Performance Decline, Market Cap Plummets... Exit Not Easy

Private Equity Exit Approaching but Hindered by Stock Decline and Economic Downturn
Lotte Insurance Enters Continuous Sale System
Hanssem and Gongcha Korea Focus on Expanding Profitability

The investment recovery calculations in the private equity industry are becoming more complicated due to the economic downturn. It is now time to consider an exit after five years since acquiring management rights, but it has become difficult to convince the market as the market capitalization has rather sharply declined after the acquisition.

According to the investment banking (IB) industry on the 19th, Lotte Insurance is waiting for a new owner under a continuous sale system. Previously, JKL Partners invested a total of 730 billion KRW in 2019 to secure a 77% stake in Lotte Insurance. Despite efforts to improve management efficiency after the acquisition, they could not overcome the industry's downturn and have been unable to find a new owner for a year.

Lotte Insurance Building. Provided by Lotte Insurance

The industry expects that JKL Partners' exit will not be easy. JKL Partners is reportedly seeking about 2 trillion KRW for the sale of Lotte Insurance, but the market values it lower than that. Currently, Lotte Insurance's market capitalization is 571.6 billion KRW. The stock price is also sluggish. It has fallen about 10% this year and closed at 1,842 KRW on this day.

The situation is similarly difficult for Hanssem, which is entering its fifth year since IMM Private Equity (IMM PE) took over management rights in 2023. IMM PE acquired Hanssem's management rights in 2021. They purchased 27% of Hanssem's old shares together with Lotte Shopping for 1.4513 trillion KRW. At that time, Hanssem's stock price was 221,000 KRW per share, but it traded at 46,800 KRW on this day.

IMM PE sought a turnaround by appointing Director Kim Yoo-jin as Hanssem's CEO in 2023, but the situation remains challenging. After recording the first operating loss since its founding in 2022, Hanssem has maintained profitability for two consecutive years recently, but sales stagnation due to the industry downturn is prolonged. Sales have recorded negative growth for three consecutive years. Accordingly, the industry expects IMM PE to recover investments through dividends. Last year, they sold the Sangam office building to Gravity Asset Management for 320 billion KRW and poured the proceeds into dividends.

The industry is also paying attention to Gongcha Korea, which was rumored to be up for sale at one point in 2023. In 2019, TA Associates acquired Gongcha Korea from UCK Partners for 350 billion KRW. At that time, Gongcha Korea's EBITDA before amortization was 57.5 billion KRW. However, Gongcha Korea's EBITDA decreased to 17.9 billion KRW in 2023. Profitability also significantly declined. Operating profit in 2023 was 6.4 billion KRW, down 61% compared to 16.7 billion KRW in 2022. Accordingly, Gongcha Korea is focusing on expanding profitability through strengthening global capabilities.

The reason the industry is focusing on these companies is that private equity funds typically attempt to increase corporate value through restructuring, cost reduction, and profitability improvement within 3 to 5 years after acquiring a company, then try to sell it. Considering market volatility, this period is the optimal time to recover investments. After this period, institutional investors (LPs) often pressure for capital recovery.

Acquisition financing is also a concern. In the process of acquiring management rights, acquisition financing is used along with equity investment, and the loan maturity is generally set between 3 to 5 years. If the final portfolio recovery is not completed before maturity, interest cost burdens are inevitable.

An industry insider explained, "If the sale process takes longer than expected, there is a considerable possibility of recovering investments through dividends or additional paid-in capital reductions," adding, "Since there is a possibility of interest rate cuts, companies will not be hurriedly disposed of below appropriate value."