We started out with a vision:
to create the leading Asian private equity firm,
owned and operated by Asians.
To Our Investors
WE STARTED 2015 as the Year of Exits. We finished it as a record year in realizations, totaling $2.7 billion in proceeds. The market environment was hospitable to exits, as well as investments selectively, for most of the year. Buoyant public markets enabled a spate of market outs, while strong corporate earnings facilitated a record volume of trade sales. In the latter part of the year, a tightened US monetary policy, signaled by the Fed’s interest rate hike in December, coupled with historically low oil and commodity prices, led to turbulence in the markets globally. China also sneezed, as its GDP growth slowed to 6.9%, and the rest of the world caught a cold. The decelerating growth augured a new normal for China, and it was accompanied by economic rebalancing, with domestic consumption emphasized over export-led output. Japan, in the face of the slowing effects of Abenomics, launched a series of “game changer” reforms in corporate governance, highlighted by the promulgation of the Corporate Governance Code in June. Korea also experienced a softening in its macro fundamentals, even as the Park administration refocused on its chaebol reform drive and corporate sector restructuring.
Amid the recent volatility, we believe the markets moved, and are continuing to move, our way. The salient trends in North Asia – domestic consumption growth, corporate governance reform, change-in-control restructuring – have guided the private markets toward our strategic bailiwick. We have remained steadfast to our strategy of focusing on buyouts, control situations with strong governance, with emphasis on domestic consumption plays. Our experience and leadership in these core areas served us well in 2015, in exits and investments alike. We had the most productive year in our 11-year history. Over the past year, we had nine completed or pending realizations, totaling $2.7 billion in proceeds:
- Partial sale of New China Life, for $74.3 million, for a 0.94x multiple of equity and 22.4% IRRs;
- Distribution on Komeda in Japan through a leveraged recapitalization of $74.9 million, for a 0.58x MoE and 48.5% IRRs1;
- Distribution on CNS in Taiwan through a leveraged recap of $146.8 million, for a 0.47x MoE;
- Sale of CNS (pending), for $2.1 billion, for a 1.62x MoE (together with the $414.2 million in distributions to date, total 2.94x MoE and 15.7% IRRs);
- Exit of Tasaki in Japan through a public offering, for $237.8 million, for a 2.96x MoE and 17.2% IRRs;
- Control sale of 51% of USJ, for $608.7 million, for a 3.32x MoE (together with $299.6 million in distributions to date, total 4.95x MoE and 36.9% IRRs1);
- Sale of HK Savings Bank (pending) in Korea, for $158.1 million, for a 1.16x MoE;
- Sale of Beijing Bowei in China, for $13.0 million, for a 1.17x MoE; and
- Distribution on ING Life Korea through a leveraged recap of $119.8 million, for a 0.32x MoE and 42.7% IRRs1.
We also completed or committed to four investments:
- Acquisition of Apex Logistics, a leading air freight forwarder in China, for $84.5 million;
- Add-on investment in NCI for $75.0 million;
- Acquisition of Homeplus, the leading hypermarket-supermarket player in Korea, for $6.15 billion; and
- Acquisition of Doosan’s Machine Tools business (pending), the largest machine tools operator in Korea, for $881.5 million.
As important as our exits was the significant value we created across our portfolio of active investments in 2015. We believe our approach of acquiring market leaders in industries we know well and, working hand in glove with best-in-class management teams, executing operational improvements is validated by the value creation results. Our portfolio has continued to show strong, stable growth in value, through market ups and downs. Over the last six years, the value of our seasoned Funds I and II, as measured in quarterly fair market marks, consistently outperformed the regional public markets:
Strong, Stable Growth in Our Portfolio Value vs. Public Market Indices2
Funds I and II combined outperformed the regional index by over four times, 52.3% vs. 13.0%. The younger Fund III has also vastly outperformed the index over the two and a half years of its life, 43.5% vs. 22.2%. With our recent exits, we have substantially realized Fund I, with the notable exception of C&M. In a sign of a mature portfolio in Fund II, we are facing our first investment loss in Young Hwa Engineering. The rest of the Fund II portfolio remains robust. As several more investments in Funds II and III bear fruit, we expect to have a busy harvest season.
The continued strong deal activity in our markets, in both investments and exits, we believe is ushering in a period of secular growth in private equity in North Asia. Recent activity indicates North Asia has decoupled from the U.S. market and global economic cycles and is moving on an independent growth trajectory. Korea in particular has been a bulwark against global downturns, recording in 2015 the largest volume of private investments in its history. The Homeplus transaction, completed in October, both demonstrates the increasing secularity of the Asian market and represents the kind of investment we seek to do. The second largest hypermarket operator and one of the largest multi-channel retailers in Korea, with $7.6 billion in revenues and $696.4 million in EBITDA and the strongest profitability in its sector globally, Homeplus was a prized asset which became available with U.K. parent Tesco’s financial troubles. We prevailed in the limited competitive process, despite not offering the highest price, with speed to closing and funding certainty. Our partnership with eight of our major LPs as coinvestors allowed us to compete against global buyers with greater capital and resources. Our relationships with local banks allowed us to secure effectively exclusively over $3.8 billion in senior loans (the largest LBO facility in Korean history) and an additional $0.62 billion in mezzanine financing. We were the beneficiary of a liquid financing market in Korea at a time when the U.S. LBO financing market was all but frozen; but it was our localness, our traditional competitive advantage, that clinched the critical local funding to complete the largest buyout in Asian history.
As we begin 2016, we face, to be sure, challenges new and old. The recent deal activity, especially in large buyouts, has led to a renewed focus by global GPs on North Asia. Our competitors are returning to Japan and especially Korea to ride the corporate restructuring wave, private equity’s version of hallyu. The burgeoning capital at their disposal continues to exert upward pressure on pricing. Public market windows for market exits are mostly closed in China while open in Japan and Korea. In this market, we believe MBK Partners stands in a position of strength and leadership. Today, we are the largest independent private equity group in Asia, with over $10.1 billion in capital under management and support from over 60 leading institutional investors around the world. We have made 24 investments, 17 of which we have exited or partially exited. Our portfolio companies (including inactive) have, in aggregate, 284,692 employees, $38.7 billion in revenues and $4.8 billion in EBITDA. The core senior team that co-founded MBK Partners is still together, with over 16 years of experience working and investing as a group. In keeping with our practice of developing from within, Ken Kagasa, co-head of Japan, was promoted to Partner this year, becoming the eighth Partner. With cohesiveness at the top and as an independent firm run by Asians, we continue to not only attract but also retain the best and brightest in our home markets. In our history, we have never been involved in any legal or regulatory proceedings or investigations, and we are committed to keeping it that way.
We started out in 2005 with the vision of creating the preeminent Asia private equity firm, owned and operated by Asians. We have stayed focused on that goal, resisting “strategy creep” as well as geographic expansion and asset class diversification. Our approach has been simple and constant: buyouts in North Asia. As Leonardo da Vinci said, “Simplicity is the ultimate sophistication.” With our simple, focused strategy, an experienced and cohesive investment team and a track record of consistently strong returns, we are poised to build on our leadership in Asian private equity this year and beyond. You have our commitment that we will work hard as ever to continue to earn your trust and support.
(2) Median of KOSPI, NIKKEI, Shanghai Composite Index and TAIEX
Source: Bloomberg, as of Dec. 31, 2015
March 15, 2016