Amid rising borrowing costs, private debt in South Korea attracts global fund participation
Amid rising borrowing costs, private debt in South Korea attracts global fund participation
Firms are chasing opportunities in South Korea. US-based private capital fund manager Apollo has entered into a joint venture with New York-based alternative investment manager Belstar Group to launch a credit business in Korea. Last September, Chicago-based private debt firm Monroe Capital opened its first Asia office in Korea. According to Preqin Pro, it has raised and managed 18 funds primarily focused on North America and Europe, and is now expanding into APAC.
Additionally, US private equity firms such as Carlyle Group, Bain Capital, and KKR already have offices in Seoul that are active in private equity and private debt fundraising and deal-making.
Private debt is fast-growing in the country, where assets under management (AUM) based in South Korea stand at $16.7bn as of December 2021, 69% higher than $9.9bn in December 2020, with $6.5bn in dry powder (Fig. 1).
Some of the largest APAC-focused private debt funds also aim specifically for exposure to South Korea. Bain Capital Special Situations Asia II fund, $2bn in size and closed in May this year, aims to fill capital gaps in the region, including those related to chaebol-driven mergers and acquisitions in South Korea. Apollo Management is currently raising a $1.25bn Asia-Pacific Credit Strategy fund in partnership with superannuation fund HostPlus.
Separately, Apollo-Belstar will raise $1bn for a credit fund that will lend to companies facing difficulties in fundraising due to rising borrowing costs. Lee Joonho, CEO of EMP Belstar in South Korea, believes that Apollo’s credit strategy will provide flexible interest rates and maturities, making it more competitive than offerings from banks.
Interest rates for new corporate lending rose to 3.84% per annum on average in June, the highest since February 2015. The Bank of Korea has been raising the base interest rate since August last year to combat skyrocketing inflation.
In competition with South Korea’s domestic private debt fund managers
These US private debt firms will be entering a relatively small private debt scene compared to that of their home country, but one that is already participated by several successful domestic managers. The number of active private debt fund managers in South Korea has more than doubled from 42 in 2018 to 86 now. The most prominent ones are Hana Alternative Asset Management, MBK Partners, IMM Private Equity, Glenwood Private Equity, STIC Investments, and VIG Partners.
South Korea-based fund managers have raised some of the biggest APAC-focused private debt funds in recent years (Fig. 2). Three broke the billion-dollar barrier: MBK Partners Special Situations II fund ($1.8bn, November 2021); Hana Alternative Asset Management’s HAAM M&A Loan Fund, ($1.2bn, December 2020); and IMM Special Situation I fund ($1.3bn, August 2017).
Fund managers that more traditionally deal in private equity have also entered the private debt space. Amendments to the Capital Market Act last year mean that South Korean private equity firms can now use different structures and investments if all their investors are institutions. These include mezzanine financing, a mix of debt and equity financing.
Yet, South Korea’s institutional investors prefer to look abroad
In the private debt space, South Korea’s domestic institutional investors still prefer overseas funds. These include US-based Ares Management, UK-based Intermediate Capital Group (ICG), UK-based CVC Capital Partners, and US-based Oaktree Capital Management, according to a survey by Korea Economic Daily.
Korean LPs seek exposure to private debt in North America and Europe to avoid concentration risk. National Pension Service (NPS) has increased its private debt commitment to KRW 1.95tn ($1.8bn), up from KRW 350bn at the end of 2020. Global fund strategies account for the largest individual share of its private equity and debt portfolio.
Other, smaller institutional investors also demonstrate preference for overseas fund managers. Yellow Umbrella Mutual Aid Fund, Korea Scientists & Engineers Mutual Aid Association (SEMA), and Military Mutual Air Association (MMAA) have committed $70mn, $60mn, and $30mn respectively to Chicago-based private credit manager Antares Capital’s $3.5bn private credit fund.
South Korea’s mature economy, favorable regulations, and tighter lending conditions have spurred private debt growth. In the current inflationary environment, global investors will increasingly commit to private debt, in Korea and elsewhere. Private debt AUM worldwide has expanded quickly, standing at $1.2tn as of December 2021, up 19% year on year and almost doubling in five years, according to Preqin Pro.
Discover the latest trends and developments in private debt in South Korea, Japan, and Australia in our report Private Debt in APAC.