Korean institutional investors retrieve investments despite slow capital market

[Courtesy of Air First]

South Korean pension funds and mutual aid unions have successfully retrieved investments amounting to 1.2 trillion won ($903.8 million) despite the sluggish capital markets at home and abroad after the country’s industrial gas supplier Air First Co. in which they invested through local private equity fund IMM Private Equity has secured the world’s largest asset management firm BlackRock Inc. as its second largest shareholder.

According to investment banking (IB) industry sources on Thursday, IMM PE completed a deal with BlackRock’s Infrastructure fund to sell a 30 percent stake in Air First for around 1.1 trillion won on Wednesday.

IMM PE plans to distribute 1.2 trillion won to its limited partners (LPs) on Friday, combining the proceeds from the transaction with funds from a capital restructuring.

Among the local and foreign LPs that participated in the acquisition of Air First, the National Pension Service (NPS) and the Korean Teachers’ Credit Union (KTCU) are known to each receive the largest amount of more than 200 billion won.

Korea Post is expected to receive more than 100 billion won and Military Mutual Aid Association Co. 60 billion won.

Among overseas LPs, Malaysia’s Employees Provident Fund (EPF) and Permodalan Nasional Berhad (PNB), a Malaysian national pension fund, will receive more than 100 billion won and 25 billion won, respectively.

The Air First deal is considered significant as it comes amid a slowdown in the mergers and acquisitions (M&A) market, adding more value to the transaction.

According to Maeil Business Newspaper’s capital market tracker Radar M, M&A deals worth over 5 billion won fell by more than 30 percent in the first half of this year.

As PEFs, major players in the local M&A market, slowed down their exits, institutions that invested in PEFs also faced difficulties in recovering their investments and managing their funds.

IMM PE’s successful transaction, which yielded an annualized internal rate of return (IRR) of 39 percent, is expected to give institutional investors some breathing room in fund management.

[Courtesy of IMM PE]

The 30 percent stake of Air First was valued 3.5 times higher than during IMM PE’s acquisition four years ago. IMM PE has already recouped more than its initial investment and is expected to generate more profit for LPs with the remaining 70 percent stake.

Industry insiders suggest that given the impressive returns achieved even in the sluggish investment environment, it would be a viable option for the PEF operator to attempt to sell the remaining stake for higher returns when the market normalizes in the future.

In particular, as demand for semiconductors is expected to increase in the mid- to long-term, Air First, whose main customers are semiconductor companies, is also expected to expand its revenue.

Currently, many semiconductor companies are reducing production and investments due to concerns about China’s economic slowdown, but demand for AI chips is expected to surge.

Consulting firm McKinsey & Company projects that the global semiconductor market will reach $1 trillion by 2030, up 70 percent from about $600 billion in 2021.

IMM PE has been focusing on increasing Air First’s production capacity since its acquisition in anticipation of expanding demand for industrial gases centered on semiconductor companies.

In 2019, IMM PE acquired the Korean business of Germany’s Linde plc and changed its name to Air First, strengthening its business development team. It also established a construction subsidiary, AF E&C.

Since then, the company has won new orders from two major Korean semiconductor companies, including for a project for Samsung Electronics Co.’s Pyeongtaek plant. The company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) rose to 142 billion won last year from 104.3 billion won in 2019. During the same period, revenue more than doubled to 603.1 billion won from 268.9 billion won.

There are also expectations that the company’s overseas revenue will increase through BlackRock’s global network. BlackRock currently holds a 5.03 percent stake in Samsung Electronics, so there is potential for collaboration between Air First, IMM PE, and BlackRock for a successful bidding for gas facilities for Samsung Electronics’ semiconductor plant in Taylor, Texas, which is expected to begin as early as the end of this year.

Air First aims to achieve an annual revenue of 1 trillion won within the next three years by increasing its market share at home and abroad.