COVID-19 redefines how to value Korean private companies

The COVID-19 pandemic has been a catalyst for changing the way of assessing the value of a privately-owned company in the private capital market in South Korea, said a veteran investment professional on Thursday.

The pandemic has accelerated both the demand and supply of services and products associated with the digital transformation and energy transition. This phenomenon triggers a bipolarization of target company valuation, Chai Jin-ho, executive managing partner at STIC Investments, said in a webinar hosted by the United Kingdom-based market intelligence firm Preqin.

“Since the pandemic, investor attitude toward asset valuation has been changing,” Chai said.

“The biggest change that I’m observing is the larger premium that investors are willing to pay for asset with high growth potential and discount on asset that are mature, in so-called, bipolarization of asset evaluation.”

Chai leads the large-cap fund operation for the Seoul-based private equity fund with 4.7 trillion won ($4.12 billion) in assets under management.

The veteran called on investors participating in the Korean capital market to accommodate flexible minds to digest the current macroeconomic performances and industrial trends altogether.

For example, STIC Investments has a track record of investing $94 million in Hybe, then known as Big Hit Entertainment, two years before the company went public in October 2020. The investment was made below the company‘s $800 million valuation, and its market cap is currently around $11 billion. STIC has divested all Hybe ownership in exchange for 941.6 billion won cash before July, double the valuation for Hybe‘s initial public offering, according to filings.

Chai said that Hybe, famous for being a management agency for boy band BTS, is good example of riding on the digital transformation, with a digital fan community platform that allows fans to digitally access artists’ content and products directly.

Also, STIC‘s $200 million investment in multinational mobility app operator Grab in July 2020 is in the spotlight as the Singapore-based company is looking to be listed on the tech-heavy Nasdaq bourse through a special purpose acquisition company.

This makes the case for the phenomenon where Korean privately held tech-driven companies seeking an IPO are valued much higher than traditional players.

For example, internet-only lender KakaoBank’s market value upon listing -- scheduled for August -- is expected to be larger than the combined market cap of traditional commercial banks, as its IPO valuation can reach up to 18.5 trillion won. Likewise, that of e-commerce firm Coupang, currently trading on the New York Stock Exchange, outstrips the combined market value of domestic traditional retail firms.

“We cannot rely on traditional valuation method or investment structures to make a success in investment,” he said.

“Assets that are directly linked to the digital transformation are given high valuation as demand for digital lifestyle is getting bigger. ... I expect both digital transformation and energy transition to last for a long time because these trends are affecting industries structurally.”

In terms of Korea‘s forthcoming regulatory change that will be effective from October -- allowing domestic private fund managers to manage private debt funds -- Chai said the news is a boon to the private capital market as more large Korean corporations may turn to private credit funds to source new capital at a lower cost. A recent example is the acquisition of a 49 percent stake in SK Lubricants by IMM PE‘s private credit operation.

Korea is one of the beneficiaries among Asia-Pacific nations as the private capital market momentum building in the region increases private capital investors’ focus.

According to Preqin data, the Asia-Pacific region‘s private capital assets under management came to $1.7 trillion as of September 2020, and $1.4 trillion was dedicated to private equity.

By Son Ji-hyoung (consnow@heraldcorp.com)