As one of the seven countries in the world withover 50 million in population as well as more than $30,000 in GDP per capita, Korea has several hallmarks of a large, developed economy, but it remains as the only country in this group without significant search fund activities.
Charles Ryu, CEO at Korea Search Fund, is looking to change this as the pioneer of the search fund industry in Korea.
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1/ Can you tell us a little bit about your background and how did you first come across the search fund model? Could you also offer an overview of the Korea Search Fund’s inception and its distinctive business model, particularly as the first accelerator of its kind in the country?
Prior to entering the ETA scene, I spent several years working in investment banking and private equity in Canada where I also completed both my MBA and undergrad studies. Similar to several fellow pioneering search fund investors and searchers in their respective country, I also learned about the search fund concept during my time in business school abroad and also from my friends and colleagues on Bay Street who pursued the search fund route.
During the COVID-19 pandemic era, I had the opportunity to stay in Korea for several months and picked up on the succession challenges directly from close family friends as well as from various media outlets. As it turned out, this was a widespread socio-economic concern – it was surprising to hear about profitable companies at the risk of closure because they do not have a succession plan. In many instances, the disinterest of the second generation, the world’s highest inheritance tax and little-to-no attention paid in the lower end of the M&A market presented additional challenges.
Here, I was reminded of the search fund model which I picked up while in Canada, but was surprised (again) that there was no search funds in Korea and no one has heard about them back then. I spent this period trying to understand why that was the case and did my own version of feasibility study for search funds in Korea, which included speaking with a number of SME operators, family business experts, industry associations among others. The more conversations I had the more I saw of the potential success of the search fund model in Korea – ultimately a very strong product-market fit. From there, I decided to take on the journey of launching and operating the first traditional search fund in Korea in partnership in late 2021.
Towards the end of the search period however, certain investors, partners and myself decided to pivot to establish an investment platform dedicated to bringing together the three pillars of ETA in the region: i) the jockey (i.e. searchers), ii) the horse (i.e. SMEs), iii) the trainer (i.e. investors) with an objective to efficiently, meaningfully and synergistically integrate the three pillars under one umbrella. This was the genesis of Korea Search Fund.
Korea Search Fund is the first search fund accelerator platform in Korea. Our mission is to empower the next generation entrepreneurs in efforts to directly address the succession challenges of the SMEs in Korea. Our business model is not dissimilar to other search fund accelerators in other regions.
We work alongside our searchers from the very beginning to end, providing the right resources and assistance in each stage of the search fund journey while offering a turn-key solution to exceptional SMEs with a liquidity event and a new successor who can take over the founder’s baton in leading the company’s next phase of growth. To our domestic and foreign capital partners, we provide them with a sophisticated path and structure to participate in the difficult-to-access lower middle market segment in Korea which can offer strong returns and strategic opportunities.
2/ What are the primary challenges currently confronting Korean SMEs, and how do Search Funds integrate into Korea’s business landscape, particularly in the context of succession planning?
It is easy to think the Korean economy is largely comprised of the well-known conglomerates (the ‘chaebols’) such as Samsung, LG and Hyundai on the surface. However, Korea also has a large SME market with more than 6.5 million SMEs strong which represent 99% of the nation’s businesses and are responsible for 88% of job creation and 50% of GDP. Korean SMEs play a very important role not only in promoting the country’s productivity and innovation, but also supporting regional economies, employment and overall competitiveness.
With that said, the post-Korean War (armistice in 1953) baby boomer founder-operators find succession planning very difficult due to a wide range of reasons, ranging from demographic and cultural to tax. One research conducted in 2022 showed that 80.9% of the Korean SMEs with more than 30 years of operations had a >60-year-old chief executive and 30.5% of the same set of SMEs had a >70-year-old operator. Culturally, much of the millennials still prefer to live in Seoul (>50% population live in the Seoul Metropolitan Area, also known as ‘sudogwon’) and work for one of the large chaebols, foreign multi-national companies or even in the government sector, leaving the regional SMEs stranded. Lastly, Korea has the highest inheritance tax in the world when it comes to business succession situations (up to 60% with progressive tax rate applied) which only adds insult to injury.
Based on our internal market sizing exercise, we believe there are 60,000 – 80,000 SMEs in Korea that fit our target size, industry (among other criteria) and are also in need of a suitable succession plan. For a select number of these companies, we believe search funds can provide a compelling solution.
3/ Very interesting – it seems like there are lots of favorable macro trends for search funds to flourish in the region with plenty of SMEs that can benefit. What about on the searcher side? Who do you think are ideal searcher candidates in Korea? Is it different from the typical searcher profile in other markets?
