Are private equity funds pursuing short-term gains instead of acting as 'catalysts in a stagnant pond'?

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Are private equity funds pursuing short-term gains instead of acting as 'catalysts in a stagnant pond'?

Published: 19 Mar. 2025, 00:00

Audio report: written by reporters, read by AI

Homeplus CEO and MBK Partners Vice Chairman Kim Kwang-il finishes his responses to the National Policy Committee at a hearing on Homeplus's management and finances at the National Assembly building in western Seoul on March 18. [NEWS1]

Criticism is mounting over the role of private equity funds (PEFs) in the crisis at Homeplus, Korea’s second-largest hypermarket chain with 126 stores nationwide. Many argue that PEFs, rather than focusing on sustainable management, are prioritizing short-term gains. Against this backdrop, the National Assembly’s Political Affairs Committee summoned executives from MBK Partners — Homeplus’s parent company since 2015 — and its management team for questioning. However, MBK Chairman Kim Byung-joo was absent, citing an overseas business trip. Lawmakers from both parties criticized MBK for shirking responsibility, despite branding itself as a "domestic" private equity fund. Some even accused Kim of being “arrogant and imperious.”

The controversy intensified on March 4 when Homeplus officially filed for court receivership. MBK claimed that it had no choice but to seek rehabilitation after Homeplus’s credit rating was downgraded on Feb. 28. However, suspicions are growing that MBK anticipated the downgrade yet proceeded with the bond issuance before initiating court proceedings. Prior to filing for rehabilitation, Homeplus raised billions of won by issuing corporate bonds and asset-backed short-term bonds secured against credit card sales receivables. Of these, 188 billion won ($129.7 million) in bonds were primarily purchased by individual and corporate investors through underwriting securities firms, raising concerns about potential losses for ordinary investors. In response, the National Tax Service has launched a tax investigation into MBK, while the Financial Supervisory Service is examining the underwriting securities firms and credit rating agencies to determine the circumstances surrounding the bond issuance and downgrade.

Homeplus's labor union shout slogans demanding that MBK Partners, Homeplus's majority stakeholder, normalize the supermarket chain's operations at a meeting in Mapo District, western Seoul, on March 18. [YONHAP]

Amid growing controversy, Kim pledged to use his personal assets to cover outstanding payments owed to small business owners operating within Homeplus stores. However, revelations of excessive borrowing practices have cast a harsh spotlight on the investment strategies of PEFs. When domestic PEFs were first introduced to Korea in 2004, they were seen as a viable alternative to foreign PEFs in managing struggling companies and boosting efficiency in the aftermath of the Asian financial crisis. This led to them being dubbed "catfish in a stagnant pond." Financial regulators imposed minimal restrictions on PEFs, operating under the assumption that their investors were primarily large institutions. As a result, the domestic PEF market has expanded dramatically, growing from 400 billion won in 2004 to 136.4 trillion won in 2023 — a staggering 341-fold increase.

MBK’s acquisition of Homeplus exemplifies the risks associated with PEF-driven leveraged buyouts. MBK financed 2.7 trillion won — 45% of the 6 trillion won acquisition cost — through loans. Such methods, which often involve selling off core assets to repay excessive debt, can significantly undermine the management of acquired companies. Homeplus, for instance, sold off prime store locations to pay off its debt, while similar concerns have emerged regarding Hansem and Lock & Lock after their acquisitions by domestic PEFs. Entrusting the proverbial cat with the fish is not a viable solution. Financial regulators must ensure that PEFs fulfill their intended role as "catalysts in a stagnant pond" while implementing safeguards to mitigate their adverse effects on corporate stability and economic sustainability.

Translated using generative AI and edited by Korea JoongAng Daily staff.