PEF and Alternative Investment Industry Halt New Investments... Capital Market 'Panic Stop'

[Asia Economy Reporter Park So-yeon] As the flow of money in the market dries up, major investment institutions such as private equity funds (PEF) and trust management companies have entered a state of "business suspension." This is the exact opposite trend from the aggressive moves seen earlier this year, when trillion-won scale investments were being made.

According to the investment banking (IB) industry on the 24th, a capital market "investment cliff" has officially begun, with major fund and trust management companies taking a wait-and-see approach. Key investment managers in the market unanimously stated that they will maintain a conservative stance, observing rather than actively seeking investment opportunities until the end of the year.

Kim Young-ho, head of investment at IMM Private Equity, said, "It is better to move conservatively while observing the market rather than acting hastily right now."

In fact, the new commitment amount for PEFs (private equity funds) in the first half of this year was 6.8501 trillion won, significantly down from 11.8427 trillion won in the second half of last year. Since the beginning of this year, the only trillion-won scale buyout (management rights acquisition) deal signed by domestic PEF operators was the acquisition of SKC’s film business unit by Hahn & Company.

Small and medium-sized deals have also disappeared. A senior official at VIG Partners, which specializes in small and medium-sized company deals, conveyed the mood by saying, "In the IB industry, there is a self-deprecating joke that resting until the end of this year is how you make money." This contrasts with the active activities seen in the first half of the year, such as acquiring Tizen, famous for its "Kombucha" brand, and selling used car sales company Autoplus.

Institutions that have suffered significant investment losses this year are also showing a very cautious attitude toward PEF contributions. They are maintaining a conservative stance not only on new investments but also on managing existing blind funds. As cases where investment recovery is impossible continue to emerge, continuation funds that extend existing investments by simply changing LPs (limited partners) have appeared for the first time in Korea.

Hahn & Company recently replaced LPs through the establishment of a continuation fund for Ssangyong C&E, rather than a buyout. IMM Investment is also in the process of forming the "IMM Special Situation No. 2 Private Equity Fund" to transfer shares of KOSDAQ-listed company Ohheim INT to a newly established continuation fund.

The industry expects the adverse factors of high interest rates, liquidity shortages, and economic recession to continue for the time being. The acquisition financing interest rate, which was around 4% earlier this year, has recently soared to over 8% per annum. Kang Sung-bu, CEO of KCGI, who was reportedly considering an equity investment in Ostem Implant, also hinted, "The investment deals recently mentioned are rumors," adding, "I will take a break and spend time with my family for the time being."

The situation for real estate investment companies is even more severe. A senior official at Koramco Asset Trust said, "Since the U.S. interest rate hike stance is strong, we have no choice but to endure for the time being," adding, "Rather than launching new projects, we plan to focus as much as possible on risk management while protecting ourselves." Jeong Hee-seok, head of development projects in the REITs division at Koramco Asset Trust, explained, "It is impossible to expect loans from first-tier financial institutions," and "We are unable to proceed with projects."

Large real estate transactions are also being canceled one after another. In the case of the International Finance Center (IFC) in Yeouido, Seoul, which was the biggest topic in the domestic commercial real estate market this year, Mirae Asset Global Investments, which had been selected as the preferred acquisition negotiator, has stopped sales negotiations. Maston Investment Management, which was selling the Donghwa Building in Seosomun, Seoul, recently lost its status as the preferred negotiator to the consortium of Citycore, NH Investment & Securities, and Samsung SRA Asset Management.

While leading overseas investment institutions, anticipating a prolonged capital market slump, are approaching Korean institutions to find victims for "hot potato" alternative investment products, domestic institutions are ironically unable to invest due to liquidity shortages. Lee Sang-hee, CIO of the Military Mutual Aid Association’s financial investment division, said, "Even if a warning about confusion in the alternative investment market is issued, it is meaningless," adding, "Institutions’ funds have dried up to the extent that they cannot invest due to liquidity shortages."