Despite managing $61 billion in assets, South Korea‘s private equity industry is considered a relatively immature market, compared to global financial hubs like London, New York and Hong Kong. The segment, however, has growth potential if it is able to improve transparency by addressing issues, including a lack of standardized reporting practices and inconsistency in the portfolio valuation methodology by private equity fund managers, according to Preqin, a London-based financial data provider, on Friday.

The financial data firm recently unveiled the results of its first Korea-specific project to analyze PE fund performance here via a report dubbed “South Korean Private Equity: Early Findings on Fund Performance.” The project is aimed at laying a foundation to create a performance benchmark for Korea-focused PE funds.

“The Korea PE industry, although growing, remains at an early stage in terms of performance transparency,” read the report released Thursday.

Preqin added that the Korean PE market lacks prevailing PE benchmarks that are widely accepted on a global level. This is attributable to the lack of standardized reporting practices largely due to a bargaining power of limited partners -- or backers to PE funds like institutional investors -- over fund managers to negotiate fund terms. In the meantime, Korean investment houses stop short of employing a uniform valuation technique for assets, and instead use different ones including discounted cash flow analysis, market comparable methods and others applying fair valuation methodology.

Such indication “further complicates the creation of transparent performance benchmarks, despite a clear need in the industry,” the company wrote in the report.

The report also points to Korean PE funds’ trend to source investment deals before an investment vehicle is created, which led to a unique penchant for single-deal funds. According to Preqin, single-deal funds, designed to invest in a single target portfolio, took up some 27 percent of all funds in Korea, which shows contrast with 2.6 percent globally as of last week.

The trend “stems from Korean LPs’ tendency to check an investment target before their fund commitment,” Emilie Kim, associate of Asia Fund Manager Data at Preqin, said in a teleconference with Korean reporters.

Preqin said behind the project is a growing global investor interest in the Korean PE market and the following industry demand for transparent data to assess fund performance. The company teamed up with Korean private equity fund managers under the Korea PEF Association.

“The benchmark project is designed to maximize Korean private equity market’s potential,” Kim said.

”As this materializes, global limited partners will be able to keep track of Korean private equities’ performance over the past decade, so that they could have a better understanding in the market.”

The estimates were based on the sampling of 116 PE funds that first began investing in between 2009 and 2019, which represent 40 percent of the market in terms of total fund commitments. The early sampling shows Korea-focused PE funds have consistently returned above 10 percent on a median net internal rate of return basis for funds that first invested in between 2009 and 2015.

Preqin was founded in 2003 and has since covered alternative assets data of over 35,000 companies across the globe.

By Son Ji-hyoung (consnow@heraldcorp.com)