[Trapped PE]④ FI with No Exit as Path to IPO Also Blocked

19 Companies Withdrew IPO Subscriptions and Reviews This Year
Uncertain Listing Timing Due to Declining Corporate Value
FIs Aiming for Big Profits Face Difficulties in Fund Recovery

Editor's Note Private 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 are focusing on risk management rather than '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. Amid this gloomy atmosphere, concerns are rising that private equity loans could become 'shadow banking' that is 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] Since the second half of this year, the initial public offering (IPO) market has seen a surge in withdrawal of public offerings, withdrawal of reviews, and listing delays. The unprecedented market downturn has made it difficult for private equity funds (PE) and venture capital (VC), which participated as financial investors (FI), to exit (recover investments). The investment industry’s formula is to supply funds at the early stage of corporate growth, recover capital when the company value increases, and reinvest in other companies. However, with the IPO market in a slump, investors’ funds have been tightly locked up. Companies face a frustrating situation where they might recklessly list with a declining corporate value or wait indefinitely for market recovery.

According to the investment banking (IB) industry on the 17th, nine companies have withdrawn their public offerings and ten companies have withdrawn their reviews this year. This year, Hyundai Engineering, SK Shieldus, One Store, Taelim Painter, Hyundai Oilbank, Golfzon Commerce, Lionheart Studio, JO, and Millie's Library among others have withdrawn their listings.

Millie's Library, a reading platform that recently withdrew its KOSDAQ listing, has grown steadily by receiving investments from the domestic capital market since its establishment. Starting with HB Investment in 2017, prominent domestic investment firms such as Korea Investment Partners, KB Investment, Kolon Investment, Nice Investment Partners, L&S Venture Capital, Login Investment, and Stick Ventures have been listed as investors.

At the time of its first external investment, Millie's Library was valued at approximately 4 billion KRW. During the Series A round in 2018, it was valued at 20 billion KRW, and in the Series B round in 2019, it was valued at about 60 billion KRW. When Genie Music acquired Millie's Library last year, the recognized corporate value rose to around 120 billion KRW. This represents a 30-fold increase in corporate value over four years. The value mentioned in the market during Millie's Library’s attempt to list on the KOSDAQ this year was about 200 to 300 billion KRW.

However, as market conditions worsened, the actual valuation proposed by the listing underwriter Mirae Asset Securities and Millie's Library was lower. Based on the expected public offering price range of 21,500 to 25,000 KRW and the planned number of shares to be offered, Millie's Library set its market capitalization at approximately 177.1 to 204.7 billion KRW. But since this also failed, investors’ funds in Millie's Library have been locked up. Given the large FI shareholding, a reattempt at listing is necessary to recover their investments.

When Genie Music acquired some of the FI’s existing shares in Millie's Library last year, they signed a shareholders’ agreement including various conditions. If Millie's Library fails to list by 2024, FIs can exercise put options (the right to sell shares at a specific price) or drag-along rights (co-sale rights) on their holdings. The put option exercise price is set at 250,000 KRW, higher than the 183,000 KRW price set when Genie Music acquired the FI’s existing shares last year.

In the case of SK Shieldus, it is showing a more proactive approach after withdrawing its listing. It is discussing investor replacement to provide existing FIs with an opportunity to recover their investments and to raise growth capital. SK Square announced on the 2nd that it is "reviewing plans for new investment attraction and share sales for SK Shieldus’s future growth." According to the industry, EQT Partners began due diligence on SK Shieldus with the help of advisory firms from the end of last month.

EQT Partners is a private equity fund manager established by the prominent Swedish Wallenberg family, managing assets exceeding 100 trillion KRW. In 2018, SK Square (formerly SK Telecom) acquired SK Shieldus (formerly ADT Caps) together with the Macquarie Infrastructure and Real Assets (Macquarie PE) consortium. The acquisition was valued at about 3 trillion KRW, with SK Square investing 702 billion KRW (55% stake) in the special purpose company (SPC) and Macquarie PE investing 574 billion KRW (45% stake).

Subsequently, SK Square’s wholly owned subsidiary SK Infosec absorbed the SPC and then merged with ADT Caps, resulting in SK Square holding 63.13% and the consortium 36.87%. Going forward, EQT Partners is likely to purchase the existing shares held by the consortium as the second-largest shareholder and then acquire some of SK Square’s existing shares or new shares issued by SK Shieldus.

K-Bank and Kurly, which were initially expected to list this year, are also reconsidering their listing schedules. K-Bank has tentatively postponed its listing to January next year, while Kurly has not set a definite listing date. Last July, K-Bank conducted a paid-in capital increase of 1.25 trillion KRW at a valuation of 2.5 trillion KRW, granting co-sale rights to investors including its largest shareholder BC Card. If K-Bank’s IPO does not proceed under agreed conditions, investors can exercise these rights. This indicates strong investor demand for capital recovery through the IPO.

Bain Capital and MBK Partners participated in the capital increase, becoming joint third-largest shareholders, while MC Partners and Tonic PE (Kanye Limited Company), the fifth-largest shareholder, and JS Shinhan Partners Limited Company (5.16%), the sixth-largest shareholder, also secured stakes. Including investors such as the Singapore Investment Corporation and Com2uS who participated in the capital increase, the total shares held by these investors now exceed 30% of the total issued shares.

Kurly must complete its listing by February next year. Kurly’s corporate value must also be conservatively assessed. Anchor Equity Partners (Anchor PE), which invested 250 billion KRW in common shares at a valuation of 4 trillion KRW in January this year, is expected to incur losses under current market conditions even if the listing proceeds.

Anchor PE reportedly faced growing dissatisfaction from overseas limited partners (LPs) due to the decline in Kurly’s valuation following the market downturn after their investment. This has made it difficult for them to actively pursue other investments. Besides Anchor PE, investors such as Sequoia Capital China, Hillhouse Capital, Digital Sky Technology, Aspex Capital, Euler Capital, Semat Translink Investment, and Jesmond Holdings have also participated in Kurly’s investment.

CJ Olive Young, considered a major IPO candidate this year, has also not finalized its listing schedule. During last year’s pre-IPO investment round, Glenwood Private Equity (PE) invested 414.1 billion KRW. Based on the transaction price of 69,660 KRW per share, the total valuation of CJ Olive Young’s 100% stake was set at 1.836 trillion KRW.

CJ needs to assist Glenwood PE in recovering funds through the listing. To do so, it must achieve a valuation exceeding 2 trillion KRW during the listing process. An IB industry official said, "The current market situation presents opportunities for new investors but is challenging for existing investors who need to recover funds. Various options are being considered, but there is no clear solution under the current market conditions."