-interest rate environment would continue. The failure of Kakao Group investments is a complex result of internal setbacks within Kakao Group and an environment where exits from private equity investments have become difficult in a high-interest rate environment. The private equity investment model, which thrived relying on cheap capital during low-interest periods, is generally being hit.

However, it is unlikely that Kakao Group's financial investors will admit to investment decision failures and accept losses. A painful exit process is inevitably expected to follow.

When Kakao Entertainment received investments from GIC and PIF, it did not specify an IPO deadline, but it is known to have included a put option clause allowing investors to sell their shares if the IPO fails due to management failure. Kakao Mobility included a clause to pursue an IPO within four years if certain conditions are met. If the IPO is not successful afterward, it reportedly established an IPO promotion committee under the board of directors, with investors able to take the lead in forming the committee.

In the investment banking (IB) industry, there are concerns that issues between Kakao Group and investors could expand and prolong, similar to the put option dispute between Kyobo Life Insurance and the Affinity consortium, which has repeatedly faced setbacks at the IPO threshold. The most realistic solution seen by the IB industry is for Kakao to find new investors to enable existing investors to exit.

However, attracting new investors will inevitably require stronger guarantees for investment recovery than before. In this case, Kakao's conditions for attracting investment will inevitably worsen. This suggests that the Kakao Group, which had been on an expansion path, is likely to undergo business restructuring and disposal of non-core assets going forward. A private equity industry insider said, "A strong restructuring effort focusing on core businesses by disposing of some affiliates or investment assets is necessary. Since existing investors' exits have already become difficult, Kakao needs to prepare proactive measures to prevent the problem from worsening."