[THE INVESTOR] HONG KONG -- Global investors are paying keen attention to the Korean government’s recent push for chaebol reforms that would lead to sale of quality assets owned by big conglomerates here.
But industry specialists who have been inking several successful small-cap deals in Korea over the past decade say the real sweet spot is the second- to fourth-tier chaebol.
“If you want to talk about chaebol restructuring, you need to talk about not even the second-tier but the third- and fourth-tier chaebol,” Gordon Cho, head of Korea and managing director of New York-based The Rohatyn Group, said during a panel session at the annual AVCJ Private Equity and Venture Forum last week in Hong Kong.
“These guys have fragile balance sheets. One strategic mistake or bad investment can actually derail their group unlike Samsungs and LGs who have good balance sheets. These third- and fourth-tier chaebol would have to give us quality assets.”
Panel speakers (from left) are D.C. Choi, senior deputy director of Global M&A Center at Kotra, Lee hae-joon, partner and managing director of IMM Private Equity, Gordon Cho, head of Korea and managing director of The Rohatyn Group, and T.J. Kono, partner at Unison Capital.
Lee Hae-joon, partner and managing director of Korean private equity firm IMM Private Equity, stressed that big companies are now selling assets more voluntarily unlike in the past when they had to sell assets to pay back debts.
“More recently, a bigger theme is voluntary asset sales. Conglomerates are becoming smarter now. They want to compete with global peers and to do so they want to focus on core assets. They are no longer interested in building an empire,” he said.
IMM’s key portfolio includes Celltrion, Novelis Korea and more recently Able C&C, a local cosmetics maker that owns Missha brand. Lee picked biotech, entertainment, contents and cosmetics as the key lucrative sectors.
T.J. Kono, partner at Japanese buyout boutique Unison Capital, agreed about new investment opportunities in small-cap companies in Korea, citing similarities with Japan on chaebol restructuring, succession to a new generation and demographic changes.
He said the situation may be similar but the pace in Korea is a lot faster than in Japan, pinning especially high hopes on the food and beverage market amid soaring demand for fine dining and luxury food materials from young Koreans.
Unison made its first exit in Korea in September when it sold 71.69 percent stake in Gourmet F&B, a local food importer, to LF Group, one of the nation’s top retailers that has been seeking a bigger presence in the burgeoning restaurant market, for about 36 billion won (US$33 million). This compares to the purchasing price of 15 billion won a year ago.
“If you can characterize Korea’s unfortunate problem in small and medium enterprises, they are very poorly managed. For example, a chairman of a company had all his friends as suppliers; the KPI is how well you get along with the CEO. It’s not result driven,” he said.
“So I agree that HR is a big issue. How to add value from our point of view is that you really need to know your industries and take a systematic approach,” he said of adding values to undervalued firms.
Asked about possible labor disputes after ownership change, PEFs said there has not been many cases where labor was a key for private investments today in Korea because they no longer look at labor-intensive industries such as shipbuilding and car-making.
Fundraising in Asia has hit an all-time high of US$127 billion in 2016. In Korea alone, a total of 693 M&A deals were sealed in the first half of this year, with the total transaction volume surging 30 percent to US$38.8 billion from a year ago.
More than 1,000 industry leaders and specialists convened for the three-day AVCJ Forum, the most influential and largest gathering of private equity and venture professionals in Asia.
Asia Venture Capital Journal, an Acuris company, is the leading provider of Asian private equity and venture capital information and intelligence. The annual forum and its regional events have become a venue for quality discussions, strategic debates and productive networking for industry experts worldwide.
The Investor, an in-house startup of The Korea Herald and the nation’s only English news service catering especially to professional investors, is an official media partner for the AVCJ Forum.
By Lee Ji-yoon (email@example.com)