[PE Now] Is the Era of Small and Mid-Sized PEFs Coming?

Large Conglomerate Assets Become Scarce
"Homeplus Fallout" Raises Regulatory Risks for Major Firms
Small and Mid-Sized Deals Offer Easier Exits
Pension Funds and the Funding Market Shift Toward Smaller Players

This year, the activities of major domestic private equity funds (PEFs) such as MBK Partners, Hahn & Company, IMM Private Equity, and STIC Investments have slowed down. Instead, foreign and small to mid-sized PEFs are filling the gap. The private equity market, which for the past several years has been dominated by large domestic players, is showing signs of gradual change.

Trillion-Won Deals Disappear, Regulatory Risks Emerge

This year, there has been a decline in the number of deals large enough to attract domestic major PEFs. This is because most of the large assets that had been put up for sale as SK, LG, Lotte, and other major Korean conglomerates restructured their businesses in recent years have already been sold. For example, the sellers of the CJ CheilJedang Green Bio Division and HPSP, which were considered mega-deals this year, withdrew their assets from the market themselves. One of the main reasons cited is that MBK Partners, which had previously participated in every trillion-won mega-deal, has taken a passive stance in acquisitions due to the "Homeplus incident."

The remaining large deals have been won by foreign PEFs, which have an advantage in raising funds and have offered higher acquisition prices. One representative case is KKR signing a contract in August to acquire 100% of the shares in three SK Ecoplant environmental subsidiaries-Renewus, Renewon, and Renew Energy Chungbuk-for 1.78 trillion won. Although STIC Investments also competed, KKR reportedly offered a relatively higher price. For the HS Hyosung Advanced Materials tire steel cord division, Bain Capital was selected as the preferred bidder, beating out STIC Investments and JKL Partners. Meanwhile, Glenwood Private Equity made its presence felt among domestic major PEFs by acquiring LG Chem's water treatment business for 1.4 trillion won.

Domestic major PEFs are also facing regulatory risks. Following the "Homeplus incident," MBK Partners and Hahn & Company underwent tax audits by the National Tax Service. In the National Assembly, a bill has been proposed to regulate institutional private equity funds at the same level as public funds. There are growing concerns that large PEFs will become the primary targets of such regulations.

Funding Market Presents Opportunities for Small and Mid-Sized PEFs

In recent years, the PEF funding market has seen a severe "rich get richer, poor get poorer" dynamic. The so-called "Big Four"-MBK Partners, Hahn & Company, IMM, and STIC Investments-have taken most of the funding from the National Pension Service, pension funds, and mutual aid associations. However, the situation has started to change this year. As political calls to regulate PEFs have grown louder, pension funds and mutual aid associations are reducing large-scale investments and increasing support for small and mid-sized projects.

A representative example is the Korea Scientists and Engineers Mutual-Aid Association launching the "PE Rookie League" this year for the first time in four years since 2019, targeting new management firms established within the past five years. Last year, Korea Post had set a minimum fund size of 500 billion won, effectively limiting investments to large funds, but this year it has created a mid-sized league (over 250 billion won) and a small league (100 billion to 250 billion won). The Military Mutual Aid Association is also reportedly planning to divide its investments into separate leagues starting next year.

From the perspective of investors, this reflects the current domestic environment where large M&A deals are becoming increasingly difficult. Large conglomerates that previously absorbed major assets are now interested only in global M&A deals, making it harder to exit from large domestic assets. A deputy representative of a domestic private equity fund noted, "For small and mid-sized deals, it is easy to sell to strategic investors or other private equity funds. However, for large assets, the drawback is that it takes too long to exit."