[PE Portfolio] ⑤ 'Mid-sized Specialist' VIG, Will It Become This Year's First Trillion-Won M&A Player?

Started as a 2005 report fund... Utilizing 'Mid-sized Company Buyout' Strategy
Blind Fund No.4 Boosts Business Potential of Eastar Air, The Skin Factory, etc.
Fried Life Exit in Progress... "Expecting Valuation in Trillion-Won Range"

Editor's NoteThis year marks the 20th anniversary of the introduction of the private equity fund (PEF) system in South Korea, and the role of the domestic PEF industry is growing. PEFs acquire management rights of undervalued companies, increase their value, and then sell them in the mergers and acquisitions (M&A) market to generate profits. They also accept companies with high future value but deteriorated financial soundness when such companies come onto the market, and attempt hostile M&As on companies with weakened governance structures, such as those with controlling shareholder risks. As the history of the PEF industry has accumulated, the number of portfolio companies and employees held by Korea's mega PEFs have far surpassed those of major conglomerates. Beyond playing the role of a catalyst to prevent stagnation in the corporate ecosystem, the performance of PEF-owned companies now significantly influences the future of our industry. Asia Economy analyzes the performance and results of portfolio companies held by leading domestic PEFs.

VIG Partners (VIG) originated from Bogofund, established in 2005. As a first-generation native Korean private equity fund management company, it led the buyout (management rights acquisition) market and changed its name to the current one in 2016. The core of its investment strategy is 'mid-sized company buyouts.' It discovers and invests in mid-sized companies and non-core affiliates of large corporations that have limitations in governance or management systems, and then substantially increases their corporate value. VIG has excelled in sectors such as finance, consumer goods, distribution, and healthcare but does not limit itself to any specific field. To date, it has invested approximately KRW 3.6 trillion in a total of 27 companies (including 24 management rights equity acquisitions) such as Dongyang Life Insurance, BC Card, Novita, iRiver, Burger King, and Bodyfriend, successfully exiting these investments. Currently, it invests in and manages companies related to consumer goods, distribution, healthcare, and lifestyle.

In January last year, VIG acquired Eastar Jet, a domestic low-cost carrier (LCC). Established in 2007, Eastar Jet began its Gimpo-Jeju route in 2009 and expanded into the international market. It maintained solid growth, winning first place in the LCC category of the Korea Service Quality Index in 2017, but with the COVID-19 pandemic in 2020, its Air Operator Certificate (AOC) was suspended, and it entered rehabilitation proceedings the following year. VIG stepped in as a savior, injecting KRW 110 billion through a third-party allotment rights offering. All the funds were sourced from VIG's 4th blind fund (a fund that does not specify investment targets in advance).

'Shaken by COVID-19' Eastar Jet Starts Turning Profitable

VIG aims to achieve profitability this year by improving Eastar Jet's financial structure and modernizing its management system. As part of the management normalization, former Asiana Airlines Executive Director Jo Joong-seok was appointed as CEO of Eastar Jet last year. CEO Jo is an experienced aviation industry professional who served as head of the Korea regional headquarters at Asiana Airlines and was the head of management during the establishment of Air Busan.

The management normalization process is progressing smoothly. Having completed rehabilitation proceedings, Eastar Jet was able to escape complete capital erosion through VIG's rights offering, and with improved financial structure, successfully reissued its AOC in February last year. A month later, it resumed domestic flights with just three aircraft. Subsequently, it increased its fleet and restarted international flights in September of the same year, beginning with the Gimpo-Taiwan (Songshan) route, and expanded to 10 routes including Japan, Taiwan (Taoyuan), Thailand, and Vietnam. From the 19th, it plans to resume the Shanghai route after a 4.5-year hiatus. In July, it also plans to launch new routes from Incheon to Chiang Mai and Incheon to Phu Quoc.

[Photo by Eastar Jet]

Eastar Jet has pursued a strategy of resuming flights mainly on mid- to short-haul routes with high demand while adding aircraft, and within about a year of resuming operations, it surpassed 3 million cumulative passengers. This is the shortest record among domestic LCCs.

