[Trapped PE]① 'Buyout Missing' Lots of Listings but No Buyers

Editor's NotePrivate equity fund (PEF) management firms are facing difficulties without exception during the capital market downturn. While M&A (mergers and acquisitions) deals are piling up, there are no buyers. Major PEFs have stated that they will focus more on risk management than on 'big deals' until the end of this year. This is based on the judgment that a financial market crisis scenario may need to be prepared for. Amid this gloomy atmosphere, there are concerns that private equity loans could become 'shadow banking' activities that are not captured in official statistics. While domestic PEFs have been shrinking back, the global Big Four PEFs have penetrated the market. Under the strong dollar trend, foreign funds are openly showing their ambitions for domestic corporate takeovers. Asia Economy observes upcoming changes through the movements of key players in the capital market.

[Asia Economy Reporter Park So-yeon] "Large deals are difficult right now." A representative from an investment banking (IB) firm in charge of the Lotte Card deal said that buyouts (management control transactions), which were active until the first half of this year, have recently disappeared entirely. Amid the global high interest rate environment, the M&A market is expected to continue shrinking until the first half of next year. With acquisition financing interest rates soaring above 8% per annum and forecasts suggesting they will exceed 10% next year, the entire capital market has frozen.

According to Bloomberg, the cumulative number of domestic M&A deals in the third quarter of this year reached 2,375, totaling $102.4 billion (approximately 145 trillion KRW). This represents a 22% decrease compared to the same period last year in terms of deal size. In the domestic M&A market, PEFs have significant influence, with institutional-only private equity funds participating in 85% of the top 20 deals last year. However, this year, as PEFs face difficulties in raising funds, the M&A market has come to a complete halt.

Assets such as Lotte Card held by MBK Partners and Able C&C (corporate name: Able C&C) by IMM Private Equity (IMM PE) have been put up for sale, but no clear buying interest has been observed. MBK Partners was reported to be considering the sale of Modern House in the first half of this year but is internally waiting for the right timing. The sale of Lotte Card also attracted significant attention from the IB industry, but the situation remains stagnant. KT Group, which owns BC Card, Woori Bank, and Hana Card have shown interest. However, given the current financial market conditions, it is difficult to expect a change of ownership for Lotte Card, which had a capital base of 2.8 trillion KRW as of the end of the first half of this year, anytime soon.

IMM PE is also in the process of selling the road shop cosmetics brand Missha (corporate name Able C&C). It is expected to take some time before the sale is finalized. Kim Young-ho, head of investment at IMM PE, said, "We expect to find a good buyer within a year," adding, "Rather than making a large profit, we are looking for a reasonable price that fits the current situation, and hope for a buyer who recognizes Missha's value and has a vision for future growth."

Among the top five hamburger franchises, except for Lotteria, Korean McDonald's, Burger King, Mom's Touch, and KFC have all been flooding the M&A market, but the market response has been cold. With the continuous rise in raw material costs such as grains and cooking oil, and delivery demand declining due to reopening, these brands have been unable to find new owners for over a year. Currently, only KFC is in negotiations with a preferred bidder. It is reported that Orchestra Private Equity is negotiating at around 60 billion KRW. This is not much different from the 50 billion KRW acquisition price by KG Group in early 2017. KG Group had proposed a hoped-for transaction amount of about 100 billion KRW, but this reflects the current market sentiment.

Mesh Korea, the operator of the delivery platform 'Vroong,' has been on the market since early this year, but the sale of management rights has been delayed. Until last year, it was considered a unicorn candidate with an estimated corporate value of up to 1 trillion KRW, but the delay in sale has lowered its valuation.

The number of deal failures has also increased. According to the IB industry, M&A deals that have fallen through since June this year exceed 7.4 trillion KRW. The failed deals announced in September and October alone amount to about 7 trillion KRW. Not only trillion-won real estate transactions such as the IFC and Credit Suisse (CS) Zurich headquarters building, but also major corporate buyouts like Megastudy Education and implant specialist Dio have failed to find new owners. The reason for deal failures is also due to difficulties in raising funds.

The 3 trillion KRW Medit acquisition, considered the biggest deal in this year's M&A market, has returned to square one after negotiations to extend the exclusive negotiation period with the GS-Carlyle consortium failed. A representative from the IB industry said, "Buyers mostly raise funds through forming funds, but institutional investors who should participate as limited partners (LPs) are shrinking back due to interest rate hikes," adding, "With cases of stock prices plummeting after contracts becoming frequent, the gap in views between both sides has widened, causing the market to malfunction."