2014 ANNUAL LETTER

We started out with a vision:
to create the leading Asian private equity firm,
owned and operated by Asians.

To Our Investors

TEN YEARS AGO, in March 2005, we started out with a vision: to create the leading Asia private equity firm, owned and operated by Asians. We have made significant strides toward that goal. Today, MBK Partners is the largest independent private equity group in Asia, with $8.2 billion in capital under management and supported by over 60 leading institutional investors from around the world. We have made 21 investments, 13 of which we have exited or partially exited, totaling $3.0 billion in proceeds. We have four offices, in Seoul, Shanghai, Tokyo and Hong Kong, with 35 investment professionals. Our portfolio companies (including inactive) have, in aggregate, 41,065 employees, $28.7 billion in revenues and $3.9 billion in EBITDA, with adjusted EBITDA margin of 32.0%.

We have made this progress while remaining steadfast in our focused strategy of pursuing buyouts only in North Asia, using our local advantage. We are in only one asset class, buyouts; 19 of our 21 investments have been for control or joint control. We have invested in only our home markets of Greater China, Japan and Korea. Over 70% of our completed investments were sourced, through our local relationships, on a proprietary basis. Finally, about half of our investments have been in our two core sectors, telecommunications and media and financial services. We have stuck to what we know, and this discipline has become a hallmark of our investment approach.

While staying focused in strategy, we have demonstrated leadership in our markets with innovation and size. In our 10-year history, we recorded a number of “firsts” and “largests”:

  • Largest first-time private equity fund in Asia, at $1.56 billion;
  • First fund with international LPs to register as a “domestic PEF” in Korea;
  • Largest buyout in Taiwan, of CNS;
  • Largest buyout in Korea, of C&M (and first billion-dollar LBO loan in Korea);
  • First buyout of a Singapore-listed Chinese company, of Luye Pharma;
  • Largest take-private transaction of a TSE Mothers-listed company, USJ;
  • First buyout of a Korean company out of court receivership, Coway; and
  • Largest financial services buyout in Korea, of ING Life Korea.

It is noteworthy that many of the milestone transactions were completed in our favored areas of telecom/ media and financial services, both regulated industries where we, as a local player, have a competitive advantage and are frequently the only qualified buyer. Our localness and twin sectoral focus are the warp and weft of our business, and we believe it will continue to serve us well.

We mark our decennial anniversary with a landmark year in exits. In the last 12 months, we completed sevendistributions, totaling $1.4 billion in proceeds:

  • Sale of Techpack, for $226.1 million, for a 1.84x MoE and 11.0% IRRs;
  • Sale of Yayoi, for $417.9 million, for a 1.58x MoE and 6.5% IRRs;
  • Sale of GSEI, for $356.0 million, for a 2.77x MoE and 24.2% IRRs;
  • Partial sale of NCI, for $74.3 million, for a 0.94x MoE and 17.6% IRRs (¹)
  • Distribution on Komeda through a leveraged recapitalization, of $75.2 million, for a 0.58x MoE and 50.3% IRRs(¹) and
  • Distribution on CNS, through a leveraged recapitalization, of $81.7 million, for a 0.26x MoE and 19.5% IRRs(¹)
    (together with the $265.9 million distribution in 2012, total 1.12x MoE and 19.5% IRRs.(¹)

There is more to come. We are working on several additional exits of investments in Funds I and II. A year from now, we should be in a position to substantially liquidate Fund I. Our active investments created significant value across the portfolio in 2014. We believe our approach of acquiring market leaders in industries we know and, in partnership with best-in-class management teams, executing operational improvements is a proven value creation path. Our portfolio has continued to showstrong, steady growth in value, through market ups and downs. Over the last three years, the portfolio value of Funds I and II, as measured in quarterly fair market marks, has increased nearly every quarter and consistently outperformed the regional public markets:

Both Funds I and II have vastly outperformed the regional index; on a combined basis, they doubled the index performance, 63.9% vs. 31.2%. In the past year alone, their outperformance of the regional index increased by 15.8%. Similarly, over the last two years, the still young Fund III outperformed the index, 70.0% vs. 28.9%.

