A leading North Asia private equity firm,
owned and operated by Asians.
To Our Investors
TWO THOUSAND EIGHTEEN was a historic year for MBK Partners. We returned to you $4.1 billion, the highest annual total in the Firm’s history.
Nearly everything, not only distributions, went right for us in the past year. We completed fundraising for our inaugural Special Situations Fund, at $850 million, surpassing the target size. We deployed $2.4 billion of capital in 14 investments across Buyouts and Special Situations. All of our fund portfolios accreted significant value (as discussed below). Most notably, our distributions featured the landmark exits of CNS, Orange Life (formerly ING Life Korea) and Coway, three of the largest exits in Asia to date.
We accomplished all this despite an exceedingly challenging environment. The U.S.-China trade war engendered global economic uncertainty. Trade tensions, Brexit concerns and rising rates led to pronounced volatility in markets around the world. In the fourth quarter alone, the S&P 500 Index plummeted by 14.0%. Nowhere was market volatility more severe than in North Asia. The Shanghai Composite fell 24.6%, the Nikkei 12.1% and KOSPI 17.3% in 2018. Asian high yield spreads spiked to 760 basis points in December, levels not seen in nearly three years.
Make no mistake: the ongoing U.S.-China trade conflict is bad for our business. But our portfolio of companies has continued to perform robustly. As we have emphasized over the years, our portfolio is built on resilient businesses grounded in domestic consumption, which we believe substantially insulates us from the vagaries of export flows. We have constructed a “fortress portfolio,” sturdy and defensible against economic slings and arrows. Our sustained strong performance in the face of difficult market conditions is testament to the efficacy of sticking with what we know: domestic consumption plays in our home markets of North Asia.
In the past year, we made six distributions, totaling $4.1 billion. Our distributions showcased all three legs of the traditional exit tripod: leveraged recapitalizations of DMT and Orange Life; block trade sale of Coway; and trade sales of CNS, Orange Life and Coway.
Figure 1: Record Distributions
We are good at large exits. We pursue selectively large cap investments, and we create value over a long period of time, typically five to seven years. Of our three recent full exits, Orange Life generated 27% IRR and 2.7x multiple of equity over five years and Coway 26% and 3.3x over six-plus years. CNS, prolonged by regulatory approval difficulties, recorded 10% and 2.2x over 11 years. While we strive for both high IRRs and MoEs, we prioritize MoE because we believe our job is to deliver maximum dollars to our LPs. As a wise investor said, “It’s the dollars, not percentages, that puts food on the table.” The three exits returned to the Funds and LP coinvestors $5.3 billion in total. We have exited more major investments, and we believe returned a greater amount of dollars, than any other GP in Asia.
Even as we exited several investments, our active portfolio has continued to generate strong growth in EBITDA. EBITDA increase is the foundation of value accretion in our Funds. Of our three active Buyout funds, Fund II has nearly tripled in value (as reflected by the sum of realized and remaining fair market values) since its inception. Fund III has nearly doubled in value, and our still growing Fund IV has increased by half. As discussed in the past, I believe the growth in our Funds’ value measured against public market indices over time is a meaningful and powerful indicator of GP performance. All three Funds have significantly outperformed the North Asian public markets over their fund life. Fund II has increased 193.7% versus 96.7% in the public markets; Fund III 87.6% versus 23.3%; and Fund IV 30.8% versus -3.2%:
Figure 2: MBKP Fund Performance vs. North Asia Public Markets
On an absolute returns basis, the average marks across our five funds at year-end 2018 were gross IRRs of 16.9% and MoE of 1.9x. Fund I was marked at 1.5x for an IRR of 7.5%, Fund II at 2.9x and 26.5%, Fund III at 1.9x and 22.6%, Fund IV at 1.3x and 20.4% and the still nascent Special Situations I at 1.1x and 18.0%. All of our seasoned funds are squarely top-quartile performers in their vintage.
Figure 3: Summary Fund-by-Fund Performance (Dec. 31, 2018)
We continued a brisk investment pace in 2018, despite the challenging environment. We deployed $2.4 billion in capital, in five buyouts (and four add-on investments) and five special situations investments. In Buyouts, we acquired Shanghai Siyanli Industrial and e-Hi Car Rental (pending closing) in China, Kuroda Electric and Godiva (pending closing) in Japan and Golfzon County in Korea. We also completed add-ons for Apex, Tasaki, Accordia and NEPA. We continue to favor add-ons as proven paths to value creation.
