South Korea’s small and mid-sized mutual aid associations and cooperatives have been hit hard by the coronavirus pandemic, with some major pension funds and mutual aid associations dominating commitments to domestic projects.
A mutual aid association with 500 billion won ($414 million) in alternative investment assets recently attempted to participate in a domestic project-specific transaction but it ended in failure. A private equity (PE) firm encouraged the mutual aid association join the deal but a major limited partner, who participated in the deal as an anchor investor, has provided most of the equity and acquisition financing which took away the mutual aid association’s investment opportunity.
“We were in the final stage of reviewing the target when we were informed that an anchor investor was going to provide most of the investment,” said an official of the limited partner. “It was too bad but we had to scrap our plan.”
Alternative investment teams of domestic small and mid-sized mutual aid associations and cooperatives are open but practically no business is being done. Fewer project-specific PE funds are launched due to the Covid-19 pandemic amid a large amount of dry powder in the PE fund market.
Normally domestic small and mid-sized mutual aid associations have committed between 10 billion won to 30 billion won to project-specific funds where major limited partners, including Korean Federation of Community Credit Cooperatives (KFCC) and Korean Teachers’ Credit Union (KTCU), participate as anchor investors. But anchor investors’ commitment to project funds have increased sharply while PE firms are contacting a larger pool of limited partners, including mid-sized companies, according to PE industry sources.
“Cases of mutual aid associations providing equity and acquisition financing for project-specific funds are recently increasing,” said a PE industry source. “Accordingly, the number of investment opportunities for small and mid-sized mutual aid associations has decreased significantly.”
Against this backdrop it remains to be seen whether small and mid-sized mutual aid associations will be able to continue their investing activities as the Covid-19 situation makes due diligence more difficult.
Small and mid-sized mutual aid associations and cooperatives’ investment performance for 2020 is expected to depend on the number of project-specific PE funds created in the second half of this year, which is likely to increase.
“There has been practically no investment over the last six months,” a cooperative official said. “Considering many PE firms are planning to make project-specific transactions in the M&A (mergers and acquisitions) market in the second half of this year, we looking forward to make commitments to those deals.” (Reporting by Ik-hwan Choi)