Korea ECM: Echoes of the Miracle on Han River

Hotel Lotte, Kyobo Life and Celltrion Healthcare among healthy pipeline of companies planning IPOs in second half of 2017 after an exceptionally strong start to the year.

South Korea’s equity capital market is on course to record another bumper year, after corporate restructuring at large conglomerates and financial sponsor activity drove equity sales in the first six months to their highest level since 2010.

Total share sales from Korea rose 25% to $8.1 billion in the first half from $6.5 billion in the same period last year, according to data from Dealogic. Equity sales have increased for four consecutive years and are at the second highest level in the past decade.

With big names such as Hotel Lotte and Kyobo Life Insurance planning initial public offerings in the second half of the year, Korea’s IPO market is unlikely to slow down in the second half as long as positive sentiment remains and geopolitical drama, such as last week's launch of an intercontinental ballistic missile by North Korea, doesn't begin to weigh on investors' minds.

"Sentiment towards Korea deals seems positive, the risk is more geopolitical," said one active investor in Korean equity capital markets. 

Indeed, national and international politics have not shaken faith in Korea. Intriguingly, deal volumes picked up amid heightened tensions on the Korean peninsula after the North claimed in September it had carried out a fifth nuclear test.

In November, the focus turned to domestic politics in the form of a corruption scandal that brought down former president Park Geun-hye.

While last year was one of the worst in South Korea's political history, its economic revival had shades of the Miracle on the Han River – the term used to describe the country's dynamic economic growth from the 1960s onwards.

After 19 months of decline, the country's exports began to increase in August, growing at their highest rate in four years in January. Growth in gross domestic product also edged up, to 2.7% last year from 2.6% in 2015.

Buoyed by the strong economic performance, over W9 trillion ($7.8 billion) of net capital flowed into Korean equities between January and May, according to data from the Financial Services Commission. Korea was the best performing stock market in the region in the first half, with the Kospi Index gaining 18% and now trading at its highest ever level.

Jumbo IPOs

“International investor interest levels for Korean issuance is high,” said David Chung, head of Korea investment banking at Goldman Sachs. “Recent transactions have performed well in the aftermarket and Korea continues to be a favoured market for investors given the high quality companies, good liquidity and a relatively strong disclosure framework.”

Goldman Sachs ranked first among all international banks on Korea ECM league table during the first half and took a 13.1% market share. It also came first on Korea follow-on offerings, taking a 22.3% market share that was more than double the 10.8% share of its closest rival.

The uptick in market sentiment bolstered two jumbo initial public offerings during the period. The $2.3 billion floatation of Netmarble Games is Asia’s largest IPO year-to-date, while ING Life Insurance raised $970 million from an IPO in April.

Attention now turns to a healthy pipeline of IPOs in the second half of the year.

A number of potential high-profile listings, including those of Celltrion Healthcare and Kyobo Life, are scheduled for completion in the next six months.

Hotel Lotte, the duty free chain and hotel business of Lotte Group, is also preparing to revive the $4.8 billion IPO it failed to complete last year.

Private equity

Private equity firms have been major dealmakers in the first half. MBK Partners, the private equity fund named after Korean-American co-founder Michael ByungJu Kim, raised over $1.3 billion from the sale of ING Life Insurance through an IPO, and Coway through a block trade.

MBK was also active on the M&A front, having acquired Daesung Industrial Gases for $1.6 billion in February.

Korea has been a preferred location for private equity firms to do deals in recent years. Since 2012, total M&A volume by sponsors was over $72 billion. As the stock market ticked up since the beginning of the year, some private equity funds have chosen to exit their investment at a decent price.

“Since tapping the public markets has always been one avenue for exit for private equity, we expect sponsors to continue to explore opportunities tied to the maturity of their investments,” said Goldman’s Chung.

Active sponsor activity helped Korea achieve a total of 42 follow-on offerings in the first half, the second best year in terms of total number of deals. In particular, there were a number of secondary share placements of decent size, with 13 deals of over $50 million already completed in the first six months.

Dealogic data as of June 30, 2017
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