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Major countries in North Asia, including South Korea, Japan and China, are attractive markets for private equity with plenty of investment opportunities, Michael ByungJu Kim, co-founder and partner of private equity firm MBK Partners, said during his virtual interview with students from London School of Economics and Political Science (LSE).

The conversation, hosted by the LSE Alternative Investments Society on April 5, covered various topics, particularly factors that make the South Korean, Japanese and Chinese markets attractive from a private equity perspective and differences between private investments in Asia and the West.

Kim pointed to “dynamism”, a common characteristic seen in innovative firms like Facebook and Google, as what distinguishes South Korea from other markets.

“South Korea is the most connected country in the world and people pursue changes at all times,” he said. “This dynamism disrupts industries, creating new investment opportunities.”

Kim also said that it's an encouraging signal that entrepreneurship is on the ascent in Korea, which he expected to have a positive impact on the overall economy by helping to inspire young entrepreneurs to strike out on their own business. Kim expected both conglomerates and innovative entrepreneur businesses to play a critical role in the South Korean economy’s recovery from the Covid-19 pandemic.

The Japanese market is attractive in terms of the size of the economy, said Kim. “While China overtook Japan as the world's second biggest economy five or six years ago, Japan is still a large economy and a great market given the country’s vast wealth,” he said.

Kim focused on the fast-growing consumer markets in China, citing McKinsey data that a billion Chinese nationals will be joining the middle class in the next 10 years. He said, “That is a historically unprecedented burgeoning or growth of a middle class and it crystallizes our belief in domestic consumption in China.”

The private equity firm acquired eHi in 2019 and CAR Inc in March this year. Those are China’s No. 2 and No. 1 players in the rental car market, respectively.

Kim said: “There are 200 million license plates in China but there are 390 million drivers licenses. It's not just the almost two to one ratio of demand but the sheer volume of drivers looking for a car. It's 190 million that's three and a half times of the entire population of the UK and the 190 million of immediate potential customers for CAR Inc. That's our investment thesis.”

MBK Partners’ other investment portfolio in China includes education group Wendu and beauty and spa brand Siyanli.

Approach suitable for Asian culture and society

Regarding the differences between private investments in the East and the West, Kim stressed that Asian countries need to develop Asian-style capitalism. He said that all decisions should be made based on “the environments and circumstances of each market.”

“In the West, for example, cost savings on wages is a tool in a private equity GP's tool box. But this option is almost impossible in the Asian region, especially in South Korea, considering rigid job market liquidity and different social and cultural resonance,” said Kim, adding, “We have instead sought other ways to boost portfolio companies’ profit margins, such as by accelerating top-line growth through digitization.”

“A different approach also needs to be taken when it comes to leverage,” Kim said. “Highly leveraged transactions are common in the West, but in Asia, not only financial institutions but other stakeholders such as employees, customers and the government are considered before decisions are made and it is important for us to try to achieve harmony.” (Reporting by Hee-yeon Han)