[New Financial Power: Private Equity Funds ②] "Just Buy First" Investments Lead to Poor Management... Private Equity Funds Bring Employees and Shareholders to Tears

Performance Declines Common After Private Equity Takeovers Like Homeplus
High-Priced Acquisitions Fueled by Excessive Leverage
Franchises Owned by Private Equity Funds Under Fair Trade Commission Investigation
"Franchisees Pressured for Rapid Capital Recovery"

Editor's Note
At the end of last year, the total committed capital of domestic institutional private equity funds surpassed 153 trillion won. Since their legal introduction in 2005, private equity funds have played a positive role by acquiring distressed companies and successfully turning them around. However, there have also been numerous cases where insufficient management capabilities have caused harm to both companies and shareholders. Furthermore, as these funds have been passed down to the third and fourth generations, they have become involved in management disputes within chaebol families whose governance structures have weakened, leading to concerns that they are destabilizing the capital market. This article examines the current state of private equity funds, which exert tremendous influence over the financial markets, and explores what their desirable future should look like.

Homeplus, which once generated hundreds of billions of won in operating profit, has entered court receivership ten years after investment by MBK Partners. It would be premature to attribute this solely to MBK Partners' investment failure, as there are numerous other companies whose growth stalled after private equity investment. Criticism is mounting regarding the management practices of private equity funds, which have brought both employees and shareholders to tears.

Once-thriving companies lose momentum after private equity investment

Homeplus, which is currently pursuing a pre-packaged merger and acquisition (M&A) before its rehabilitation plan is approved, recorded an operating loss of 314.1 billion won last year. The company has been in the red for four consecutive years and is now in a state of capital impairment. This stands in stark contrast to the operating profit of 194.4 billion won it posted in 2014, just before MBK Partners acquired it. While the main cause is the downturn in the offline retail industry, Homeplus's performance has consistently declined since the MBK Partners acquisition, raising doubts about the fund's management capabilities.

Industry insiders in the capital market point out that MBK Partners' acquisition of Homeplus in 2015, relying excessively on debt and paying a high price, is a textbook example of the so-called "winner's curse." Critics also accuse MBK of moral hazard, as the firm sought court intervention for debt relief and restructuring even though Homeplus had not yet defaulted on supplier payments or interest obligations.

There are other similar cases. Halla Holdings, which was acquired by Hahn & Company in 2015 and remained its largest shareholder until last year, also saw its performance deteriorate sharply over the past decade. Its operating profit, which was 370.3 billion won in 2014 (the year before the acquisition), fell by about 74% to 95.5 billion won last year. Its debt ratio remained in the 200% range for six consecutive years through last year, and its reliance on borrowings stayed in the 40% range for five straight years, with excessive dividend payouts cited as a reason. However, there was controversy over whether last year's performance decline was due to a "big bath" of about 300 billion won in the fourth quarter alone, just before the sale to Hankook & Company, as the company wrote off global business operations and intangible assets.

Other companies that have seen their performance slump following private equity investment include LocknLock (acquired by Affinity Equity Partners), Donghae Machinery & Aviation (acquired by JKL Partners), Ritec (held by Skylake Private Equity), and Hanssem (acquired by IMM Private Equity). While the overall business environment has been challenging, the performance decline of these companies has been particularly steep compared to their competitors.

Poor management by private equity funds is often attributed to rushing to acquire companies at high prices. Private equity funds have fixed fund lifespans, and the later they deploy committed capital, the lower the management fees they receive. As a result, funds are sometimes spent quickly?often on companies that have not been thoroughly analyzed?just for the sake of making acquisitions.

Another factor undermining a company's potential is "refinancing," or borrowing against the shares of the portfolio company after a high-priced investment to recover the investment capital. It is common for private equity funds to use acquisition financing (share-backed loans) for about half of the acquisition amount to boost returns on common equity. Subsequently, they increase borrowings based on revenue or performance, and then recover their investment through dividends funded by the increased debt. While this is not a problem if performance improves, issues arise when funds proceed with capital recovery without demonstrating adequate management capabilities.

The ones who suffer most in this process are employees and shareholders. Most companies that have experienced performance deterioration after being acquired by private equity funds have implemented large-scale workforce restructuring under the pretext of improving management efficiency. While this may improve short-term results, it creates a vicious cycle in which long-term growth momentum is lost. In the case of listed companies such as Halla Holdings and Hanssem, share prices have steadily declined since private equity acquisition, drawing the ire of shareholders. For LocknLock, the delisting process through a tender offer sparked backlash from minority shareholders.

Private equity funds owning franchises, regular targets of antitrust investigations

The issue is not limited to the management capabilities of private equity funds. There is also criticism that their management practices aimed at short-term capital recovery have gone too far. Private equity funds that own several well-known domestic franchise companies have become regular targets of the Fair Trade Commission due to their unfair practices toward franchisees.

Last year, the Fair Trade Commission launched investigations into unfair practices at franchises such as BHC, Burger King, and Mom's Touch, all of which are owned or operated by private equity funds. These investigations were prompted by revelations of abusive practices by franchisors managed by private equity funds.

BHC attempted to shift mobile gift certificate fees onto franchisees and tried to require franchisees to sign a "coexistence agreement" mandating 12-hour operations (from 12 p.m. to 12 a.m.). In 2023, BHC was also fined by the Fair Trade Commission for unilaterally terminating contracts with franchisees. MBK Partners is the majority shareholder of BHC.

In 2023, Burger King franchisees filed for dispute mediation with the Fair Trade Commission, citing excessive profits by the franchisor, including charging franchise fees twice as high as those in the United States. Burger King is operated by BKR, which is 100% owned by Affinity Equity Partners.

Mom's Touch, whose majority shareholder is KL & Partners, was ordered by the Fair Trade Commission last year to correct violations of the Franchise Business Act and was fined 300 million won. Previously, Mom's Touch had terminated the contract of the Sangdo Station franchisee and filed criminal charges against the franchisee for forming a franchisee association.

The Lee Jaemyung administration is pushing for an amendment to the Franchise Business Act to improve franchisee interests. The government is also considering establishing a new department within the Fair Trade Commission dedicated to franchise-related disputes, which is expected to increase scrutiny of private equity funds that own franchises.

Lee Junghwan, a professor at the Department of Business Administration at Hanyang University, said, "Private equity funds often mobilize large amounts of capital to acquire companies and then carry out aggressive restructuring to maximize short-term returns. In particular, after taking control of management, they may sell off assets or cut staff to reduce costs, which can ultimately weaken the long-term competitiveness of the company."