"Back to Basics"... From Corporate Raiders to Value-Up Experts [New Financial Power: Private Equity] ③

Restructuring Business Divisions and Reforming Performance Rewards...
Demonstrating Management Expertise Doubles or Triples Corporate Value
The Answer Lies in Strengthening the Role of "Corporate Partners"
Encouraging the Positive Functions of Private Equity Funds
Through Responsible Management by LPs such as Pension Funds and Mutual Aid Associations

Editor's NoteAt 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 inadequate management capabilities have caused harm to companies and shareholders. Additionally, as ownership has passed down to third and fourth generations, private equity funds have become involved in conglomerate family succession disputes, destabilizing the capital market. This series examines the current state and the desirable future of private equity funds, which now wield significant influence over the financial markets.

There are calls for private equity fund managers to return to their core mission in order to shed their reputation as "corporate raiders" and instead establish themselves as "corporate partners." The argument is that private equity should serve as partners to large corporations by enhancing corporate value through professional and responsible management, act as productive investment channels for public funds such as pension funds and mutual aid associations, and serve as catalysts for improving corporate governance and driving industrial transformation in the capital market.

Started as restructuring experts, but "asset stripping" controversy persists

The first buyout-focused private equity fund (officially called "management participation-type private equity fund" at the time) appeared in Korea in 2005, following a revision of relevant laws in 2004. The backdrop was a policy judgment that Korea needed private equity funds led by domestic capital and talent, as foreign private equity funds such as Lone Star had dominated the acquisition of large corporate restructuring assets in the aftermath of the 1997 Asian financial crisis.

Since then, domestic private equity funds have grown rapidly by acquiring distressed assets from Korean conglomerates and providing restructuring capital during the 2008 global financial crisis. While there have been many successful turnaround cases, the "corporate raider" image of private equity has been hard to shake. This is because some domestic private equity funds have fixated on short-term gains instead of pursuing the more difficult path of responsible management, leading to persistent controversies over "asset stripping."

Park Yukyung, head of emerging markets at APG, one of the world’s top 10 public pension fund managers based in the Netherlands, criticized, "By accepting private equity capital, companies can learn investment discipline, profitability, and management expertise and grow. However, in Korea, there seemed to be a lot of one-shot speculation in the past. In the process of acquiring and selling, they would convince only one major shareholder to create a 'control premium,' which contributed to the distortion of capitalism."

Numerous cases of expertise in enhancing corporate value

Although there have been many side effects in the 20-year history of domestic private equity, there are also numerous cases where management expertise?such as business restructuring, HR system reform, and efficient capital allocation?has been leveraged to successfully turn around struggling companies and enhance corporate value.

Hahn & Company has acquired nine subsidiaries from SK Group as the conglomerate restructured around its core businesses, and has worked to enhance their value. A representative case is the SKC PET film business (now SK Microworks), acquired in 2022. At the time of acquisition, there was a widespread perception that growth had stalled, but Hahn & Company focused on qualitative growth by ▲ shifting the product portfolio toward high value-added products such as display and electronic materials films, ▲ investing 80 billion won in high-margin product lines with bargaining power based on technological superiority, and ▲ improving production efficiency by adjusting the product mix at domestic and overseas sites in Korea, China, and the United States. As a result, EBITDA (excluding non-operating expenses) grew from 156.5 billion won in 2022 (before the acquisition) to 226.3 billion won last year, a 1.5-fold increase in two years. During the same period, net debt decreased from 624.5 billion won to 390.4 billion won, and the debt ratio fell from 65.4% to 63.2%. As part of a bolt-on strategy (acquiring to secure additional competitiveness), Hahn & Company also established a PET film joint venture with Kolon Industries at the end of last year.

MBK Partners acquired ING Life at the end of 2013 for 1.8 trillion won. Recognizing that human resources and organizational structure are key to competitiveness in the insurance industry, MBK first appointed a new CEO and assembled the C-level team with the industry’s top experts, while improving organizational efficiency by consolidating similar departments. They also created a new long-term incentive system for exclusive agents and entered the rapidly growing general agency (GA) channel. As the average number of agents per quarter increased from about 4,200 to 5,000, annualized premium equivalent (APE) for protection-type products rose from 191.2 billion won to 327.3 billion won over five years, and new business value swung from a 16.1 billion won deficit to a 117.3 billion won surplus. MBK partially recouped its investment through an IPO in 2017, and in 2019 sold a 59.1% stake to Shinhan Financial Group for 2.4 trillion won.

IMM Private Equity achieved a dramatic turnaround at Taihan Electric Wire, a key player in the national infrastructure sector. After venturing into non-core areas such as Muju Resort in the early 2000s, Taihan’s financial structure deteriorated and it faced difficulties during the 2008 global financial crisis. IMM acquired Taihan in 2015 for about 300 billion won, reduced the number of subsidiaries from 36 to 18, and increased the share of high-margin orders such as extra-high voltage power cables. It also introduced a performance-based HR system by reforming stock options, bonuses, and promotion structures. Total borrowings were reduced from 1.1373 trillion won in 2014 to 586.3 billion won in 2020. IMM reportedly recouped a total of 500 billion won, including the sale of a 40% stake in Taihan to Hoban Construction for 250 billion won in 2021.

'BACK TO THE BASIC'?Private equity must fulfill its role as a facilitator

As these value-up cases show, the essential role of private equity is to fill gaps in the capital market as a facilitator. Rather than simply buying distressed assets at a low price and selling them high, private equity should be experts in unlocking value that companies themselves could not realize. They must also faithfully serve as intermediaries who grow the long-term funds of pension funds and mutual aid associations?the main limited partners (LPs) of most private equity funds?through productive investment.

Recently, various regulations on private equity funds are being discussed in political circles, including bills to curb excessive leverage. In response, Lee Junghwan, professor of business administration at Hanyang University, said, "Private equity clearly plays a role in the M&A market, and if regulation is introduced whenever problems arise, it could lead to reverse discrimination against domestic private equity compared to foreign funds, and even result in foreign capital dominating the domestic market. Instead of regulation, the government should step in to provide a kind of guideline as a check."

The domestic private equity industry also warns that excessive regulation would "ultimately only strengthen foreign private equity funds, which are not subject to any regulation." Accordingly, there are calls for LPs such as pension funds and mutual aid associations to take a more responsible and autonomous approach in overseeing the private equity funds they invest in. Lee Namwoo, chairman of the Korea Corporate Governance Forum, explained, "If a buyout fund acquires and resells management control, then the much-debated leverage strategies are not actually problematic. If LPs manage private equity funds so that they operate more responsibly and enhance corporate value appropriately, contributing to the capital market, the stigma of being 'corporate raiders' can be overcome."

-End of series-