Stalled Small and Mid-Sized M&A... Chill Hits Acquisition Finance Firms and Small PE Funds

Strategic investors remain on the sidelines
IPO market stuck in limbo
Deal drought for small and mid-sized buyouts

The mergers and acquisitions (M&A) market appears to be recovering on the surface this year, with transaction volumes increasing compared to the previous year. However, the sentiment on the ground remains cold. While large-scale deals are supporting the overall market size, small and mid-sized buyout deals and the initial public offering (IPO) exit market have yet to show signs of recovery. As strategic investors (SIs) are taking a wait-and-see approach—closely monitoring changes to capital market regulations—anxiety is growing, especially among mid-sized and small private equity fund (PEF) managers and acquisition finance companies, who find it difficult to independently lead deals.

According to the investment banking (IB) industry on September 3, concerns about a “deal drought” are spreading, particularly among mid-sized and small PEF managers with accumulated assets under management (AUM) of less than 1 trillion won. Due to their scale, they often have no choice but to partner with SIs rather than pursue standalone buyout transactions. However, SIs themselves have become cautious about pursuing new deals, largely because of recent reforms such as the mandatory tender offer requirement and prohibition of multiple listings within the capital market system. On top of this, owners of small and mid-sized companies are also sensitive to the regulatory changes, resulting in a reluctance to put assets up for sale and deepening the so-called “deal drought,” according to industry insiders.

An executive from the PE industry commented, “Even when we put forward a deal that we’ve worked hard to source, SIs are no longer responding as actively as before—in fact, they seem quite indifferent. To avoid being the first to be affected by regulatory changes, there’s now a tendency to prioritize risk management over taking the initiative, at least for the time being.”

The chill felt throughout Korea’s investment banking sector is apparent in the numbers. According to Samil PwC’s recently published ‘Second Half M&A Market Outlook,’ domestic M&A transaction value in the first half of this year reached 26 billion dollars, a 27% increase year-on-year. However, the number of deals fell to 718, a 2.6% decrease from 737 in the same period last year. In particular, as transactions involving participation by large corporate SIs or deals bolstered with structures such as put options have declined, capital companies and securities firms are increasingly aware of the shortage of structured finance opportunities.

A capital market insider revealed, “There are several firms that have managed to execute only a single acquisition finance deal so far this year. While a healthy flow of small and mid-sized buyout transactions or deals with large corporations accepting put options would provide some breathing room, such transactions have all but disappeared recently, leading to an overall slump in the structured finance and IB markets.”

The constricted exit market is also a burden. In particular, the sluggish KOSDAQ IPO market is proving painful for both PEs and venture capital (VC) funds. Only 16 companies (excluding SPACs and REITs) went public on KOSDAQ in the first half of this year—less than half the 34 that did so a year prior. A manager at a PEF firm said, “At this rate, it’s uncertain whether the number of new KOSDAQ listings will even exceed 30 for the whole year. If the IPO market is blocked, not only PE but also VC funds face longer wait times for exits, and with no exits from existing portfolios, there’s limited room to pursue new investments.”

However, some see the current situation as a temporary lull. Since there has been no sudden destabilization of the macroeconomy or widespread wave of corporate bankruptcies, transaction activity could pick up once more cases of the new regulations being applied accumulate. An IB industry official observed, “There’s a general sense of waiting to see how major players like Hanwha respond to changes such as the new guidelines on multiple listings. Since this isn’t a market collapse due to a lack of funds, as capital injections such as the National Growth Fund roll out next year and more precedents for the new regulations are set, we could see transactional activity revive.”

This content was produced with the assistance of AI translation services.