As Korea's traditional private equity investors face growing challenges and invest less in the asset class at home, small domestic companies are increasingly looking overseas for funding after years of government support.

“These suppliers have good product, leading technology. They can’t market themselves, however. They’re poorly managed. There are giant companies outside of Korea that would be happy to work with them,” Kim Soomin of Japan’s Unison Capital told AsianInvestor.

Such companies are keen to diversify their customer base by expanding abroad, because it is becoming increasingly risky to rely only on sales from the big conglomerates, or chaebol, such as Samsung Electronics, he added. 

The country's economic development was spearheaded by such groups. But as this export-driven model of growth runs out of steam, small and medium-sized enterprises (SMEs) are gaining importance as job creators and sources of entrepeneurship.

Indeed, President Park Geun-hye has embarked on a deregulation drive to support SMEs in a bid to create a second 'miracle on the Han River'.

Four types of LP – public pension funds, private pension funds, life insurance companies and banks – are the key institutional PE investors in Korea. However, they face growing challenges when investing in the asset class. 

For banks, PE assets don’t match their short-term liabilities, Kim said. And new risk-based capital rules for insurers mean PE investment requires a capital ratio of 4%, which is higher than that required for public equities.

“If an insurer’s balance sheet is in so-so shape, PE becomes a burden. So only a handful of healthy insurance companies can afford to invest in it,” Kim noted.

What’s more, because pension funds’ liabilities are rising faster than their assets, they are having to meet their cash obligations, he added. “A long-term, illiquid strategy like PE doesn’t suit them." 

“We’ve seen several pension funds change over the past few years; they used to be much more aggressive investors but now they’re pulling back. And the 2005-06 vintage years, when the biggest investments were made into local PE, have turned into a big headache.”

The Organisation for Economic Co-operation and Development forecasts that Korea will have one of the oldest populations of member countries by the middle of the century, just behind Japan, Italy and Greece.

As well as these investor challenges, Kim sees hard times ahead for many general partners because the nature of PE investing is changing.

“A few years ago – let’s say four years ago – if you put your nametag on your forehead and went to local LPs, you’d get money,” he said. “But now there’s a new process to shake things up. LPs [limited partners] are investing smarter.”

Kim forecasts that many GPs' business models will come under pressure as a new generation of domestic PE players is forging a more sophisticated approach to investing, he added. 

“Guys like Ahn Sanggyun at Anchor Equity Partners [formerly of Goldman Sachs' private investment group], Scott Hahn [ex-Morgan Stanley private equity]."

A longer interview with Kim Soomin appears in the forthcoming (September) issue of AsianInvestor magazine.