[PE Now] "Full Sale Not Working" Private Equity Funds Activate Plan B

Cautious Sales Amid Public Scrutiny After the Homeplus Incident
Utilizing Block Deals, Carve-Outs, and Refinancing

Following the controversy over MBK Partners' investment in Homeplus, the private equity fund (PEF) industry is facing increasing concerns over investment exits. This is because the exit process itself has emerged as a social risk, given the issues of job insecurity and restructuring that have arisen during the sale of large retail companies. As both strategic investors (SI) and financial investors (FI) have become more cautious about large-scale mergers and acquisitions (M&A), private equity funds are actively adopting a 'Plan B' strategy that combines partial exits and long-term holding, rather than seeking to sell entire companies at once.

Selling in parts, selling off segments... Prioritizing cash conversion

The most recent example is the sale of LG CNS shares by the foreign asset manager Macquarie Private Equity (PE). Macquarie PE recently carried out a block deal (after-hours bulk sale) of 8 million shares (8.3%) in LG CNS for approximately 536 billion won. From the second half of last year to early this year, Macquarie PE has gradually recovered its investment by selling LG CNS shares in three separate block deals.

Macquarie PE previously recovered about 348 billion won and 446 billion won through block deals in August (5.57%) and November (7.0%) of last year, respectively. By adopting a strategy of selling shares in the market through multiple block deals rather than a single bulk sale, the firm was able to both recover its investment and disperse the overhang risk (the risk of a stock price decline due to excessive sell orders in the market). Considering that around 600 billion won was raised by selling existing shares at the time of LG CNS's IPO in February last year, the company is seen as having recovered almost 100% of its original investment of 1.019 trillion won made in 2020 in a stable manner.

The 'carve-out' strategy of separating and selling subsidiaries or business units also remains effective. Hahn & Company, facing delays in the sale of K Car, opted to separately sell its financial subsidiary, K Car Capital. Although the sale has been underway with Goldman Sachs as the lead manager since December 2022, the company chose this alternative after three years without significant progress. Hahn & Company had already recovered its initial investment through existing share sales and dividends during the K Car IPO process, but the intensifying competition as major conglomerates enter the used car market remains a burden. As a result, the firm decided to liquidate assets that could be converted into cash first. The decision to put Green Eco Solution, a waste management subsidiary of Ssangyong C&E, up for sale is seen in the same context.

Active use of financial techniques... 'Non-sale exits' on the rise

'Non-sale exits' such as refinancing and recapitalization are also increasing. H&Q Korea, in its investment in Hyundai Holdings Company, effectively recovered the entire principal investment through refinancing and the disposal of exchangeable bonds (EB). Based on the company's improved performance and rising stock price, H&Q Korea significantly increased its loan size through refinancing, repaid existing loans, and distributed returns to limited partners (LPs) via recapitalization. In addition, approximately 80 billion won worth of exchangeable bonds were converted into shares and sold through a block deal, resulting in the recovery of around 160 billion won.

Continuation funds, which transfer assets to new funds, are also being considered as alternatives. JC Partners chose to move Goodrich, a corporate insurance agency (GA), to a newly established fund for long-term holding instead of selling it to a third party. By transferring assets to a continuation fund, the firm provides existing LPs with an opportunity to exit while also attracting new investors to the new fund, thereby allowing the general partner (GP) to extend the holding period.

However, opinions are divided among LPs. While it is positive that a certain level of cash distribution to investment ratio (DPI) can be secured, the internal rate of return (IRR), which reflects the time value of money, declines, and uncertainty about the final exit timing increases. In particular, there are concerns that continuation funds or recapitalization structures may be perceived as means to delay exits.

An investment banking industry insider stated, "Since the Homeplus incident, both investment and sale of B2C companies have become more politically and socially sensitive, increasing the variables that private equity funds must consider when exiting. LPs also want capital to circulate rather than simply waiting, so there is a trend of exploring and utilizing various methods."