South Korea kicked off 2023 with the country’s largest deal of its kind in the webtoon firm, underscoring the growth of K-content globally
South Korea kicked off 2023 with the country’s largest deal of its kind in the webtoon firm, underscoring the growth of K-content globally
South Korea started the new year with a record-breaking pre-IPO round. Kakao Entertainment’s blockbuster $966.3mn pre-IPO round on January 11 was larger than the annual aggregate venture capital (VC) deal value of $863.5mn recorded across 20 deals in 2021 (Fig. 1). Despite faltering technology markets in 2022, pre-IPO dealmaking volume in South Korea remained strong, with the 22 investments translating to a 10% year-over-year increase.
South Korea has the second-highest level of pre-IPO activity, behind only China in 2022, according to Preqin Pro (Fig. 2). This level of optimism contrasts with the current shift in investor preference for early-stage deals, as a market downturn typically shuts the IPO window for late-stage companies and delays upcoming exit plans.
K-content boom
Kakao Entertainment's KRW 1.2tn pre-IPO funding round is also the largest foreign investment in a South Korean content company to date, indicating high global demand for K-content driven by the success of Korean shows on Netflix.
Singapore's GIC and Saudi Arabia's Public Investment Fund (PIF) have each invested KRW 600bn in the entertainment firm. The company was valued at KRW 10.5tn post-money.
Kakao Entertainment said it plans to use the funding to improve its financial stability and expand through the acquisition of other entertainment companies, in preparation for a potential IPO later this year.
The landmark transaction is a dramatic turnaround from its failed attempt to raise $398.6bn last summer through a pre-IPO round (less than half the amount raised this time). The change this time could partly be attributed to renewed global recession fears arising late last year, prompting investors to search for more resilient investments that could withstand economic downturns.
In an interview with CNBC, CT Investments and Contents Technologies CEO Jangwon Lee said: “Content consumption, especially digital, is relatively resilient across recessionary and inflationary environments and longer term.” The Seoul-based investment firm debuted the first K-pop ETFs on the NYSE Arca exchange in September 2022.
K-content’s global fan base has grown significantly since the pandemic, as lockdowns led to a surge in demand for Korean dramas, music, and entertainment on streaming platforms such as Netflix, Viki, and YouTube.
In January, South Korea's Minister of Culture, Sports, and Tourism, Park Bo Gyoon, stated that K-content has become one of the country’s major exports and is gaining global appeal.
“As of 2021, the total export value of K-content ($12.45bn) exceeded that of home appliances ($8.67bn), electric cars ($6.99bn), and display panels ($3.6bn),” he said.
In recent years, the South Korean government has supported the K-content industry through funding, tax breaks, overseas promotion, and intellectual property rights protection. These initiatives aimed to foster the growth and global expansion of the industry, solidifying its position as a key export sector for the country.
Korean webtoon phenomenon
Behind Kakao Entertainment's appeal is its strategic position as one of the pioneers of webtoon. The term comes from the combination of ‘web’ and ‘cartoon’ and originated in South Korea in the late 90s as digital comics. They were first published on the country’s largest internet portals, Daum and Naver, in 2003 and 2004, respectively. This was a game changer that officially kickstarted the webtoon era. In 2014, Kakao Corp merged with Daum to compete with rival Naver, which has more than 60% of market share.
Despite existing for almost three decades, webtoon as a genre has only gained worldwide recognition in recent years. For the first time, combined sales in the South Korean webtoon industry surpassed KRW 1tn ($843.6mn) in 2020, representing a 64.6% increase from the previous year.
Globally, the size of the webtoon market is forecast to grow at a CAGR of 30.99% to reach $26.2bn by 2028, up from $3.7bn in 2021, according to market research firm Proficient Market Insights.
Kakao Entertainment is expanding its webtoon business overseas, including through the acquisition of US-based platforms Tapas Media and Radish Media in 2021. These acquisitions have opened up opportunities for the company to enter the fast-growing English-speaking webtoon market. Since 2019, it has partnered with DC Comics to release webtoons based on popular DC series like Batman, Superman, Wonder Woman, and the Justice League.
Webtoons have revolutionized the movie and TV industries. The success of webtoon adaptations has led to an increase in the number of original webtoons that are created with the intent of being adapted into other forms of media, further blurring the lines between traditional and digital content creation.
Some of Netflix’s most watched webtoon series include ‘Hellbound’ and ‘All of Us Are Dead’. Kakao’s successful webtoon-based TV series include ‘Itaewon Class’, ‘Moving’, and ‘Dr Brain’.
At the heart of webtoon’s business case is also the ability to acquire compelling original story-telling intellectual property that can be tailored for the big screens.
Kakao Entertainment’s IPO ambitions
As a subsidiary of tech giant Kakao Corp, Kakao Entertainment’s IPO ambitions follow its sister companies KakaoPay and KakaoBank’s successful listings on the Korea Exchange in 2021, which garnered strong demand from institutional investors. However, both listings are so far down by over 60% from their peak. This is partly due to prompt divestment of early KakaoPay investors as soon as lock-up periods expired, while KakaoBank has capped as one of the most underwhelming IPOs in the banking sector worldwide, plagued by parent Kakao’s service outage disruption.
In line with the global trend, the Korean IPO market slowed in 2022 after a strong 2021, as exits stalled amid uncertain stock market conditions and rising interest rates (Fig. 3). In 2022, only six IPOs debuted (down from 19 in 2021), all of which were backed by VC and none by private equity.
This year, the outlook for IPOs in the country is expected to remain sluggish, with high interest rates and investor concerns about valuations still key factors. Despite the challenges, some market watchers anticipate a recovery in the Korean IPO market in the second half of the year should market volatility stabilize.