[PE Towel Passing] ① From A Private Equity Fund to B Private Equity Fund... The Circulating M&A Deals

As Inter-Fund Transactions Increase, Criticism Arises Over 'Sugeondolligi' Trades
Companies Fail to Integrate into Industries and Become Means for Capital Gains
Transactions for Track Record, LP Distribution Payments, and Performance Fees

"Private equity funds (PEFs) are 'passing the towel' by trading assets among themselves."

Recently, many mergers and acquisitions (M&A) deals have been conducted between PEFs, leading to criticism that these transactions resemble a 'passing the towel' style of trading. As PEFs find it difficult to exit through sales to strategic investors (SIs) or initial public offerings (IPOs), they have resorted to inter-PEF transactions as a self-help measure. However, concerns arise that if such transactions dominate the capital recovery market and accumulate, companies may fail to gain industrial synergies and momentum, reducing these deals to mere capital transactions.

From Fund A to Fund B... The 'Passing the Towel' Phenomenon Among Portfolio Companies

According to the investment banking (IB) industry on the 22nd, major PEFs such as Blackstone, GenesisPE, VIG Partners, IMM Investment, IMM PE, and Praxis Capital Partners have been selling stakes and management rights of key domestic portfolio companies this year, choosing PEFs rather than SIs, i.e., general corporations, as their transaction counterparts.

In April, Blackstone sold GeoYoung, the largest pharmaceutical distribution company in Korea, to MBK Partners. GeoYoung's corporate value was estimated at about 2 trillion KRW.

GenesisPE recently sold recycling companies including KJ Environment in bulk to EQT Partners. This deal also exceeded 1 trillion KRW, making it the largest M&A transaction in the domestic recycling sector. Last month, VIG Partners sold 20% of its 80% stake in the funeral service company Freed Life to Kohlberg Kravis Roberts (KKR) for about 200 billion KRW.

IMM PE also sold Genewon Science, a CDMO company specializing in synthetic pharmaceuticals, to Macquarie Asset Management for 750 billion KRW. Earlier, Macquarie Asset Management acquired United Terminal Korea (UTK), a tank terminal operator, from IMM PE for about 300 billion KRW.

Additionally, Praxis Capital Partners sold the software-as-a-service (SaaS) company BusinessOn to Skylake PE, continuing the trend of transactions between PEFs.

This phenomenon is interpreted as a result of the rapid expansion of the PEF market in a short period, with a lack of suitable domestic companies for trillion-KRW scale deals, leading to the exchange of assets among domestic funds.

Rapidly Growing Private Equity Fund Size... Small Market but Large Funds

A chief investment officer (CIO) at Institution A analyzed, "Although the M&A market has contracted following interest rate hikes, the increase in redemption demands from limited partners (LPs) and the need to deploy dry powder (uninvested capital) have overlapped, resulting in increased transactions among general partners (GPs)."

Simply put, while the overall market is shrinking due to a downturn, the capital and assets of private equity funds, which have grown rapidly over the past 20 years, are overflowing. Consequently, assets are circulating only within the PEF market.

Senior researcher Park Yong-rin of the Korea Capital Market Institute's Financial Industry Division explained, "PEFs primarily prefer to sell to general companies, but as the private equity market has expanded rapidly, a large amount of capital has been invested. Sellers need quick exits and fund liquidation, while buyers need to deploy newly raised capital, so their interests align."

From the PEF perspective, accepting each other's assets aims for a 'triple win.' They can build a track record of successful exits at appropriate times after investment, meet LPs' distribution payment requirements (DPI), and create performance indicators such as internal rate of return (IRR), which are important for earning carried interest.

CIO of Institution B stated, "Not all GP-to-GP transactions are bad, but when such deals constitute the majority of the exit market and accumulate, it symbolizes a bubble in the industry. The so-called 'continuation funds' launched in the PE industry may seem reasonable at first glance, but in reality, they can be seen as similar GP-to-GP transactions or fund rollovers."