Korean Federation of Community Credit Cooperatives (KFCC), the state-run institution with nearly 70 trillion won under management, is expanding its presence as an anchor investor in the alternative investment space.
KFCC’s investment committee approved on March 16 a 200 billion won commitment to a PE fund dedicated to buying MagnaChip’s foundry business for 400 billion won. The fund managed by Credian Partners will invest in a special purpose entity formed solely to acquire the target asset. The remaining amount of the acquisition cost will be covered by Alchemist Partners’ PE fund in which SK Hynix will invest 200 billion won.
For the KFCC, this is seen to be an investment with both high potential returns and a safety net. KFCC will take over a 50 percent plus one share stake in the special purpose entity, with its committed capital going toward the senior tranche. SK Hynix will take the remaining shares of the junior tranche that will absorb any initial losses.
It is also likely that SK Hynix might have included a clause that guarantees a certain level of returns for Credian’s fund, like other SK’s affiliates did in previous deals where they invested in partnership with financial investors.
Two years ago, when SK Telecom formed a consortium with Macquarie, Keistone Partners and Daishin Private Equity to acquire ADT Caps for about 2.9 trillion won, it promised them to buy their shares – a combined 45 percent stake – at a price that guarantees an investment return of six percent if the security company fails to list on the domestic stock exchange by 2021.
Similarly, SK Telecom partnered with H&Q in 2018 when it spun off Eleven Street from its subsidiary SK Planet. H&Q invested 500 billion won in the ecommerce platform in the form of redeemable convertible preferred stock (RCPS). SK Telecom holds a call option to buy back the hybrid security at a price that guarantees a certain level of returns for the PE firm unless Eleven Street lists its shares within an agreed timeframe.
SK Hynix has probably taken a similar approach with the acquisition of MagnaChip’s foundry business. For the KFCC, there is also room for upside as its stake potentially can be sold SK Hynix at a higher price if the acquired entity shows a strong earnings performance in the future.
KTCC participated in the acquisition as a single limited partner of Credian’s fund. This is seen as an achievement after it was allowed to commit only 50 billion won to H&Q’s 500 billion won fund dedicated to investing in Eleven Street in 2018. At the time, the National Pension Service (NPS) was an anchor investor in the fund with its 400 billion won commitment.
Over the last two years, KFCC has expanded its presence as an anchor investor in sizable project-specific funds. For instance, it committed capital last year to Glenwood PE as an anchor investor through the firm’s 200 billion won fund dedicated to buying Hankuk Glass Industries for 310 billion won from French material producer Saint-Gobain. KFCC also played a role of an anchor investor in several other deals, including Well to Sea Investment’s secondary buyout of Junjin Heavy Industry and Centroid Investment Partners’ acquisition of Kolon Advanced Fiber.
Such strategic moves by the KFCC have raised its profile among domestic PE firms looking for investors in their project-specific funds, allowing it to have more options to allocate its assets. Project-specific funds in which KFCC previously invested have reportedly generated an average internal rate of return in excess of 10 percent. (By reporter Jo Se-hun)