[PE Now] Secondary Deals Between Private Equity Funds Booming

'DIG Airgas,' This Year's Biggest Deal, Changes Hands from Goldman to MBK to Macquarie
KKR, Carlyle Eye Classys Owned by Bain Capital
Mega-Deals Like DIG Airgas and Classys Reach 3 to 5 Trillion Won
Domestic Conglomerates Lack Funds, While Private Equity Funds Hold 40 Trillion Won
Private Equity Funds Gain Confidence in Boosting Corporate Value

The so-called "secondary deals," in which private equity funds (PEFs) sell assets to other PEFs, are expected to become increasingly common. This is because only PEFs with sufficient purchasing power are showing interest as mega-deals worth several trillion won, such as DIG Airgas, Classys, and HPSP, are appearing one after another. In addition, domestic conglomerates are becoming more interested in overseas mergers and acquisitions (M&A) rather than domestic deals due to the restructuring of global supply chains. Another major factor is that as PEFs improve their management capabilities, they have gained confidence that "even if they buy at a high price, they can sell at an even higher price."

This Year's Mega-Deals Likely to Be PEF-to-PEF Transactions

DIG Airgas (formerly Daesung Industrial Gases), which is expected to be the biggest M&A deal in the market this year, has changed hands several times over the past decade, from Goldman Sachs to MBK Partners, and then to Macquarie Asset Management. It is reported that Macquarie is currently contacting potential buyers behind the scenes and weighing the timing of the sale. The potential buyers being mentioned are also large global PEFs with ample funds, such as Kohlberg Kravis Roberts (KKR) and Carlyle. There are reports that the sale price alone could exceed 4 to 5 trillion won.

In the recent preliminary bidding for Classys, a medical aesthetic device company, conducted by Bain Capital, it is known that many global PEFs such as KKR, Carlyle, and Hillhouse Capital participated. Bain Capital acquired a 61% stake in Classys in 2022 for 670 billion won. As the current market capitalization on KOSDAQ exceeds 4 trillion won, there are expectations that the sale price will approach 3 trillion won.

HPSP, a semiconductor equipment company expected to be sold for over 1 trillion won, is also expected to be sold by Crescendo Equity Partners to domestic and foreign PEFs such as MBK Partners.

20% of PEF Transactions Are Secondary Deals

A secondary deal refers to a transaction in which previously invested assets or equity stakes are sold to another investor, rather than to an individual or a company.

Secondary deals are common in venture capital (VC). As a company grows from startup through Series A, Series B, Series C, and eventually to an initial public offering (IPO), the main investors change from accelerators and micro VCs to VCs, PEFs, and asset management firms. As a result, transfers between investors are inevitable.

Although unfamiliar to the general public, secondary deals between PEFs have also become active over the past decade as the domestic PEF industry has matured. According to the Korea Capital Market Institute, the breakdown of PEF exits from 2011 to 2023 was estimated at 63.7% through M&A, 22.2% through secondary deals, 8.0% through redemption, and 4.9% through IPO.

A representative example of a secondary deal between PEFs is the aforementioned industrial gas company DIG Airgas.

When buying and selling companies, PEFs place great importance on cash flow and use EBITDA (earnings before interest, taxes, depreciation, and amortization) as a key metric for valuation. In the case of industrial gases, although the market growth is not steep, EBITDA improves as the industry grows, making the eventual sale price more attractive.

In 2014, a Goldman Sachs consortium acquired DIG Airgas for 500 billion won. In 2017, it was sold to MBK Partners for 1.8 trillion won. MBK Partners then resold it to Macquarie Asset Management in 2019 for 2.5 trillion won. Now, Macquarie has put DIG Airgas back on the market this year, and the expected sale price is over 4 to 5 trillion won.

More "Exclusive" Deals Are Inevitable

There are several reasons why secondary deals between PEFs are bound to increase in the coming years. First, the number of domestic conglomerates capable of acquiring companies on the market has decreased. Due to protectionist policies in many countries, conglomerates are forced to focus more on building factories overseas or on M&As with local companies, rather than on domestic acquisitions. This trend is expected to intensify further due to tariff policies under U.S. President Donald Trump. In addition, during the current economic downturn, even conglomerates with the capacity to acquire are rare. Instead, conglomerates are more interested in "carve-out" deals, selling off their domestic business units.

Due to the prolonged low interest rate environment, both domestic and foreign PEFs are flush with cash. According to Samil PwC, global dry powder (uninvested capital in funds) stood at 2,300 trillion won as of the end of last year. Over 40 trillion won is piled up in Korea alone. As a result, PEFs are now virtually the only players left in Korea capable of executing large-scale, trillion-won-level deals.

PEFs "More Confident About Selling at Higher Prices"

The accumulation of experience by domestic PEFs over the past 20 years is also one of the reasons for the increased activity in secondary deals. There is now trust in the ability of PEFs to identify "profitable assets."

A representative example is H&Q Korea's acquisition of JobKorea in 2013 and its sale to Affinity Equity Partners in 2021 for 900 billion won. Until then, most large secondary deal assets had been in manufacturing or distribution, such as DIG Airgas (industrial gases) and GeoYoung (pharmaceutical distribution). JobKorea attracted attention because it is a platform business, completely different from "traditional industries," and generated more than four times the investment principal in returns.

PEFs have also diversified their strategies for increasing corporate value.

Affinity recruited a CEO for JobKorea who was formerly the Chief Technology Officer at Baedal Minjok, and made large-scale investments in artificial intelligence (AI). By leveraging the accumulated big data over many years, JobKorea was transformed into an "HR tech company," offering customized career planning for job seekers and AI-based talent recruitment services.

In 2019, Praxis Capital acquired BusinessOn, a listed electronic tax invoice company, and actively acquired stakes in Glosign (electronic signature) and Shiftee (workforce management). Last year, Skylake Equity Partners acquired BusinessOn from Praxis, delisted it, and then spun off Shiftee once again. Under the independent management of founder Shin Seungwon (who holds a 25% stake), the company plans to accelerate its expansion into the Asian market.

An industry insider commented, "As PEFs accumulate diverse experience, they have become more confident that, even if they buy at a high price, they can later sell at an even higher price through new strategies."