In Korea’s young, yet fast-evolving private equity market, the road to investment exits is the weakest link, fraught with difficulties and a lack of valid options, said veteran lawyers who have witnessed the local industry’s very inception and rapid growth over the past decade.

“By any measure, growth in private equity in Korea has been exponential -- the money committed, executed or the number of private equity houses registered,” Lee Haeng-gyu, a lawyer and partner at law firm Jipyong said in an interview with The Korea Herald.

“The exit environment, however, hasn’t caught up with that pace. Many private equity firms are now struggling to find an exit route for their investments,” he said.

Lee, together with a team of seasoned private equity lawyers at Jipyong, has recently published a book on Korea’s private equity market.

“Introduction to Private Equity Funds,” coauthored by four Jipyong members, including lawyer Chai Hee-suk ,and edited by Lee, is the first textbook approach to an industry that has only 12 years of history to record but a dizzying amount of changes to study, particularly in terms of rules and regulations.

“Unlike its origin in the developed financial markets, private equity in Korea began as a regulated industry,” explained Chai, who also joined the interview.

According to the regulator Financial Supervisory Service, Korea was home to 342 private equity funds as of the end of June, with a record 60.3 trillion won ($54.4 billion) in assets under management.

Private equity firms are only allowed to invest in equity stakes with the purpose of management participation, not in other asset classes such as real estate or distressed debt.

Those restrictions are likely to be removed going forward, as Korean regulators move to give greater freedom of investment to private equity firms, while still keeping a tap on the managers who run them.

“In recent years, we’ve seen a lot of regulatory easing, but there definitely is more room for easing as the market advances,” Lee said. “We expect the regulatory authorities to lift many current regulations on private equity investments. That’s what they say they will do.”

In the early stage, private equity firms had no track record to prove their worth, but as time went by, the field began to get some definition of who’s good at what, the lawyer said.

The biggest issue confronting Korean private equity firms is the limited exit opportunities, both Lee and Chai stressed.

“Right now, with virtually no secondary market for private equity investments, finding a way to divest is very difficult,” Chai said.

The final and most important stage of a fund’s life cycle is when a private equity firm sells an asset it bought with the aim of unlocking its unrealized value, ideally at a profit.

An exit can be achieved via an initial public offering, a deal with a new buyer or the secondary market where funds buy and sell their portfolio investments.

The first two options are becoming increasingly tough in light of a sluggish stock market and tough economic and business environment at home and abroad, the lawyers said.

To really open up the exit door for private equity firms and facilitate further growth of the industry, Korea needs a market where investors can trade their interests in private equity funds in case of an unanticipated need for liquidity.

“It is a very urgent issue. Private equity funds have a contractual lifetime (of five to 10 years). Without a secondary market, many homegrown funds will be forced to liquidate their investments when the time comes -- be it at a profit or a loss,” Lee said.

By Lee Sun-young (milaya@heraldcorp.com) 

This is the second in a series of articles looking into Korea’s private equity world and its key players. -- Ed.