In Special Situations, we were even more active. This was by design, and some propitious timing. As I discussed in last year’s letter, we launched Special Situations in late 2017 in anticipation of market dislocation in North Asia. We targeted primary and secondary credit and non-control, structured equity opportunities. A minor crisis in North Asia in the latter half of 2018 validated our strategy, throwing off an extraordinary volume of distress opportunities. Winston Churchill advised, “Never let a good crisis go to waste.” We capitalized on the mini-crisis, making five investments in the past year. We invested in Xeno II, LinkDoc and OCI Investment in China, Green Leisure in Japan and Franchise Services Asia in Korea. These investments highlighted, in addition to geographic dispersion, the wide range of security types available, from senior loan and convertible bond to preferred and common equity. In little over a year since embarking on our new strategy, we have invested nearly two-thirds of Fund I.
Special Situations, like Buyouts, is firmly rooted in our localized strategy. Our niche is North Asia, our competitive advantage is localness and our continued success rests in our ability to scale our business within our niche. This past year, our “niche with scale” approach enabled us not only to weather the market volatility but capitalize on it. We executed our strategy of using our localness to generate proprietary deal flow while levering our two fund platforms in deal sourcing as well as due diligence, financing and operations. The proof is in the Special Situations portfolio pudding – of its six investments, two were referred from and one an investment (at a different capital structure level) alongside Buyouts.
Since our founding in 2005, MBK Partners has sustained a strong, steady trajectory of growth. We’ve increased our capital under management to nearly $16 billion today and equity invested to $12.9 billion in 38 companies (including exited). We added 16 investment professionals in the past year, the lion’s share in Special Situations. In the last two years, we increased our investment staff by half, to 59 people. Nearly all of our investment team members have both local experience and Western multinational training, an optimal combination for what we do. And they all remain bound by our “TIE” ethos, built on teamwork, integrity and excellence.
As the Firm has grown, so has the need for strong leadership. We elected three Partners this year: Daisuke Ikeda in Tokyo, Jinha Lee in Seoul and Hongfei Yu in Shanghai. They constituted the largest Partner class in our history. To help manage our burgeoning portfolio, we hired our first Operating Partner, Youngsoo Cha, a 33-year veteran of the Samsung Group. We plan to expand the Operating Partner group in the coming years. Finally, we have made strides in diversity and inclusion, with CFO Inkyung Lee and General Counsel Christie Tang as key members of our senior management (pictured below). We are redoubling our efforts to advance this organizational agenda.
As an industry leader in North Asia, we increasingly recognize the importance of government policy in our business. Policymaking is not part of our job description, nor is there a role for us in regional geopolitics or domestic politics. It is undeniable, however, that the political and regulatory environment influences, and at times materially impacts, the way we do our business. Our experience is that rational, consistent and market-supporting or at least market-based policy is essential to doing good investments. When we have good policy, as in the case of the Orange Life investment and exit, the process is frictionless and the result salutary; when we do not, or when policy is tainted by politics, as in the CNS sale attempts, there is a drag on the outcome. At this maturation stage of the private equity industry in our region, we see a mounting need for GP leaders to forge a more collaborative relationship with government. We have strived, in our way, to give more input to local economic policy and market practices.
Two keystones of our policy dialogue are corporate governance and tax regime. Good governance – transparent, accountable and free of conflicts of interest – is at the heart of what we do as investors, and where China, Japan and Korea historically have been weak. They are catching on, with some cue from people like us. In Japan, the Abe Administration promulgated a new corporate governance code entailing return on equity targets, more comprehensive disclosures and increased number of independent directors on company boards. President Moon in Korea has instituted chaebol reform measures aimed at eradicating conflicts of interest by owner families and unfair intra-group business practices while fortifying minority shareholder rights. A rational tax system with consistent enforcement is another linchpin of our business. We have engaged in a thoughtful dialogue with policymakers and government agencies to press for commitment to a fair, transparent and consistent tax regime. MBK Partners is no longer just a participant in the market, or a beneficiary (or victim); we are, increasingly, an agent of change. We will continue to endeavor to make a “technology transfer” of global best practices and push for advancement of and adherence to market-based policy.
The challenge of having a stellar year is to replicate it the following year and the year after. There are uncertainties large and small heading into the new year. Foremost is a looming global recession. Competition threatens to intensify and asset prices driven up in Asia, on the back of over $96 billion in accumulated GP dry powder. Even the distress segment, where we had wide open lanes last year, is getting more crowded. Still, we are more well positioned than ever to continue to deliver superior results. We are armed with nearly $2 billion in available capital, and we now have a scalable platform across Buyouts and Special Situations. We have vast value still to be realized in our portfolio. Our investment team is stable and cohesive, led by a seasoned, more diverse senior management. We are buttressing our leadership position with a more collaborative relationship with government. Finally, we have the advantages of 14 years of investment experience and franchise establishment in our home markets which we will press for the benefit of our Funds.
All of us at MBK Partners remain committed to our partnership with you and to our goal of being good stewards of your capital.
March 15, 2019