2017 ANNUAL LETTER

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

To Our Investors

TWO THOUSAND SEVENTEEN saw a continuation of a “golden period” for MBK Partners, in which we completed both investments and exits at record levels. During this two-year stretch, we have completed 10 investments, putting over $2.7 billion of capital to work, at attractive valuations despite rising public markets across North Asia. Last year, China’s economy grew by 6.8%, Japan 2.1% and Korea 3.0%, driving increases of 6.6% in the Shanghai Composite Index, 19.1% in the Nikkei and 21.8% in the KOSPI. Amid this buoyant market environment, we completed acquisitions of Accordia Golf and Tasaki, along with additional investments in Apex Logistics and Tasaki, in Fund III; and Daesung Industrial Gases, MH, Kuroda Electric and Golfzon County in our new Fund IV. We also recently announced the signing of a take-private transaction of e-Hi Car Services in China.

As importantly, during this period, we made 11 distributions, returning $2.0 billion to our LPs:

Figure 1: Recent Distributions (Jan. 2016–Dec. 2017)

In the last year alone, we completed a leveraged recapitalization and a partial sale of Coway; a sale of a 40% stake in ING Life Korea through a landmark IPO in Korea; and full exits of NCI and Komeda, the latter for 4.6x equity invested. We also sold our remaining 8% stake in Universal Studios Japan. Combined with the recapitalization in 2013 and the control sale in 2015, this distribution led to nearly $1.3 billion in total proceeds returned to our LPs, for 6.9x equity, making USJ one of the most profitable investments in Asian PE history. And our exit momentum continues into this year, with several liquidity events in progress.

Aggregated across our four funds, we ended 2017 with a gross multiple of equity of 2.0x and gross IRR of 19.4%. Fund I was marked at 1.8x for an IRR of 9.8%, Fund II at 2.9x and 26.6%, Fund III at 2.1x and 36.4% and Fund IV, still a young fund, at 1.2x and 41.2%. Other than Fund I, which continues to be dragged down by two large unexited investments, CNS and D’Live, all our funds are squarely top-quartile performers in their vintage.

Figure 2: Summary Fund-by-Fund Performance (Dec. 31, 2017)

Even as we made a spate of distributions, we have continued to build substantial value in our active portfolio companies. As shown in the table above, we still have significant value to be realized: over $5.75 billion in remaining fair-market value in Funds I, II and III. The lion’s share of the value was created with EBITDA growth. Of the aggregate 3.1x equity value increase from entry to exit of our exited investments, EBITDA growth accounted for 77% of the increase, while debt paydown and multiple expansion account for a combined 23%. Increasing EBITDA remains our number one priority.

As we enter the new year, we remain sanguine about our business, but the market is not without challenges. A massive influx of capital into the Asian region has led to an increasingly severe supply-demand imbalance in capital chasing deals. By the end of 2017, there was nearly $260 billion in GP dry powder in our region, up nearly 20% from a year earlier. This imbalance has put upward pressure on pricing in deals, with average entry valuation approaching the highest in a decade. The competition, following years of focus mostly on China (and India), has redoubled efforts to follow us into Japan and Korea. Our strongly held view is the most effective way to mitigate the intensifying competition and rising valuations is to use our local relationships to source proprietary deals, which tend to be lower in price and higher in quality. About two-thirds of our investments closed to date were sourced on a proprietary basis. We also believe sticking to the geographic “niche” we have established in China, Japan and Korea is a sustainable, differentiated strategy. All 32 of our investments have been in our three home markets, and we intend to keep it that way.

A noted industry wag has observed, “Every several years, dark clouds fill the economic skies, and they will rain gold.” We are not in the forecasting business, but we do believe the market volatility we have seen in recent months augurs a new era of opportunistic investment in Asia. After years of study, we have determined the North Asia market is ripe for distress investing, and last year we decided to form a special situations fund for North Asia, our first new strategy since our founding. We believe the opportunity for special situations in North Asia today is compelling, as we see a surge in distressed or stressed opportunities but, importantly, with limited competition. The deal surge is being driven by an increasingly limited access to liquidity, given regulatory constraints on bank balance sheets. At the same time, compared to the madding crowd in buyout and growth capital, there is a marked scarcity of established GPs for special situations in our markets today. We see a huge market inefficiency especially in Japan and Korea, which have not only the deepest pools of corporate assets for restructuring but the best jurisdictions for restructuring and bankruptcy proceedings.

In November last year, we launched fundraising for Special Situations Fund I, with a target fund size of $750 million-1 billion and target IRR of 20-25%. This fund is aimed at primary and secondary credit and non-buyout private equity investments in our home markets of China, Japan and Korea. Thanks to support from our stalwart LPs, we are halfway to our goal in commitments after one closing. We have also substantially built out the investment team, with 12 professionals across four offices, including a new Beijing office. The team is coheaded by Jay H. Bu, a Founding Partner who has moved permanently to Special Situations, and Stephen Le, a 15-year special situations veteran and one of the recognized distressed investment leaders in Asia. Bryan B. Min, COO and a newly promoted Partner, has also moved to Special Situations to provide leadership. In December, we closed our first investment, Xeno Origin, a primary credit deal in China. Our conviction about the outsized special situations opportunity in North Asia today is as strong as the conviction we had for buyouts in the region in 2005.

With our expansion into a second asset class, we are poised to gain not just growth in AUM but, more importantly, scalability. Today, MBK Partners is the largest independent private equity firm in Asia, with $15.5 billion in capital under management, five offices and 50 investment professionals. We added more than a dozen new people in the last year, including two Partners (one an internal promotion) and a General Counsel, Christie H. Tang. More critically, the initiative in special situations, a complementary business line to buyouts, will enable us to scale our business, from centralization of operations, including LP relations, finance and accounting, legal and compliance, human resources and IT; to combining the local relationships of our two investment teams to leverage deal flow, for both investments and exits. It is important to note that even as we seek to scale with our new strategy, focus on our niche of North Asia remains intact. We believe our competitive advantage is localness in China, Korea and Japan; outside of North Asia, that advantage is eroded. Our approach, what we call “niche with scale,” seeks to scale our business while sticking to the home markets we know best.

In my over 30 years in finance, I have never seen a more exciting time for investments in Asia. The increasingly volatile market is playing to our opportunistic strengths, which now encompass credit and distressed equity as well as control investment capabilities. MBK Partners is armed with $3.2 billion in dry powder and has more flexibility than ever to provide capital solutions to corporate sellers and management. The Firm’s local franchises have become established leaders in each of their markets, and our senior investment team is seasoned, stable and cohesive. Our model of localness concentrated in just three adjacent geographies remains our hallmark and is reaping progressively large dividends for our investors. As we strive to exercise wise leadership in our region, we also aim to be positive agents of change in our industry and our communities. We remain committed as ever to being good stewards of your capital.

Michael ByungJu Kim
Partner
March 15, 2018