Bunjang, Musicow... Once-Popular Platform Investments Face “‘Tough Going’” [PE Now]

Praxis Struggles to Sell Bunjang
Stick's Musicow and Anchor PE's Kurly Also Face Challenges
IPO Delays and Valuation Gaps

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Major domestic private equity fund (PEF) managers are struggling to recoup their investments in platform companies. They invested hundreds of billions of won, betting on the companies' growth potential, but intensifying market competition and profitability improvements falling short of expectations have put sales on hold. With the bar also rising in the initial public offering (IPO) market, some say it has become difficult to secure, at the exit stage, the high valuations once assigned to platform companies.

Bunjang Sale Stalls... Concerns Grow Over Karrot's "Buy Now" Service

According to investment banking (IB) industry sources on November 9, Praxis Capital Partners has been seeking to sell its controlling stake in secondhand trading platform Bunjang since early this year. It appointed Citi Global Markets Securities as the lead manager and began approaching potential buyers, but the deal has made little progress.

Praxis acquired an 80% stake in Bunjang in 2020 for about 150 billion won. It has since diversified the company's revenue model by strengthening its secure payment service and acquiring related businesses. Six years after the acquisition, Praxis has begun seeking to recoup its investment, but market observers say it may be difficult to secure the initially discussed valuation of around 700 billion won.

Of particular concern is the expansion of Karrot, which has grown into a major player in the secondhand trading market. Karrot has attracted users by focusing on local, in-person transactions and then expanded into advertising, recruitment and job searches, among other areas. Last year, its consolidated revenue rose 43% year over year to 270.7 billion won, while operating profit jumped 481% to 14.6 billion won. It continued to grow in the first half of this year, posting revenue of 170.3 billion won and operating profit of 20 billion won. Its operating profit in just six months exceeded its full-year figure for last year.

By contrast, Bunjang recorded its highest-ever revenue last year, at 58.1 billion won, up about 30%, but remained in the red with an operating loss of 19.9 billion won. Although charging for secure payments increased payment-fee revenue, higher related costs and marketing expenses meant that revenue growth did not translate sufficiently into improved earnings. The gap is also significant in user numbers. As of August, Karrot had 23.17 million monthly users, about 4.5 times Bunjang's 5.16 million.

Karrot's expansion of its "Buy Now" service to nationwide transactions in March has also put pressure on Bunjang, according to market observers. Karrot has moved beyond its traditional focus on local, in-person transactions and stepped up nationwide trading using secure payments and parcel delivery. In effect, Karrot has expanded into the nationwide secondhand market where Bunjang has traditionally been strong.

Growth has also accelerated sharply since the service was expanded. According to Karrot, transaction volume through Buy Now rose 779% from March to October. As Karrot, with its dominant user base, expands into nationwide trading, Bunjang now faces the dual challenges of attracting users and improving profitability. Bunjang has also seen transaction volume and user numbers increase, but amid intensifying competition, it must demonstrate results that can justify a high sale price.

Musicow, Kurly and Kakao Entertainment Also Struggle to Exit

Stick Investment is also facing pressure from its prolonged inability to recoup its investment in Musicow, a music copyright investment platform. Stick invested 100 billion won in Musicow in 2022, followed by an additional 60 billion won the next year. However, Musicow has struggled to increase its valuation amid a restructuring of its business in response to financial regulations and worsening profitability. Its consolidated revenue rose to 26.7 billion won last year, but its operating loss also widened to about 35.9 billion won. Despite revenue growth, its losses have continued to accumulate, leaving the timing of any potential investment recovery uncertain.

Hong Kong-based PEF manager Anchor Equity Partners (Anchor PE) has likewise been unable to find an exit for its platform investments. In 2021, Anchor PE invested 250 billion won in Kurly, a fresh food delivery platform, at a valuation of about 4 trillion won. Kurly temporarily suspended its IPO process in 2023 and has yet to set a listing schedule.

Kurly returned to annual operating profitability last year and further improved profitability in the first half of this year. Nevertheless, the valuation it received during Naver's additional investment in May was about 2.8 trillion won, lower than when Anchor PE invested. Even if a company's performance improves, existing investors may struggle to achieve their expected returns if the company cannot regain its previously high investment valuation.

Kakao Entertainment, in which Anchor PE has invested since 2016, is in a similar position. Kakao Entertainment was valued at more than 11 trillion won in 2023, but its listing outlook has since become uncertain amid weak performance and tighter regulations on dual listings. Anchor PE is seeking to further extend the maturity of acquisition financing amounting to about 310 billion won. Delays in recouping the investment are thus leading to higher financing costs and refinancing burdens.

Winner-Takes-All Platform Market... IPOs Also Prove Difficult

The difficulty of recouping platform investments reflects a combination of the sector's business characteristics and changes in capital markets. Platform companies must spend substantially to attract users. And when users and transactions concentrate among market leaders, it becomes even harder for later entrants to achieve profitability. Industry observers say that unless companies can turn user growth into stable cash flow, they will struggle to maintain the high valuations assigned at the time of investment.

Exit options are also limited. Traditional manufacturers and consumer goods companies can be sold to other private equity firms in secondary transactions, backed by stable cash flows. But for platform companies that continue to post losses, even securing acquisition financing can be difficult. An industry official said, "Unless a platform company is an undisputed market leader, it is also difficult to find a strategic investor (SI) willing to recognize a high valuation. Unlike in the past, the IPO market is placing greater emphasis not only on growth potential but also on performance and cash-generation capacity."

The problem is that the longer it takes to recoup investments, the greater the burden on fund management. PEFs typically need to recover their investments within a set fund life and distribute the proceeds to limited partners (LPs). An IB industry official said, "If the growth of portfolio companies and their IPOs are delayed, funds have little choice but to extend their terms or sell their stakes at a discount. I'm concerned that platform investment could contract as PEFs, which once assigned high valuations based on future market size and user growth, now take a more cautious approach focused on actual earnings capacity and realistic exit prospects."

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