Since its birth in 2004, South Korea’s private equity market has become an increasingly important presence in the global industry. Over the period 2008-2018, South Korea-based fund managers raised approximately $62bn in private equity commitments, accounting for 1.6% of the global total – this is the seventh largest amount of any private equity market worldwide, and third largest in Asia-Pacific behind China and Hong Kong. This significant growth is likely due to the superior returns generated by private equity investments in relation to the 1-3% annual returns generated in South Korean public equity markets over the past five years.
Over the past decade, buyout has become a key strategy pursued by South Korea-based GPs, underlining how the market has matured in tandem with its rapid growth. While venture capital remains the predominant investment strategy in the South Korean private equity market, buyout funds have steadily grown from accounting for 8% of funds closed in 2012 to 41% in 2018. This reflects the increasing population of domestic GPs with the experience and capacity to acquire larger shares in a range of companies – from start-ups to established firms – while providing the management required of buyout investments to ensure a profitable exit.
Buyout looks set to continue its growth in South Korean private equity. The Financial Services Commission has been progressively easing a series of regulations since 2015, making it simpler and easier to register private equity firms and to fundraise, as the government aims to develop private equity into an alternative source of corporate financing to bank loans. On top of such regulatory tailwinds, the buyout sector is set to receive a boost from a growing pool of SMEs available for acquisition. The ageing first- and second-generation founders of SMEs are facing succession issues due to South Korea’s high inheritance tax rates – which stands at a minimum of 50% compared with an average of 26% for OECD countries – as well as the reluctance of company heirs to take over the business.
There are concerns that, despite the favourable conditions for buyout investments, such investments could suffer from a dearth of exit options in the current environment: South Korea’s economy is showing signs of a slowdown, the IPO market remains lacklustre as stock markets underperform and the secondary market is relatively small. However, GPs remain bullish, believing that South Korea’s strong economic fundamentals and maturing private equity industry will allow for a robust M&A and secondary market which will continue to attract investors in search of buyout opportunities.
For more data and analysis specifically on the South Korean private equity market, take a look at our Markets in Focus report or browse Insights for more of our recent research.
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