ByteDance, which operates the short-form video platform "TikTok," is attempting to enter the South Korean private equity fund (PEF) market. The aim is to make indirect investments in South Korean corporations by contributing to domestic PEFs.
Industry insiders note that there is a high possibility of increased Chinese capital entering the South Korean PE market, raising concerns about potential side effects such as technology leakage from domestic corporations. As the amendment of the Capital Markets Act could likely limit the operational flexibility of domestic PEs, industry experts analyze that Chinese capital may exploit the gaps to expand its influence.
According to investment banking (IB) industry sources on the 9th, ByteDance has reportedly expressed a desire to invest in several South Korean PEs recently.
ByteDance recorded a revenue of $155 billion (approximately 210 trillion won) last year. As a non-listed company, its corporate value was estimated at $300 billion (approximately 410 trillion won) as of November last year.
ByteDance previously made headlines by investing a total of 48 billion won in the domestic webtoon company KidariStudio and its subsidiary, Lezhin Entertainment, last year; however, there are no known instances of investments in PEs so far.
IB industry insiders believe that if big tech companies from China, like ByteDance, invest as limited partners (LPs) in South Korean PEs, it could shake up the investment market.
The proposed amendment to the Capital Markets Act, currently being pursued by the ruling party, also includes provisions to limit leveraged buyouts (LBOs) by PEs. Typically, PEs combine equity investments with borrowing to boost their return on equity (ROE); thus, if borrowing is restricted, ROE is bound to decrease. This could deter fund LPs, such as pension funds or mutual aid associations, from making contributions.
A PE official said, "In such a scenario, if capital from big tech in China seeks to invest, there would be no reason for management firms to decline."
If contributions from domestic institutions to PEFs decrease and the influence of Chinese capital grows, there is concern about the risk of technology leakage. The risk could increase if the funds that invested Chinese capital were to invest in semiconductor or defense companies.
There is also a risk that the fierce competition for dominance between the U.S. and China may spill over to South Korean private equity funds and corporations. This is because the U.S. could impose restrictions on the export of advanced equipment or technology to those corporations that receive investment from Chinese capital.
In response, the South Korean PE industry is currently in a wait-and-see mood. Since a concrete picture of the new law has not yet emerged, it is deemed too early to jump to conclusions.
An industry insider explained, "The main goal of the LBO regulation is to reduce the borrowing limit of PEFs from 400% to 200% of the fund's net worth, but there is a possibility that exceptions may be added in the enforcement decree, so it's still too early to make a judgment. However, many believe that if the leverage limit is drastically restricted, only foreign capital will be able to operate in the domestic market."