Recently, corporate restructuring has been a critical issue since the profitability of businesses has been deteriorating, followed by years of low growth with the increase of marginal firms. Main corporate restructuring schemes consist of corporate structure improvements, “workouts” by voluntary agreement of the creditors and corporate rehabilitation proceedings or “court receivership” by court. This institution and court-led, ex-post corporate restructuring basically targets firms with insolvency issues, leading to firms paying painstaking costs, such as significant job losses, fire sales, and conflicts of interests among stakeholders. Therefore, as an alternative measure, corporate restructuring scheme by capital market, particularly through private equity funds, gained popularity as the ex-ante, preemptive complementary corporate restructuring scheme takes place before insolvency and is thereby considered more effective in that it can reduce agent costs by taking control of management and increasing monitoring capabilities.
This study investigates how to vitalize private equity in Korea as an alternative corporate restructuring mechanism by empirically analyzing whether Korean private equity funds have increased operating performances of the firms they invest in and drawing policy implications based on empirical results. We could not find supporting evidence that the Korean private equity is able to improve operating performance of the firms it invested. This empirical result might be because private equity in Korea play the role not as buyouts, which were the original purpose of introducing private equity in Korea, taking control of management and executing turnarounds for under-performing companies, but as growth capital, which provides timely financial resources to companies relatively young, similar to venture capital.
For invigorating private equity as an corporate restructuring scheme government deregulation is in need to foster the dynamism and innovativeness of the Korea private equity industry because regulations on private equity funds that guide towards executing buyouts might limit private equity activities. The private equity industry itself should also build up capacity through making efforts (e.g. hiring professional management teams). Furthermore, the enlargement of private equity funds in size is necessary to carry out market-friendly corporate restructuring for the likely increase in the demand for corporate restructuring, in particular for large companies.