[Trapped PE]③ Foreign PE Seeking Opportunities in Korea... Native Funds Face Liquidity Shortage

US and European PE Firms Enter Korea One After Another
Singapore and Hong Kong Emerging as Alternative Investment Regions
Calls for Safeguards to Prevent Foreign Dominance

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

[Asia Economy Reporter Park So-yeon] Over the past year, foreign private equity funds have been steadily establishing their presence in Korea. While domestic funds struggle with interest rates and exchange rates, foreign funds are increasing their investment opportunities in high-quality domestic companies. As Korean companies worry about funding shortages and financial shocks, foreign funds are eyeing investment opportunities including mergers and acquisitions (M&A).

Foreign financial institutions consider the current difficult funding situation for companies as the right time to invest in prime domestic companies or assets. Established players in the Korean market such as Kohlberg Kravis Roberts (KKR), Carlyle, TPG, Bain Capital, CVC, Baring PEA, and Affinity Equity Partners are increasing their hiring of Korean investment professionals. Notably, KKR recently expanded its staff to 30, and the European PEF EQT Partners acquired Baring PEA outright.

The world's largest private equity fund, Blackstone, also re-entered the Korean market this year. About eight years ago, Blackstone withdrew its office after failing to achieve significant results in Korea, but this year it ambitiously established a Korean corporation. It has built a strong lineup by recruiting Ha Young-gu, former chairman of the Korea Federation of Banks, a financial heavyweight, and Kim Tae-rae, a real estate investment expert from global competitor Angelo Gordon. Apollo Global Management (Apollo), a global PEF managing assets worth 731 trillion won, recently declared its entry into the Korean market. Recently, James Zelter, CEO of Apollo Asset Management, visited Korea to meet with chief investment officers (CIOs) of major pension funds and mutual aid associations to discuss various investment strategies.

Since the COVID-19 pandemic, various American financial firms have entered the Korean market besides the global top 5 funds such as Blackstone and Apollo. American firms like Pretium Partners, Neuberger Berman Asset Management, Orchard, and British financial firms such as Man Group and Coller Capital have also recently established a presence in Korea. Foreign financial firms including Brookfield Asset Management (Canada), IMC Securities (Netherlands), and Nordic Capital (Norway) have been entering the market one after another.

Investment banking (IB) industry insiders attribute the influx of foreign funds into the Korean market to the rapid changes in the capital market environment after COVID-19. The interpretation is that Korea was targeted as a market where major funds could deploy the capital they had accumulated. An IB industry insider said, "Foreign funds anticipated that companies would face difficulties during the COVID-19 pandemic and raised huge amounts of capital for investment and restructuring, but contrary to expectations, companies enjoyed a boom and the funds could not be deployed. Now, as companies with funding shortages are emerging, foreign PEFs with liquidity are entering Korea in large numbers."

In the context of the US-China hegemony conflict, foreign funds, especially American capital, face limitations in actively entering the Chinese market, which is also a major reason why global PEFs are flocking to the Korean market. An industry insider explained, "It is difficult to go to China now, and in Japan, bank-affiliated financial firms dominate the IB sector, making it practically difficult for foreign capital to enter. Originally, Hong Kong played this role, but Singapore has taken over most of it, and Korea is absorbing some of it."

The entry of large-scale and system-equipped foreign funds into Korea poses risks to domestic funds. The Korean financial market is currently showing liquidity shortages, making it impossible to completely block the entry of overseas PEFs. Most industry experts believe that if it cannot be avoided, it should be wisely utilized. They see it as an opportunity for the Korean financial market to grow as an Asian financial hub and expand its market share. An IB industry insider said, "Rather, the authorities and pension funds should welcome them and bring opportunities as an Asian financial hub. We should encourage them to open offices to create jobs and actively take steps so that major Asian market deals can be conducted in Korea."

There is also a growing call for checks and balances to prevent foreign funds from monopolizing the market amid the strong dollar situation. While domestic PEF managers struggle to raise funds, foreign PEF managers who can raise dollars should not be allowed to dominate the domestic M&A market. Last month, Singapore-based asset management company Keppel Infrastructure Trust completed the acquisition of domestic waste treatment company Eco Management Korea (EMK) for 770 billion won. Canadian Brookfield Asset Management also completed the final payment for the acquisition of industrial gas production facilities of SK Materials Airplus. The acquisition scale is reported to be about 1 trillion won.

On the other hand, domestic PEF managers rarely appear in large M&A deals. A senior official of a foreign private equity fund said, "If we wait a little longer, trillion-won deals will be possible in Korea." An IB industry insider predicted, "They will pursue an aggressive strategy similar to overseas PEFs during the Korean foreign exchange crisis, when they purchased assets at low prices and achieved high returns."