In an Uncertain Political Climate... Both Lenders and PE Are Frustrated

Political Instability and Homeplus Crisis Create Double Whammy
Funds on Edge... "Difficult to Take Active Management"
PEFs Sigh... "Industry Trust Collapsed Overnight"

The private equity fund (PEF) industry is freezing up due to the uncertain political situation and the Homeplus incident. Institutions controlling the money flow are tightening PEF investment criteria amid the unstable political climate, and PEF management firms also appear tense about the market cooling down more than expected.

According to the investment banking (IB) industry on the 21st, major mutual aid associations and pension funds such as the Teachers' Mutual Aid Association and the Korea Local Government Officials Mutual Aid Association have recently been strengthening their PEF evaluation measures. As criticism against MBK Partners grew following the Homeplus incident, these institutions are independently stepping up their 'inspection measures.' The uncertain political situation is also a source of anxiety. A senior official from a mutual aid association said, "At recent meetings among mutual aid association executives, the uncertainty of the administration was a hot topic," adding, "There is also uncertainty related to personnel matters, and since we manage public funds, we inevitably have to be mindful of the political sphere and public opinion."

The National Pension Service has already established a policy not to invest in hostile mergers and acquisitions (M&A) when investing in MBK Partners. This policy will also be reflected when signing contracts with other PEF management firms in the future. The Government Employees Pension Service, considered one of the three major pension funds along with the National Pension Service and the Teachers' Pension, also plans to incorporate management stability into the selection of management firms. The Teachers' Mutual Aid Association is also reviewing measures to assess whether management firms can grow their portfolio companies without issues.

Both the 'money providers' and the PEF management firms operating with their investments are equally disappointed. Since the domestic PEF market started in 2004, it has grown rapidly, gradually improving its negative image, but the recent Homeplus incident caused it to collapse in an instant. When MBK Partners engaged in a management dispute with Choi Yoon-beom, chairman of Korea Zinc, last year, public perception of PEF management firms was mixed, but the recent sudden filing for corporate rehabilitation by Homeplus has completely turned public opinion against them.

A senior official from a PEF management firm said, "We have been making relentless efforts to shed the image of 'eat-and-run,' and the perception that PEFs have clear advantages over owner management by growing companies and increasing their value was gradually spreading," adding, "But this incident feels like everything has collapsed at once."

In particular, the precedent of Chairman Kim Byung-joo of MBK Partners donating his personal fortune is expected to be a significant burden on the PEF industry. There are criticisms about whether it is appropriate for a company managing funds, rather than the business owner, to make personal donations. An IB industry official explained, "PEFs manage external funds, so if a precedent is set where management firms make personal donations to take responsibility for investment failures, both the management firms and the funds intending to invest will inevitably feel uncomfortable," adding, "Although voices of self-reflection are emerging, it is unavoidable that the industry's atmosphere will freeze up."