[Inside PEF]① "Intense Competition in Narrow Markets... Threatening Even Large Corporations' Management Rights"

Leading Deals in Trillion-Won Units but Still Lacking Overseas Expansion
Over 1,000 Private Equity Funds Managing 100 Trillion Won in the Narrow Korean Market

"Domestic private equity funds (PEFs) are often seen as having grown significantly by handling trillion-won deals, but their overseas operations are still lacking. Overseas investment is a major challenge that our PEF management industry must overcome going forward." (Ramin Sang, Chairman of the PEF Management Association)

This year marks the 20th anniversary of the introduction of the domestic PEF system. While leading domestic PEFs with established track records are spearheading notable 'big deals,' they have yet to achieve significant results in overseas investments. Over 1,000 funds are managing more than 100 trillion won in the narrow Korean market, engaging in cutthroat competition. Voices of self-reflection are emerging, emphasizing that PEFs, which are competing so fiercely as to threaten the management rights of large conglomerates, must pioneer new markets by expanding beyond the domestic market into overseas territories.

According to the Samil PwC Management Research Institute on the 23rd, an analysis of investment regions for major domestic PEF portfolio companies shows that out of a total of 173 portfolio companies, 130 (74%) are concentrated in Korea. As of the latest data at the end of April 2023, except for some PEFs such as MBK Partners and Stick Investment, most investment portfolios are concentrated in Korea. Han & Company, considered one of the domestic 'Big 3,' has 14 portfolio companies focused solely in Korea. IMM Private Equity also has 15 out of 17 portfolio companies located in Korea.

Large funds are also insufficient in building overseas business portfolios in various countries such as Southeast Asia, the United States, and Europe. The situation is similar for most funds including Korea Investment PE, VIG Partners, and JKL Partners. Looking at the regional investment proportions of domestic PEFs (as of the end of 2022), 69% are domestic, 19% in Asia, 8% in the U.S., and 4% in Europe, showing a concentration in Korea and Asia.

High Difficulty of Overseas Business...Post-Acquisition Management and Initial Investment Costs

The reason domestic PEFs find it difficult to expand overseas is that post-acquisition management is not easy. One of the most important aspects of investment is post-management. Enhancing corporate value through active management participation after acquisition is necessary, but in the case of overseas investments, post-management is limited and constrained due to geographical and cultural differences. Taking control of the organization and managing personnel on-site is required, but language and cultural differences act as significant barriers.

The initial investment cost for building an organization is also substantial. It requires long-term investment and effort. For PEFs operating with fund capital, it is true that overseas investment, which demands steady input of costs, time, and personnel, is not easy. In developed countries, competition with well-established local operators is tough, while in emerging countries, capital regulations are strict and investment risks are relatively high. Under these circumstances, overseas expansion is pushed down the relative priority list.

Seungwoong Kwak, Vice President of UCK Partners, said, "Overseas mergers and acquisitions (M&A) are highly challenging," adding, "Even large conglomerates like Samsung and LG have experienced failures in attempting overseas M&A, which shows how formidable these challenges are."

Over 1,000 Institution-Only PEFs and Commitment Amounts Exceeding 100 Trillion Won...Cutthroat Competition in a Narrow Market

Blocked by high barriers to overseas business, PEFs are only growing bigger within the narrow domestic market. According to the Financial Supervisory Service's latest data as of the end of 2022, the number of institution-only PEFs in Korea is 1,098, with committed funds totaling 125.3 trillion won. Compared to seven years ago (2015), when there were 316 funds and 58.5 trillion won in commitments, the number of funds has more than tripled, and the committed amount has more than doubled.

Institution-only PEFs can be understood as large funds managed by raising capital from institutional investors (LPs) such as the National Pension Service and Government Employees Pension Service, rather than individual investors. A Financial Supervisory Service official stated, "Due to the global interest rate hike, difficulties in fundraising are expected, and with the continuous entry of new general partners (GPs), industry competition is expected to intensify."

PEFs, which have increased their concentration in a small market, have chosen to expand their business sectors domestically rather than bear overseas risks. In some cases, this has resulted in encroachment on other business areas. The scope of PEF business overlaps with venture capital (VC) investing in early-stage companies or even threatens the management rights of large domestic corporations, manifesting in various forms. Recently, PEFs have rapidly expanded their domains beyond equity investments or management rights acquisitions to include loan funds and real estate investments. There are even criticisms that PEFs are stepping into public sectors deemed inappropriate for their operation, shifting from 'market cleaners' to 'market disruptors.'

Another side effect is vulnerability to risk diversification. With a focus on domestic investments, about 43.4% of PEF investment assets (as of 2022) are concentrated in manufacturing, while IT sector investments account for only about 15%. A representative from a private equity fund said, "When PEF portfolios concentrate on domestic investments, the proportion of investments in cutting-edge tech areas decreases, and funds concentrate in manufacturing, which may not be adequately prepared for the future."

Inability to respond flexibly to macroeconomic risks is also cited as a drawback. A representative from Fund A said, "The domestic market is highly volatile depending on the macroeconomic environment, and if the timing of investment recovery is missed, the recovery period may be prolonged," adding, "Diversification of business sectors and investment regions is necessary."