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Value creation is essential for PEFs: experts

[THE INVESTOR] Private equity firms are facing growing pressure to discover their own value creation strategy to secure high investment returns from portfolio companies they purchase, according to PEF executives.

“Companies these days have many sources for financing. People even say PEFs and venture capital firms need to compete with banks. So now PEFs’ core role is shifting to creating value,” said Seo Jong-kun, head of Investment Division at Korea Growth Investment Corp. at Private Equity & Venture Forum, hosted by Asian Venture Capital Journal, in Seoul on Aug. 31.


Key value drivers include high-impact operational improvement initiatives to drive revenue enhancement, margin improvement and capital efficiency, said Chung Hoon-hwey, managing director of Morgan Stanley Private Equity, who attended the forum as a panelist.

He exemplified a buyout case in South Korea -- Monalisa, tissue and diaper maker in Korea, and its affiliate Ssangyong C&B -- which his company acquired in 2013.

“As soon as we bought the companies we had to make a major decision whether to build a new plant. Cash flow is a crucial factor for PEF, and it was a difficult to reach a decision but we opted for a new mill,” he said.

As a result, Monalisa and SSangyong C&B gained a foothold to expand their product portfolio to adult diaper and premium baby nappy. And it also helps the companies to meet the growing demand for baby products from Chinese consumers, Chung noted.

Chung also said that Morgan Stanley PE adopted an operating partner system, hiring a business management expert to increase operational efficiency of its portfolio firms, for its Korean unit about 1 1/2 years ago.

Kim Soo-min, a partner at Unison Capital, said his team mapped out value creation plans while sourcing a target firm.

“We had been determined to enter the Japanese market and takeover the global headquarters of Gong Cha Korea before we bought the Korean unit,” Kim said.

In July, Taiwanese milk tea franchise Gong Cha Korea signed a share purchase agreement to acquire a 30 percent stake in its global headquarters Royal Tea Taiwan in a deal worth some 100 billion won (US$89 million).

The Japan-based PEF Unison Capital acquired a 70 percent stake in Taiwanese milk tea franchise Gong Cha Korea in 2014.

By Park Han-na (hnpark@heraldcorp.com)
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