MBK, KOGIC Investment Rejected... Has the Aftermath of Korea Zinc in the PEF Industry Begun?

MBK's Winning Streak Falters After Korea Zinc Incident
Negative Sentiment Detected Among Domestic LPs Toward Hostile M&A
"It's Just One Strategy, Should Not Sell," Voices Heard

The aftermath of the hostile merger and acquisition (M&A) incident involving Korea Zinc is spreading to the private equity fund (PEF) industry. In the first institutional investor (LP) capital contribution project selection process since the incident, MBK Partners, which led the hostile M&A, was eliminated. There are even remarks that "PEF managers aiming to seize management rights will find it difficult to raise funds domestically in the future."

According to the investment banking (IB) industry on the 24th, the Korea Scientists & Engineers Mutual Aid Association selected Praxis Capital and Premier Partners as large-scale entrusted managers for PE, and Curious Partners and LB Private Equity (PE) for the mid-sized sector. The total capital contribution amounts to 265 billion KRW. However, MBK Partners, which made it to the shortlist (qualified candidates) in the large-scale sector and competed until the final stage, was eliminated.

"May Require a Pledge to Prohibit Hostile M&A"

MBK Partners has actively applied for domestic LP capital contribution projects this year. Unlike in the past when it relied solely on foreign capital, it changed its approach as the overseas fundraising environment became difficult. Leveraging its symbolic status as the largest PEF manager in Northeast Asia and an industry-leading track record of returning 20 trillion KRW (principal and investment gains) to investors over ten years from 2013 to 2023, it had a perfect winning record wherever it entered. It won a series of major LP capital contribution projects such as the National Pension Service, Government Employees Pension Service, and Radioactive Waste Management Fund, enjoying great success. However, ironically, it tasted defeat after the Korea Zinc incident.

In the PEF industry, there is analysis that "the conservative stance of domestic LPs not to fund PEFs involved in hostile M&A has been confirmed." A representative of firm A said, "MBK must have been somewhat prepared after getting involved in the Korea Zinc management rights dispute," adding, "Domestic LPs are mostly public institutions and likely do not want to be entangled in social controversies." He also predicted that in the future, some LPs might ask questions related to hostile M&A or require a pledge prohibiting it when selecting entrusted managers. Kim Tae-hyun, director of the National Pension Service, recently expressed during a national audit that "It is undesirable for National Pension funds to be used for seizing management rights through hostile M&A."

"Beware of 'Demonization' of Private Equity Funds"

As the atmosphere of avoiding PEF managers pursuing hostile M&A strategies is sensed, voices of concern have also emerged. A partner from another firm said, "The PEF system was created to nurture domestic capital capable of acquiring domestic companies, triggered by the International Monetary Fund (IMF) crisis, foreign capital's invasion of domestic companies, and massive national wealth outflows," adding, "It is worrisome that the entire industry is being 'demonized' by baseless controversies and frames such as 'stealing healthy companies to sell them overseas,' ignoring the fact that PEFs have been partners of the capital market for 20 years." He said, "If LPs 'pass' on managers pursuing such strategies without examining the fundamental causes of hostile M&A, such as the Korea discount (undervaluation of Korean companies), it will not be desirable for the LPs' top priority goal of improving returns."

Meanwhile, this year's LP capital contribution projects are nearing their final stages. Only the Yellow Umbrella Fund and Military Mutual Aid Association remain without selected entrusted managers. The firms that stood out in this year's capital contribution projects are Praxis Capital and Premier Partners. Both were selected as entrusted managers for the Korea Development Bank, National Pension Service, Government Employees Pension Service, and Korea Scientists & Engineers Mutual Aid Association. Premier Partners also secured the Korea Export-Import Bank capital contribution project, achieving a fundraising 'jackpot.' On the other hand, institutions allocating funds to the 'rookie league' have drastically decreased, making fundraising significantly more difficult for newly established PEF managers.