Many of the private equity firms that applied for the investment program of Korea Growth Investment Corp. (K-Growth) submitted to the fund of funds letters of commitment they so far have obtained from other investors – one of the required documents – mostly consisting of regional mid-sized companies. They seemingly tried to get even a bit higher scores as the amount of raised capital is one of the key criteria in the selection process, though whether those commitments will lead to actual investments still remains to be seen.
K-Growth and the state-run Korea Development Bank (KDB), an anchor investor of the fund-of funds investment program, plans to conduct interviews – which include presentation competition – with 32 shortlisted candidates, starting from Thursday.
The majority of the shortlisted candidates reportedly met the threshold of having some commitments on record, which was set by KDB after it saw delays in raising capital by some of its general partners selected last year. This year, the state-run bank decided to give higher scores to firms that have secured more capital from other investors, which allegedly turned out to be one of the determining factors in the shortlisting process.
Among these other investors are the likes of private pension funds and domestic securities firms for major PE firms. By comparison, a large number of smaller sized PE firms that applied for scale-up and rookie leagues of the investment program – which require a smaller target size of the fund – have letters of commitment mostly obtained from mid-sized companies based in regional areas.
It is not unusual that domestic PE firms partner with regional mid-sized companies as limited partners. However, the number of such cases was unusually high this time, industry watchers said, an outcome possibly resulting from moves by some firms that were in a hurry to secure capital to meet the threshold set by KDB.
“Securing letters of commitment was the most urgent thing for firms preparing for proposals for the investment program,” an unnamed official from a PE firm said. “We asked some of regional mid-sized companies that have a close relationship with us for a letter of commitment.”
This could be also positive for those companies as they might enjoy higher returns by adding alternative assets to the traditional portfolio composed largely of investments in stocks and bonds. Indeed, many of them that have seen such cases probably issued a letter of commitment.
But concerns have been raised, with some pointing out that this new group of limited partners is not verified for their ability to provide capital they promised. Others are also slightly skeptical about whether letters of commitment from them would actually guarantee their investments, because the possibility cannot be ruled out that they could later cancel their commitments or reduce the amount of committed capital.
Securing a certain level of capital commitments from other investors is an almost common requirement for firms applying for investment programs of domestic institutions. So, many argue that how much reliable those commitments are needs to be thoroughly verified in the selection process.
“A handful of anchor investors play a key role in fundraising activity of domestic private equity funds,” an industry source said. “They would need to strengthen verification of quantitative factors including letters of commitment if they want to avoid any disputes over fairness.” (By reporter Choi Ik-hwan)