2019 Annual letter

A leading North Asia private equity firm, owned and operated by Asians.

To Our Investors

FIFTEEN YEARS AGO, we founded MBK Partners on an idea: to bring Western-style buyouts to Asia. Our aim was not merely to disseminate a new technology but to improve it by customizing it to the Asian market and culture. We developed, and refined over the years, a distinctly Asian investment model, based on deep localization and partnerships with sellers and management. Our pioneering approach has had an impact on the way investments are done in North Asia to this day, even as it has driven our industry-leading performance in the region.

Consistently strong results have been a hallmark of MBK Partners over the past 15 years. 2019 was no exception. We delivered superior results and reached milestones in our key priorities in the past year. We continued to lead the way in returns performance in Asia, with seven distributions, totaling $3.5 billion. We made 12 investments across Buyouts and Special Situations, deploying $2.3 billion, the highest annual amount in the Firm’s history. We also launched and substantially raised Buyout Fund V, soon to close at around $6.5 billion. Our record flagship fund raise was supported by “re-ups” by nearly all our major LPs. Lastly, we welcomed our first female Partner, the latest testament to our organizational commitment to diversity and inclusion.

We achieved these results despite persistent headwinds in the markets. The U.S.-China trade war continued unabated, with barely any progress in negotiations from beginning to end of 2019. The Japan-Korea political row and the Hong Kong protests weighed on the North Asian economies. GDP growth slowed to 6.1% in China, 0.8% in Japan and 2.0% in Korea. This moderate growth was buttressed in large part by fiscal stimulus packages from governments. The major market indices in the region finished in positive territory for the year, despite increased volatility. Shanghai Composite gained 22.3%, Nikkei 18.2% and KOSPI 7.7%. With the new year has come an immense new threat, the COVID-19 viral outbreak. Spreading alarmingly rapidly from Wuhan, China, to Japan and Korea and many other parts of the world, COVID-19 comes in a vulnerable place at an inopportune point in the global business cycle. The adverse impact of the COVID-19 shock on a weakening global economy will be significant and far-reaching; the North Asian economies are already experiencing an unprecedented disruption.

In the uncertain environment of 2019, we continued our march of exits. We sold Coway to Woongjin, for multiple of equity of 3.3x and IRRs of 26%, and Orange Life to Shinhan Financial Holdings, for 2.7x MoE and 27% IRRs. Early this year, we completed the sale of Daesung Industrial Gases to Macquarie, for 2.1x MoE and 32% IRRs. These sales represent three of the five largest exits in Asia in the last 12 months. We also completed leveraged recapitalizations of Daesung Industrial Gases (prior to full exit) for $359 million and HKBN for $100 million, and we made interest distributions of $42 million from OCI and Xeno. All told, we realized $3.5 billion in proceeds.

By nearly any measure, MBK Partners is the leader in realizations in Asia. In the past 15 years, our realized proceeds total $12.1 billion (including LP co-investment proceeds), the largest amount among Asian GPs. As we have emphasized, we believe our primary job is to deliver maximum dollars to our LPs; we continue to prioritize it over other performance objectives. Even on the basis of relative performance metrics, including notably distributions-to-paid-in capital (DPI) and aggregate capital returned-to-capital raised, MBK Partners is the clear leader among our peers. No one in Asia has done a better job than in returning money to LPs.

Our strong performance has been consistent across our funds. We have continually outperformed industry benchmarks in both total value-to-paid-in capital (TVPI) and DPI. All three active MBK Partners Buyout funds, Funds II, III and IV, are top-quartile performers, in both TVPI (globally) and DPI (in Asia). In recognition, MBK Partners was ranked by Institutional Investor as the “Most Consistently Top-Performing Buyout Fund Manager” in the world, along with four other managers, in 2019.

Our “fortress portfolio” of companies, built on a sturdy domestic consumption foundation, has weathered the recent storm well. The companies collectively have shown consistent growth in EBITDA, the driver of value accretion in our portfolio. Of our active Funds, Fund II has nearly tripled in value (as reflected by the sum of realized and remaining fair market value) since its inception. Fund III and Special Situations I have doubled in value, and the still young Fund IV has gone up by half. We view fund value accretion over time versus public market indices as a meaningful performance indicator. All four of our funds have significantly outperformed the North Asian public markets over the period of their fund life. Fund II has increased 190.1% versus 95.4% in public markets; Fund III 103.9% versus 54.1%; Fund IV 51.0% versus 1.7%; and Special Situations I 102.7% versus negative 7.8%.

Figure 1: MBKP Fund Performance vs. Public Markets

On an absolute returns basis, the aggregate marks for all of our funds at year-end 2019 were MoE of 1.9x and IRRs of 18.0%. Fund I (closed) was at 1.5x for an IRR of 7.5%, Fund II at 2.9x and 26.2%, Fund III at 2.0x and 21.1%, Fund IV at 1.5x and 33.8% and Special Situations I at 2.0x and 86.2%. These results demonstrate MBK Partners’ ability to invest and make money through markets good and bad.