Even as we note our accomplishments to date, we are aware of how much farther we have to go and the challenges we face. The past year saw what many described as an “asynchronous recovery” globally, with the U.S. economy expanding robustly, Europe lagging and Japan going sideways. All economic roads may go through China, but China’s economic slowdown, at 7-8% GDP growth, augured a “new normal.” The ongoing uncertainty in the global markets, combined with surging liquidity and near-zero interest rates, led to a renewed focus on North Asia. Global GPs, armed with massive dry powder from a fresh round of fundraising in 2013-14, returned in full force to Japan and Korea especially. The capital tsunami hitting our shores put significant upward pressure on asset prices. The result was an increasingly tough investment environment, in which we were priced out of many competitive situations.

We were, accordingly, judicious in our deployment of investment capital. We lost or walked away from more opportunities in the past year than in the previous three years combined. We agreed to one investment, a joint-control acquisition of Apex Logistics International, a leading air freight forwarder in China, for $85.0 million. This investment was representative of the deals we seek to do in China: joint control with the founder and CEO, proprietary sourcing, safe, cycle-resistant business and low valuation (approximately 7.5x EBITDA). But highly attractive opportunities like Apex Logistics were the exception rather than the rule.

In general, we were more comfortable being sellers than buyers in the intensified competitive environment of the last year. We do not see the supply/demand imbalance changing anytime soon. Our conviction, however, is that proprietary deals are of lower valuation and often higher quality. And we believe our local relationships are the most powerful tool for securing proprietary deal flow. Our localness continues to be what defines us, and what separates us from the pack.

As we look ahead, we have compelling reason for optimism, despite the challenges. As we foresaw 10 years ago, the center of gravity of the world’s financial markets is shifting to Asia. The exception is the U.S. market, whose resilience and dynamism know no bounds; its leadership role in the global financial markets will continue unabated. The private equity markets in North Asia are outpacing growth in the rest of the world, though the growth may be uneven. Korea and Japan, despite a slowdown in 2014, are established as the twin pillars of buyout activity in the Asia region. China is developing into a bona fide buyout market in addition to being a growth capital hub. Strategic buyers, armed with cash surpluses, are increasingly acquisitive, and the regional equity markets, especially the buoyant Japanese market, are reopened for public exits. Capital is no longer a constraint in Asia; credit is cheap and abundantly available. Global GPs have a renewed focus on North Asia, and it is intensifying competition. But the competitive advantage is accruing to the local GPs, who are capturing the lion’s share of the quality proprietary deal flow. As history has shown in other areas, Asians will lead Asia in private equity.

The core senior team that cofounded MBK Partners is still together - older, a bit wiser - now having invested together for over 15 years. With such cohesiveness at the top, our organization has been extremely stable, with virtually no turnover in recent years. As an independent firm owned and operated by Asians, we are succeeding in not only attracting but also retaining the best and brightest in our home markets. In keeping with our practice of developing from within, Daisuke Ikeda was promoted to Managing Director this year. A wise man said that it is easier to build a good company than to maintain a good company. As our firm grows in size and matures, we will continue to focus on the core values that bind our special corporate culture, teamwork, integrity and excellence (“TIE”). We will also be vigilant as ever about protecting the good name of our firm and of our investors. In our history, we have never been involved in any legal or regulatory proceedings or investigations (other than regular audits by regulators), and we are committed to keeping it that way.

With a differentiated strategy, an experienced and cohesive investment team and a track record of consistently superior returns, we believe we have built over the last 10 years a rock-solid foundation for leadership in Asian private equity. We are grateful for your support over the last decade. We have a particularly sophisticated investor base, and we are proud that nearly a third of you has coinvested alongside us in several investments. We look forward to continuing our special partnership for decades more to come.

(1) Including FMV for unrealized portion
Michael B. Kim
Partner
March 15, 2015