[PE Now] Fund IV Already Half Deployed... Busy H&Company

Hanwha & Company Invests 40% of 4th Fund Raised Last Year
Swift Investments Reassure Limited Partners
Firm Deals Focused on Major Corporations Like SK
SK Shipping Sale Underway... 3rd Fund Recovery Accelerates

Hanwha & Company (Hanwha & Co), a leading domestic private equity (PE) firm, has been actively moving as it has already utilized about 40% of the largest-ever blind fund it finalized in mid-last year. It appears to be moving swiftly in the mergers and acquisitions (M&A) market by focusing on buying and selling SK Group assets.

Swift Investment Progress... Reassuring Message to LPs

According to the investment banking (IB) industry on the 27th, Hanwha & Co reportedly spent about 2 trillion KRW out of the 4.7 trillion KRW 4th blind fund formed around July last year. This fund is the largest-ever dedicated Korean investment fund. After deciding to acquire Lutronik immediately following the first closing in May 2023, it also acquired the SK Enpulse Fine Ceramics division (now Solmix) in February last year. Even after the final closing of the fund in July last year, it decided and is proceeding with acquisitions of SK Specialty and SK Enpulse CMP Pad business units in October and December of the same year. Typically, private equity firms invest even while raising funds. Nevertheless, unlike the recent M&A market atmosphere where suitable assets are scarce, Hanwha & Co is evaluated to have moved ahead.

The industry sees Hanwha & Co’s intention as reassuring its limited partners (LPs). Hanwha & Co’s fund returns are solid. The 3rd fund, formed in 2019, recorded a distribution to paid-in (DPI) ratio in the 30% range. The internal rate of return (IRR), which gauges annual profitability, reached 31%. The IRRs of the 1st and 2nd funds formed in the early to mid-2010s are known to be around 20-25%.

However, there are some painful points. Hanon Systems, invested through the 2nd fund and sold last year, is a representative example. Although 2.7512 trillion KRW was invested in 2015, the amount received from selling to Hankook Tire & Technology and dividends is expected to yield limited profits. This is due to the electric vehicle chasm (temporary demand stagnation) causing Hanon Systems’ stock price to fall, as well as acquisition financing interest costs. Although the principal was recovered through listing, K Car, which remains a 'perennial asset,' and Namyang Dairy Products, which had conflicts with the owner family during acquisition, are still disappointing.

An IB industry official said, "Hanwha & Company has fundamentally made good investments, creating the largest-ever fund and gaining recognition, but especially overseas LPs have expressed some disappointment with M&A processes involving Hanon Systems and Namyang Dairy Products," adding, "To reassure them and show a solid investment portfolio, they may have accelerated the execution of the 4th fund."

Firm Deals Centered on Large Corporations... Minimizing Price Bubbles

Nonetheless, expectations for Hanwha & Co in the market remain high. The fact that the 4th fund raised more than the initial target of 4.4 trillion KRW at its formation last year reflects this trust. In particular, Hanwha & Co has consistently pursued a strategy of 'direct transactions' with sound companies at fair prices. This is based on the judgment that competitive bidding with underwriters usually requires paying premiums above fair value.

Consistent transactions with SK Group are in this context. Hanwha & Co opened dealings with SK Group by acquiring SK’s offline used car business division for 220 billion KRW in 2018, creating K Car. Since acquiring SK D&D and SK Shipping the same year, it has conducted eight M&A deals over eight years, including last year’s SK Enpulse CMP business unit.

An IB industry official explained, "Hanwha & Company succeeded in these deals without particular academic or regional ties with the owner families," adding, "From the group’s perspective, they wanted buyers who could meet mutually desired conditions and complete the deal with trust, and from Hanwha & Co’s perspective, the advantage was acquiring companies at fair prices without excessive competition." While other PEs like UCK and Glenwood PE pursue similar strategies, Hanwha & Co is still regarded as unique.

SK Shipping Sale Imminent... 3rd Fund Recovery in Full Swing

The recovery of the 3rd fund, finalized in 2019, is also gaining momentum. After starting the sale of SK Shipping last year, HMM was recently selected as the preferred negotiation partner. Hanwha & Co invested 1.5 trillion KRW when acquiring SK Shipping in 2018. Currently, it holds a 71.43% stake through Hanwha & Co Tanker Holdings LLC. The valuation based on 100% ownership is estimated at around 4 trillion KRW.

Price negotiation is critical. Previously, when HMM sold its LNG business unit to IMM Private Equity in 2014 during its Hyundai Merchant Marine days, a non-compete clause was included preventing entry into the LNG business until 2029. Therefore, this sale excludes the LNG business unit, focusing on ships and other business units. Because of the need for separate sales and the shipping industry’s status as a national key industry, there are no additional domestic buyers besides HMM, which may put Hanwha & Co at a disadvantage in price negotiations.

However, since the LNG business is a valuable asset, it is interpreted that even if sold separately later, it can fetch a fair price, so it is not a major burden. An IB industry official said, "After acquiring SK Shipping, Hanwha & Co secured strong clients such as SK Gas, SK E&S, SK Energy, as well as Korea Gas Corporation and Qatar Energy, enhancing performance stability," adding, "Given the promising outlook for the LNG business, the LNG division may attract interest from a wider range of companies, making its sale easier than a full SK Shipping sale."