[Preview of PE] 'Top Performer in Returns' H&Q Korea to Launch First 1 Trillion Won Fund in Second Half

11st Sale Followed by Formation of Over 1 Trillion Won Fund
National Pension's First Investment History...Cumulative IRR Nears 20%
Four Co-CEOs, Average Tenure 22 Years 'One Team'

Editor's NoteThis year marks the 20th anniversary of the introduction of the private equity fund (PEF) system in South Korea. According to the Financial Supervisory Service, the domestic PEF market has grown to 1,119 funds with committed capital of approximately KRW 134 trillion as of the first half of last year. It now plays a key role in the capital market, supporting corporate growth, management improvement, and restructuring processes. The perception has shifted from a negative image of "corporate raiders" to a positive image of "game changers." Asia Economy takes a closer look at various PEF houses in the industry, reviewing their past performance as well as their future investment, exit, and fundraising plans.

H&Q Korea, the first-generation domestic private equity fund (PEF) management company, is planning to raise its first fund exceeding KRW 1 trillion since its founding, aiming for a new leap forward this year. H&Q is the longest-established native fund in Korea. It originated from the global PEF manager H&Q, which first entered Korea in 1998, and transformed into a domestic PEF in 2005 when its Korean office spun off.

According to the investment banking (IB) industry on the 21st, H&Q Korea is pushing to raise its 5th blind fund (a fund that selects investment targets after raising capital) with a scale exceeding KRW 1 trillion in the second half of this year. This will be H&Q Korea's first blind fund in four years since 2020 and its first fund at the "trillion-won" level. The plan is to start fundraising after completing the M&A of 11st in the first half. H&Q Korea is currently working with the National Pension Service and MG Saemaeul Geumgo to form the Nine Holdings Consortium to proceed with the sale of 11st. The sale advisors, Citi Global Markets Securities and Samjong KPMG, recently completed the production of a "teaser letter" to be distributed to potential domestic and foreign investors. The sale process has now entered full swing.

Cumulative IRR Approaching 20%... Returning Twice the Principal to Investors

Although the market is currently in a downturn, H&Q Korea believes there will be no difficulty in raising the 5th fund considering its past performance and creditworthiness. H&Q Korea has a cumulative assets under management (AUM) of KRW 2.5 trillion and a cumulative internal rate of return (IRR) of about 19%. Compared to its history, the scale is not particularly flashy. However, thanks to its industry-leading IRR, it is regarded as a "model student" in terms of returns. Since the fund management period exceeds five years, an IRR of around 20% means it has returned more than twice the principal to investors.

The National Pension Service, which is currently working with H&Q Korea on the sale of 11st, also made its first PEF investment with H&Q Korea. The PEF system was introduced domestically in 2004 with the revision of the Capital Markets Act, and the following year, H&Q Korea raised its first blind fund, "H&Q-National Pension Service No. 1," with a scale of KRW 300 billion. It concluded with an annual IRR of 30% over five years, generating more than twice the principal in returns. Since then, the National Pension Service has invested in all of H&Q's 2nd to 4th blind funds. In other words, the National Pension Service has been with H&Q Korea from the beginning to the present. H&Q Korea has also received investments from other pension funds and mutual aid associations.

If the sale of 11st, the last remaining portfolio of the 3rd blind fund, succeeds, it could actually be an opportunity for H&Q Korea. Even if the KRW 100 billion invested in 11st were written off as a total loss, the IRR of the 3rd fund would still far exceed 12%. Surpassing an IRR of 12% qualifies the fund as an excellent manager for the National Pension Service and makes it eligible for "ad hoc investments." The 3rd fund, raised in 2013 with KRW 565 billion, has so far recovered about KRW 1.5 trillion, roughly three times the principal. Investments included JobKorea, which invested KRW 200 billion and recovered KRW 970 billion, and Playtime, which invested KRW 70 billion and sold for KRW 126 billion.

Core Four, Average Tenure of 22 Years as a 'One Team'

H&Q Korea's core team of four has an average tenure of 22 years. The four co-CEOs are Jongwon Lee, Jeongjin Lee, Yucheol Lim, and Hujeong Kim. CEOs Jongwon Lee and Hujeong Kim have been with the company since it was the Korean branch of H&Q in 1998. CEO Yucheol Lim joined H&Q Korea in 2002 after working at ReTower Tech and Lead Corp. CEO Jeongjin Lee, who joined in 2008, is a financial veteran with experience at Seoul Securities, Hanil Investment Trust Management, Value Quest, and Lead Corp. Since establishing the co-CEO system, H&Q Korea is characterized by joint decision-making among the four.

Having worked tightly as a "one team" for a long time, they have steadily built their track record through the ups and downs of the capital market, including the International Monetary Fund (IMF) foreign exchange crisis, the 2008 global financial crisis, and COVID-19. They do not limit investments to specific sectors. The 1st fund focused on manufacturing, such as automotive parts and ship engine parts; the 2nd fund was mainly consumer goods; the 3rd fund ventured into bio-pharmaceuticals and platform businesses. The 4th fund, formed in 2020, has Hyundai Elevator, with an investment of KRW 310 billion, as its core portfolio.

An IB industry insider said, "In baseball terms, the PEF industry values hitting many singles over occasionally hitting home runs, and H&Q Korea excels at this," adding, "Many tried to invest in Hyundai Elevator, which had a management rights dispute, but H&Q Korea was chosen because of its reputation built over time."