[Inside PEF]② PE Managing 'People's Money'... Localization as the Key to Capital Export

Discovering Challenging Overseas Deal Networks
Continuous Investment Needed in Local Offices and Personnel
Capital Export Is the Inevitable Path for the Domestic PE Industry

A domestic private equity (PE) firm suffered losses due to exchange rate fluctuations after investing 100 billion KRW in overseas companies in cooperation with a large corporation. Although the value of the invested companies increased, the local currency value plummeted to about one-fifth, causing difficulties in recovering the investment. Industry insiders agree that while overseas business is fraught with variables and challenges, capital export is inevitably the path that the domestic PE industry must take in the mid to long term.

Securing a 'deal' discovery network through hiring local experts is the core of competitiveness

Stick Investment, the only domestic PE to have made investments in more than 10 countries overseas, is a case that achieved results through 'early entry' and 'localization'. It continuously forms funds aimed at global investment and strategically invests about 50-80% overseas.

With diverse and bold investments such as in an Indian hospital chain and Dunzo, known as the 'Indian version of Baedal Minjok (Korean food delivery service)', the cumulative overseas investment amount reaches 2 trillion KRW. Stick first entered the overseas market in 2001 through venture investment in the United States. Subsequently, it expanded to China in 2005 and established an office in Ho Chi Minh City in 2008, building a local deal discovery network by hiring local experts. It has steadily invested in offices and personnel to expand overseas investment.

Having experienced professionals in overseas business expansion as in-house management advisory committee members also helped. Leveraging large-scale fund capital and overseas networks, Stick has become a partner that assists domestic companies in their overseas expansion.

Private equity managing 'the people's money'... Expected to play a partner role in domestic companies' overseas mergers and acquisitions (M&A)

Capital export also contributes to domestic companies' overseas expansion. It is a role that domestic private equity (PE) firms, which manage 'the people's money' by receiving funds from the National Pension Service, Government Employees Pension Service, Korea Post, and others, must fulfill. Recently, domestic companies have also been expanding overseas investments linked with PE. Especially, as open innovation management and strategic equity participation in overseas companies expand, the demand to utilize PE's investment and exit know-how is gradually increasing.

However, from a global M&A perspective, there is still a long way to go. The proportion of overseas M&A by Korean companies is 9.6%, which is low compared to 20-40% in advanced countries. When domestic large corporations acquire overseas companies, if pension funds such as the National Pension Service co-invest through PE, they can more actively create investment opportunities in global growth industries. From a policy perspective, it is necessary to foster various asset managers with overseas M&A capabilities among private equity firms and utilize them as partners for domestic companies' overseas M&A. In countries like China and Middle Eastern nations, major pension funds or sovereign wealth funds proactively invest in key industries through joint investments with private equity firms and act as vanguards for their domestic companies' overseas expansion.

Korean PE has grown rapidly over the past 20 years and has reached a certain trajectory not only in market size but also in the quality of management. Based on the accumulated management knowledge and networks so far, it is time for Korean PE to attempt a major transformation in investment to take a step further. There are also calls for limited partners (LPs) such as the National Pension Service to break away from conservative perspectives and practices and adopt a challenging attitude by investing a certain portion of the total investment amount in new areas.

Choi Jae-young, head of Samil PwC Management Research Institute, said, "As the areas where PEs can operate in the domestic market shrink, the time has come to move toward cross-border deals," adding, "While PEs will fundamentally perform well according to capitalist principles, policy support is needed for foreign exchange issues and technical aspects when making overseas investments."