A decade-long review of South Korea’s private equity market reveals that investments have generated returns of around 20 per cent, far outstripping the public equity market which has only achieved between 1 and 3 per cent annual returns over the last five years.
The new analysis, completed by McKinsey & Company, concludes that returns have been even higher (up to 35 per cent) if exits were completed within three years, or if the investments were in the industrial or consumer sectors (these generated average returns of around 25 per cent each).
The McKinsey & Company report, released today, examines South Korea’s private equity industry since 2005, the year that the market opened up, following regulatory changes that enabled the creation of local buyout funds. Since then, private equity funds have invested almost USD100 billion of capital into more than 870 companies in South Korea.
Private equity firms, however, are now facing much stiffer competition for deals, both domestically, and from international players. Heightened interest from global mega funds is pushing multiples higher, especially in auctions, and domestic institutional investors are seeking to diversify investments and place an increasing share in private market alternatives (South Korea’s National Pension Service, for example, has increased its investment in alternative assets by 28 per cent over the last 10 years).
Richard Lee, a Senior Partner at McKinsey, and co-author of the report, said: “The private equity industry in South Korea has thrived over the last 13 years and now accounts for roughly a quarter of all South Korean M&A activity. Furthermore, PE backed portfolio companies tend to outgrow both revenues and operating profits than non-PE backed companies. There’s a healthy exit record and investments are providing robust returns to investors. But to succeed in today’s competitive market, firms must evolve their investment strategies and models. They now need to find additional sources of growth to justify elevated prices, find new deals beyond just auctions, and expand investment strategies beyond the buyout.”
The report, ‘The continued rise of South Korean private equity’, also reveals that private equity-owned companies in South Korea are outperforming their rivals not owned by private equity firms. Compared to non-private equity backed companies, portfolio companies outperformed their peers in seven out of 10 years in revenue growth, and eight out of 10 years in operating profit growth. McKinsey’s report also reveals that private equity-backed companies have made a significant contribution to the economy in the form of increased employment, contradicting the narrative that private equity firms in South Korea are interested primarily in reducing costs and selling off their portfolio companies rather than pursuing growth.