Figure 2: Summary Fund-by-Fund Performance (Dec. 31, 2019)

In 2019, we also continued our recent investment momentum. In the last three years, we have deployed $1.2 billion in China, $1.5 billion in Japan and $1.9 billion in Korea. Last year, we made 12 investments across Buyouts and Special Situations. In Buyouts, we invested $1.6 billion in five companies, acquiring in Godiva Japan, Lotte Card in Korea and eHi, Siyanli and Wendu in China. We also made add-on investments in Accordia and Golfzon. Capitalizing on market uncertainties, Special Situations invested $424 million in five companies, all through structured securities with downside protection: BHC in Korea, Accordia Next Golf in Japan, OCI in Hong Kong and CGI Holdings and Modern Land in China. We are now over 80% deployed in Special Situations I, paving the way for the launch of Fund II in second-half 2020.

Through cycles and particularly in unclear environments, our focus has served us well. Our focus starts with a disciplined investment strategy. For 15 years, we have stuck to what we know. We still target North Asia exclusively: all of our 45 investments have been in China, Japan and Korea. We continue to believe our home markets in North Asia represent the most fertile ground for investments in all of Asia. Secondly, we insist on control for Buyouts: 35 out of the 37 investments are control transactions. We adhere to distress or “special” circumstances for Special Situations. Lastly, we emphasize domestic consumption, which underpins our three core sectors of consumer/retail, telecommunications/media and financial services. Consumption plays constitute the lion’s share, over three-quarters, of our portfolio. We believe our reliance on consumption, over exports, has effectively insulated our portfolio against macro shocks and negative exogenous factors, including the U.S.-China trade conflict, currency wars and foreign sovereign debt crises.

As the Firm has evolved over 15 years, we have crystallized our market positioning. Our localness has fostered close relationships with the chaebol owner families and management in Korea. This has led to our dominance of chaebol-related buyouts, the most prolific deal category across North Asia. Of our 17 Buyout investments in Korea, eight are chaebol divestitures. In Japan, we have converted our local relationships to partnerships with management of listed mid-cap companies. Of our nine Japanese investments, five are take-private MBOs. In China, we have developed joint-control partnerships with founder-entrepreneurs of leading private companies. Seven of our 11 Chinese investments are of this partnership model. In all three markets, we have harnessed our localness to develop “harmonious” Asian solutions.

We continue to grow as an organization. We will have a critical-scale staff of 100 by the end of 2020. The investment team, bound by our “TIE” (teamwork, integrity and excellence) ethos, is experienced, cohesive and stable. We have had no senior turnover over the past four years. 2019 saw the largest class of promotions in our Firm’s history, with 18 people promoted, including In Kyung Lee to Partner. We also expanded our operating group by adding an Operating Partner in Japan, with another soon to follow in China. We have achieved “dynamic equilibrium” in our staff, stable but growing and changing. Importantly, the evolution of our firm is not aimed at growth for growth’s sake; it is toward building a platform to scale. Our continual aim is to scale our franchise and operations through the combination of Buyouts and Special Situations. We are already realizing economies in deal sourcing, industry expertise and value creation as well as in legal, finance and human resources. Scaling our growing firm will be a key factor in our future success.

We enter 2020 facing challenges old and new. The oversupply of GP capital has only grown, to a record $105 billion in dry powder in Asia. Valuations in private transactions were up across North Asia. The median purchase multiple in 2019 was 13.0x EBITDA, the highest in more than a decade. But we made our investments at attractive prices. Our investments in 2019 were done at an average 27.7% discount to market. Our conviction remains that proprietary deals are cheaper; the preponderance of our investments was done on a proprietary basis. COVID-19 represents a threat of historic magnitude. China’s share of global output today is nearly 20% (double its 9% share at the SARS outbreak in 2003), and its industrial disruption is leading to a significant impairment of the global supply chain. We expect the impact of the COVID-19 shock on the North Asian economies, as well as the global economy, to be deeper and longer-lasting than SARS. We’re already seeing a significant adverse impact, with China and Korea experiencing unprecedented slowdowns in output and Japan contracting in the first two months of the year. COVID-19 poses a particularly severe threat to our portfolio, and a test of our domestic consumption thesis, given the vulnerability of consumption to public health risks.

Experience tells us, however, that opportunities arise from challenges. Having invested through two cycles, the Asia Financial Crisis and the Great Financial Recession, we know this crisis, too, shall pass. There may not be a V-shaped recovery as in the post-SARS experience, but we expect a robust rebound in consumer demand upon resolution of COVID-19. We also know deal opportunities proliferate in times of distress or upheaval. There will be compelling opportunities in Buyouts and especially in Special Situations. We remain mindful of competition, but our growing conviction is that relationships trump all competition. We will bring to bear our relationships with local sellers, advisors, lenders, even regulators and policymakers, to press our competitive advantage. This is the time to make investments.

From our founding in March 2005, we have come a long way. We have increased our capital under management to $22 billion, cementing our position as the largest independent private equity manager in Asia, and we have invested $13.6 billion in equity in 41 companies (including exited companies). Most importantly, we have returned a market-leading $12.1 billion to our LPs. We have done all this the right way, with no legal proceedings or investigations in our history. It has been a rewarding journey in many important ways. But, in the poetic words of Robert Frost, still, we have promises to keep, and miles to go before we sleep. We appreciate your taking the journey with us.

Yours truly,

Michael ByungJu Kim
Partner
March 15, 2020