We tend talk a lot more about the SMEs and where we see opportunities and why SME owners might be motivated to sell. However, we spend a lot of time and effort on prospecting and grooming the right searcher-operator talent – we believe this is often more important than deal sourcing and is what differentiates us in the market.
Korea is a society where age, seniority and experience matter relatively more compared to other cultures. This holds true whether one is actively searching to convince SME owner-operators to sell, in position to lead and manage an organization or whether one is looking to cultivate relationships with the key stakeholders. Our thesis in Korea is centered around traditional businesses with a long operating history likely with an aged owner-operator looking to retire which would typically come with a top-middle management team comprised of seniors with over a decade of tenure. The average age of Korean SME employees was 48 according to one study in 2023 – the average age of top-middle managers is likely to be much higher. Such businesses are also likely to have a company culture that has been passed down for many years.
As such, in contrast to the typical searcher profile in the Americas and Europe – typically fresh MBA graduates with a background in private equity, investment banking and consulting – we see more opportunities to back mid-career searchers in Korea. In particular, we believe mid-career searchers who have a strong sales and operational skill-set with management experience and a track record in leading people, teams and projects can be strong candidates. We also seek certain skills such as ability to listen, learn, adapt and execute, character traits such as executive presence and drive to win, and values such as integrity and stewardship.
Contrary to popular belief, we find that midcareer professionals can also have a high level of drive and motivation to become a searcher after a lifetime of working for somebody else. It is often their ideal time to start the second half of their career as an entrepreneur and they still have a plenty of career runway. In addition, they can bring a wealth of industry experience, acumen and network, allowing them to be well-equipped to conduct a focused thesis-driven search.
With all said above, we believe the search fund model can be an attractive route to entrepreneurship to searchers in various age groups and backgrounds. Depending on the search-industry focus and post-acquisition strategies, different searcher profiles can shine in different settings. For this reason, our searchers do not compete with each other and have different unique values to bring to the table.
It is truly difficult to identify prospective searchers who are equally talented at both searching and operating a business. If we had to choose one however, we would lean towards searchers with a stronger operator skill-set. Where our searchers lack experience in deal sourcing, diligence and M&A execution, we can provide relevant support and resources, leveraging our hands-on experience in search and M&A as well as our industry network. It is important that searchers see searching as a means to an end. They do not need to become a professional searcher.
4/ In addition to Korea, your interest extends to the wider APAC region. Could you provide further details on your recent involvement in an SME acquisition and in another search fund in Japan, including insights into both operations?
In Q2 2024, we participated in M-Capital G.K.’s acquisition of I’ll Corporation, a niche 3D styrofoam designing company, where Mitsuya Shimura became the successor of the company. More recently, we invested in Japan Relay Partners G.K., the fourth traditional search fund in Japan, in Q3 2024, supporting Yasushi Kobayashi’s search fund journey.
Korea and Japan share certain demographic, cultural and economic similarities which are quite different from the markets where search funds have been traditionally active such the Americas and Europe. With that said, the search fund industry in Japan now has five years of history whereas it still remains in the very early innings in Korea. We are closely observing and studying how search funds are positioning themselves in the existing SME, entrepreneurship and M&A landscape in Japan and across Asia as a direct participant in these markets
While our primary focus is supporting searchers and SMEs based in Korea, we hope to also play a role in the growth of the search fund model across the wider APAC region, particularly in markets that are close and similar to Korea, and where see potential synergistic opportunities.
5/Looking ahead, what strategic plans and objectives are in store for the Korea Search Fund?
While empowering aspiring entrepreneurs and exceptional SMEs are at the core of what we do and we hope to continue and grow this to a much larger scale, our ultimate goal and objective is to cultivate a sustainable ETA ecosystem in Korea, bringing together a wide range of potential searchers, investors, experts and professionals in the region.
We also hope to serve as the key gateway to the Korean ETA scene to the global search fund community. As we continue to build relationships with our foreign investors, we look forward to the opportunity to collaborate and co-invest with them where we could play the de-facto lead local investor role with relevant local insights and network. We are well-grounded to support Korean searchers and operators in-person.
Currently, we are supporting a couple of searchers actively exploring opportunities. Recently, one searcher had their LOI accepted and secured exclusivity – full diligence is well underway and we hope to see SPA execution in the coming months. Overall, we are enthused to see excellent progress to date and believe that there will be many more to come in the future.
