[PE Now] Can 10 Billion Won Generate 2 Trillion Won?

PE Owned by the 'PayPal Mafia'
Over 50% Profit Margin from Semiconductor Equipment Monopoly
Growth Stalls, Sale Price Seen as Excessive
Second Largest Shareholder Hanmi Semiconductor Also Began Selling in 2023

An unusual trend is emerging in the sale of semiconductor equipment company HPSP, known for its "100 billion to 2 trillion jackpot." Although well-known domestic and international private equity firms reportedly participated in the preliminary bidding, it has been confirmed that some actually did not participate. There are doubts about whether the technological advantage will continue, and some reactions suggest that the currently discussed sale price itself is excessively high.

PE Owned by the ‘PayPal Mafia’

At the end of last year, Crescendo Equity Partners (hereafter Crescendo), the largest shareholder of HPSP, put up for sale 40% of the company’s shares held through the special purpose company (SPC) 'Presto No.6 Private Equity Fund' (hereafter Presto No.6) via the sale agent UBS.

Crescendo is a private equity firm founded in May 2012 by CEO Lee Gi-du, who holds a PhD in Materials Engineering from MIT. At that time, Peter Thiel, chairman of Palantir and a founder of PayPal, famously known as part of the ‘PayPal Mafia,’ invested in Crescendo due to his connection with CEO Lee, which attracted attention.

Crescendo used most of its funds from its first blind fund of 75 billion KRW in 2012, its second fund of 450 billion KRW in 2018, and its third fund of 1.1 trillion KRW in 2022 to acquire IT companies. Due to the high price-to-earnings ratio (PER) characteristic of IT companies, Crescendo actively employed a strategy of recovering investments (Exit) through initial public offerings (IPOs) rather than mergers and acquisitions (M&A). Seojin System and Sangshin Electronics, included in the first fund, went public in 2017, and Model Solution in 2022.

Meanwhile, in 2017, Crescendo created a separate project fund to acquire HPSP, which was spun off from a subsidiary of the Poongsan Group, for 10.6 billion KRW.

Since then, HPSP’s performance has grown exponentially due to the global semiconductor industry boom. Based on strong performance, it successfully listed on the KOSDAQ in July 2022. Since the largest shareholder’s lock-up period is 2 years and 6 months from the listing date, it was expected that the shares would be put up for sale around January this year.

Thanks to outstanding performance shown until 2023, many expected the management rights sale price to exceed 2 trillion KRW in the first half of last year.

Sale After 7 Years: A Much-Hyped Feast?

In the preliminary bidding completed earlier this month, well-known domestic and international private equity firms reportedly all participated, including KKR, Blackstone, Carlyle, Bain Capital, and MBK Partners.

However, there are also voices saying that the "2 trillion jackpot" is far from reality. One PE representative stated, “It is an industry too difficult for private equity to understand,” effectively revealing non-participation.

HPSP produces equipment used in semiconductor front-end processes called High-Pressure Hydrogen Annealing (HPA). Semiconductor manufacturers performing ultra-fine processes such as Samsung Electronics, SK Hynix, TSMC, and Intel are all HPSP customers. As it is virtually a monopoly equipment, the operating profit margin exceeds 50%.

Last year, Korea Investment & Securities analyzed, “Because the process involves handling hydrogen, it takes a long time to approve new competitors,” and predicted “HPSP’s monopoly power will be maintained for at least 5 more years.”

The problem is that 5 years. For PE to acquire and then sell at a higher price, they must raise technological barriers further or diversify into other equipment fields within 3 to 4 years. The business difficulty is very high.

Although largely due to the semiconductor industry conditions, there is also analysis that growth peaked in 2023. HPSP’s sales and operating profit, which had been continuously increasing, stopped growing last year according to securities analysts’ estimates.

Unless there is an ‘earnings surprise,’ PE valuations (enterprise value assessments) are bound to be conservative.

PE firms focus on cash flow when buying and selling companies, so EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an important indicator. According to KB Securities’ estimates, EBITDA increased from 86 billion KRW in 2022 to 97 billion KRW in 2023 but then decreased slightly to 96 billion KRW in 2024.

The Second Largest Shareholders of the Semiconductor Equipment Company Started Selling in 2023

One year before the listing in 2021, Hanmi Semiconductor, which produces semiconductor equipment called TCB, and its owner Chairman Kwak Dong-shin each acquired 10.49% of HPSP shares. After HPSP’s stock price steadily rose following the listing, Hanmi Semiconductor and Chairman Kwak changed their holding purpose from ‘management participation’ to ‘simple investment’ in March 2023. Since then, they have continuously sold HPSP shares. As of the most recent data, Hanmi Semiconductor’s stake has fallen to the 4% range, and Chairman Kwak’s stake is below 1%.

HPSP’s stock price peaked at 63,100 KRW on February 15 last year and has been declining since. The closing price on February 24 this year was 30,000 KRW, meaning it halved in one year.

Despite the price drop, as of the 24th, HPSP’s estimated price-to-earnings ratio (PER) is 32 times. This is higher than the average PER of 20 times for the three comparable companies (Eugene Technology, Nextin, PSK) selected when HPSP submitted its securities registration statement before listing.

The current market capitalization is 2.5 trillion KRW. The management rights sale price of 2 trillion KRW for a 40% stake inevitably raises concerns about overvaluation.

Crescendo Has Already Recovered Its Investment Principal

Crescendo will recover more than three times its principal through HPSP dividends by April.

It is estimated that Crescendo received about 15 billion KRW in dividends before the listing in 2019 and 2020.

HPSP paid dividends of 1.8 billion KRW and 7.5 billion KRW in 2023 and 2024 respectively after listing. However, Crescendo, as the largest shareholder, was excluded from the dividend recipients.

On the 13th, HPSP held a board meeting and decided on a cash dividend totaling 48.2 billion KRW, including the largest shareholder. Of the dividends scheduled to be paid within one month after the regular shareholders’ meeting on the 28th of next month, Crescendo’s share is about 20 billion KRW.

HPSP paid 150 KRW per share in dividends in 2023 and 2024 excluding the largest shareholder. However, this year, including the largest shareholder, the dividend per share increased fourfold to 600 KRW per share.

This suggests a meticulous strategy to recover investment funds was planned even before the listing.

Excluding the price issue, Crescendo holds the ‘winning card.’

An investment banking industry insider analyzed, “From Crescendo’s perspective, they will inevitably make a ‘jackpot’ profit in any way,” adding, “If the sale does not go well, they may delay the sale timing further.”

The Presto No.6 fund holding HPSP matures in April 2027. After maturity, with the consent of limited partners (LPs), the maturity can be extended by one year at a time up to a maximum of two years. This means the sale timing can be delayed by up to 4 more years.