VIG also entered the bidding for the acquisition of Asiana Airlines Cargo, which is valued at over KRW 1.5 trillion. It faces competition from three other domestic LCCs. To acquire Asiana Airlines Cargo, VIG is raising a large blind fund, similar to the one used to acquire Eastar Jet, and reportedly has raised about KRW 500 billion so far. Unlike other competitors, Eastar Jet's biggest weakness was the lack of a cargo AOC, but it recently obtained a license from the Ministry of Land, Infrastructure and Transport, meeting the requirements to participate in the bidding.

The Skin Factory's 'KUNDAL' Grows Overseas Sales and Expands

The Skin Factory, which owns the lifestyle brand KUNDAL as a subsidiary, is also part of VIG's portfolio. VIG acquired 100% of The Skin Factory's shares in 2021. The purchase price is reported to be in the high KRW 100 billion range. At that time, VIG focused on The Skin Factory's position as the number one online business operator. The Skin Factory was founded in 2016 by co-CEOs Kim Min-woong and Yoon Young-min, former employees of the e-commerce company WEMAKEPRICE. The product brand KUNDAL has held the number one sales position in hair, shampoo, and treatment categories on Coupang, the largest domestic e-commerce platform, since 2017, securing an overwhelming market share.

Through an online-centered sales strategy, The Skin Factory is making strides in the domestic lifestyle goods market dominated by LG Household & Health Care and Aekyung Industrial. In 2022 and last year, it consecutively achieved sales exceeding KRW 90 billion. According to recent industry reports, The Skin Factory's sales last year were KRW 115 billion, with an operating profit of KRW 11.2 billion. This represents about a 38% growth compared to KRW 83.1 billion in sales in 2021, the year of acquisition.

Currently, various product lines such as shampoo, treatment, body wash, diffuser, and hand cream are sold under the KUNDAL brand domestically and overseas in Japan, Southeast Asia, the United States, and Europe. Following a bolt-on strategy to acquire similar businesses to enhance synergy and increase industry value, last year it acquired 100% of Able Korea's shares, expanding its global distribution network. Able Korea operates the overseas natural cosmetics brand NEOGEN, famous for its 'bath serum.' Its diverse online channels in over 10 countries are expected to aid the global expansion of the KUNDAL brand.

'No.1 Funeral Service Provider' Freed Life Prepares to Exit Four Years After Acquisition

The sale of Freed Life, the country's number one funeral service provider, is also attracting attention. VIG entered the funeral service business in 2016 by investing in Joeun Funeral Service and subsequently acquired Geumgang Culture Hub and Modern Comprehensive Funeral Service. These companies were merged into Freed Life, which was acquired in 2020. VIG's total investment in Freed Life is estimated to be around KRW 300 billion to 400 billion. Last year, Freed Life's sales increased by 25% year-on-year to KRW 229.5 billion, and operating profit grew about 2.5 times to KRW 75.7 billion. The operating margin jumped to 33%, double that of the previous year, thanks to increased financial income.

VIG began the sale process in the third quarter of last year. Foreign private equity firms Texas Pacific Group (TPG) and Bain Capital are considered strong candidates. The M&A industry estimates Freed Life's valuation to be over KRW 1 trillion. The market focuses on Freed Life's advance payments (money received from funeral service customers). The corporate value and cash-generating ability of funeral service companies depend on advance payments. Freed Life was the first in the industry to exceed KRW 2 trillion in advance payments. As of the first half of last year, it had about 2 million members and KRW 2.1 trillion in advance payments. Approximately KRW 1.5 trillion of these advance payments are managed as investment assets. About 75% of the managed assets are invested in safe assets such as bonds, and 25% in various asset classes including deposits, stocks, and alternative investments. The target return is adjusted according to portfolio composition and annual asset allocation strategy, with an average operating return of about 5%. To ensure efficient asset management, VIG established the industry's first asset management division within Freed Life in 2020 and has strengthened expertise by signing business agreements with asset management companies.