[PE Now] Private Equity Funds Face Tougher Acquisitions of Both Financial Firms and Franchises

'Franchise Business Act' Amendment Gains Traction
Franchise Owners, Mainly PEFs, Face Difficulties with Exit and M&A
'Stricter LP Eligibility Review'
PEFs to Face Greater Hurdles in Acquiring Financial Firms under President Lee Jae Myung's Key Pledges on Private Equity Regulation

There are growing concerns that private equity funds (PEFs) may face a contraction in the mergers and acquisitions (M&A) market following the inauguration of the Lee Jae Myung administration. In particular, it is expected to become more difficult for PEFs to acquire financial companies and franchise businesses.

Franchise Business Act Amendment Gains Momentum... Franchises Lose M&A Appeal

During the presidential campaign, President Lee Jae Myung made the protection of franchisees' rights a key pledge. To this end, he proposed an amendment to the Franchise Business Act, and the amendment is currently on the fast-track in the National Assembly, led by the Democratic Party.

The core of the amendment is to legally guarantee the collective bargaining rights of franchisees and tenants. From the perspective of franchisors, there is growing concern about the increased burden resulting from the expansion of bargaining obligations.

PEFs, which own a significant number of domestic franchise companies, are paying close attention to these developments. Additionally, many funds are approaching their maturity dates, meaning they will soon need to sell off their holdings. If the Franchise Business Act amendment passes, there is a high possibility of friction, such as franchisees attempting to block sales.

Koston Asia and Q Capital Partners, the largest shareholders of Norang Tongdak, are currently seeking to sell their stakes. Among five potential buyers, three are being seriously considered: one domestic strategic investor (SI), one domestic financial investor (FI), and one overseas FI. The franchise has about 750 outlets.

KFC Korea is also up for sale. The largest shareholder, Orchestra PE, has selected Samil PwC as the lead manager and is expected to set an asking price in the 400 billion won range. In addition, KL&Partners attempted to sell Mom's Touch in 2022 but halted the process, while Affinity Equity Partners put Burger King up for sale in 2021 but later postponed the deal.

MBK Partners acquired BHC in 2018 and is currently operating it. The typical maturity of funds raised for M&A is five years at minimum and up to ten years. Before maturity, the fund must exit its investments and return capital to its limited partners (LPs). As a result, BHC will inevitably be put up for sale at some point as well.

Until now, franchises have been attractive M&A targets for PEFs due to several factors: high brand recognition, stable and predictable cash flows, strong cash generation, high growth potential, and relative resilience to economic cycles. However, if the Franchise Business Act amendment passes, franchises are expected to lose much of their appeal in the M&A market going forward.

Adding to these challenges is the ongoing wave of lawsuits demanding the return of excess franchise fees. Excess franchise fees refer to payments made by franchisees to the franchisor for goods and services that exceed reasonable wholesale prices, paid regularly or irregularly. Franchisees cannot know whether these fees are reasonable, and since such details are not included in franchise agreements, courts have increasingly ruled in favor of franchisees.

A PEF representative stated, "PEFs that own franchises are already voicing concerns about the recovery of their investments," adding, "While protecting franchisee rights is important, it could also become an obstacle for M&A, prompting many PEFs to adjust their portfolios."

President Lee Jae Myung is taking the oath of office for the 21st President at the National Assembly in Yeouido, Seoul on June 4, 2025. Photo by Kim Hyun Min

Stricter LP Eligibility Review Considered... PEFs Likely to Face Greater Difficulty Acquiring Financial Firms

The new administration is also expected to make it harder for PEFs to acquire financial companies. This is because the presidential campaign pledges included a plan for the government to consider strengthening eligibility reviews for PEF limited partners (LPs).

The pledge includes plans to strengthen reviews so that major shareholders can be stripped of their status in the event of serious issues such as lack of internal controls. However, the specific conditions under which the government can review LP eligibility were omitted from the pledge. Industry insiders believe this reflects an intention to prevent so-called "eat-and-run" behavior by PEFs. In particular, it is interpreted as likely to apply when PEFs acquire financial firms.

Major shareholders seeking to acquire financial companies must obtain approval from the Financial Services Commission for major shareholder eligibility. If the major shareholder is a PEF, and if an LP holds more than 30% of the fund or can exercise substantial influence, the LP must also pass the eligibility review.

The problem is that, depending on how the structure is designed, there is ample room to circumvent the 30% ownership or substantial control restrictions. The 2014 attempt by Kohlberg Kravis Roberts (KKR) to acquire Korea Land & Housing Trust is a representative example. At the time, KKR established three special purpose companies (SPCs) and structured the investments so that each SPC held less than 30% of the fund, which was criticized as an attempt to evade the major shareholder eligibility review.

A senior executive at a domestic PEF management company commented, "Judging from the pledges, it seems inevitable that PEFs will face increased regulation," adding, "Since issues such as improving governance and refining M&A standards cannot be resolved by simply introducing new regulations, I hope the government will take into account a wide range of market opinions."