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Hedge Fund Gains 81% in Slowing Korea by Betting on K-Pop

2019-10-08 10:51
Content : [Bloomberg 2019.10.07]

In South Korea’s sputtering economy, where stocks have been falling since the start of last year, one way to generate returns has been in the risky world of startup investment.

One hedge fund firm, AlpenRoute Asset Management, has gained 81% in its flagship fund since inception in July 2016, by investing in unlisted companies such as the firm behind K-pop boy band BTS. AlpenRoute, which oversees about 1 trillion won ($836 million), benefited as revenue at Big Hit Entertainment Co. more than doubled last year on the success of BTS.

It’s a high-risk, high-reward type of investing that’s not for everybody, and the funds that do it don’t have a long-enough track record to judge their performance, according to one analyst. But for AlpenRoute Chief Executive Officer Bo Guen Choi, the thriving startup market is a better choice than public equities in the current economic climate.

“Why are our funds doing well? It’s because South Korea’s economy is slowing,” Choi said in an interview at his office in the upscale Gangnam area of Seoul. In times of sluggish growth, it makes more sense to take risks on startups than to invest in established names, he said.

The Kospi index of the nation’s larger public shares has gained less than 3% since the start of July 2016. It’s down more than 22% since a high in January 2018.

Wealthy Clients

The AlpenRoute Montblanc 4807 fund, which invests in unlisted startups and mezzanine debt, mainly counts wealth South Korean individuals in the Gangnam area as its clients, according to Choi. He calls them “V.V.I.Ps.”

Oh Gwang-young, an analyst at Shinyoung Securities, sounds two notes of caution. These kinds of strategies tend to be for affluent or sophisticated investors who can afford to take risks, he says. And none of the hedge funds investing in unlisted startups has been doing it long enough. “The Korean hedge fund industry is still in an early stage, so there’s herd behavior whenever a certain strategy generates high profits.”

Startup Boom

Startups in South Korea doubled over the past decade

Still, what’s difficult to dispute is that the South Korean startup market is thriving as public equities languish. The number of initial-stage companies surged to 102,000 in 2018 from 51,000 in 2008, boosted by government efforts to nurture the industry, according to the Financial Services Commission. They include low-rate government loans to entrepreneurs, tax benefits and eased IPO requirements. South Korea now hosts nine unicorns, unlisted companies with valuations of more than $1 billion.

“The government’s support has been tremendous,” Choi said.

They’re a bright spot in an otherwise darker picture for the country’s economy, which is expected to grow this year at the slowest pace since the global financial crisis, as the U.S.-China trade war and a Chinese economic slowdown hurt overseas demand for Korean goods. Consumer prices fell for the first time in September, while exports plunged.

“It is true that the pre-IPO market is booming in Korea,” said Park Yong-Rin, senior research fellow at Korea Capital Market Institute.

AlpenRoute invests half its assets in about 40 South Korean startups, allocating about $10 million on average, according to Choi. Its investment in the firm behind BTS came after much consideration, he said.

“Before buying into Big Hit Entertainment, we had a lot of questions,” such as whether members of the band might get into difficulties or even apply for military service, Choi said. But “two months after we invested, the boy band BTS topped the charts.”

Market Kurly

The firm runs about 50 funds, with one of its investment vehicles, a pure pre-IPO fund named Montblanc Absolute I, posting a 252% return since November 2017. One of its investments was Market Kurly, a mobile app created by a former Goldman Sachs Group Inc. banker that offers fresh food delivery services, Choi said. It also trades in mezzanine debt, such as convertible bonds, and structures loans backed by startups’ sales.

AlpenRoute also has stakes in Goto, a fitness chain with low membership fees that has 50 branches across the country; Zaksim Library, which offers private study rooms targeted to millennials; and Manna CEA, an smart-farm operator that uses artificial intelligence to monitor conditions of vegetables in real time. The firm also invested in ABLBio Inc., a biotechnology firm whose shares jumped more than 150% after going public.

As for whether the good times can last for his firm and its strategies, Choi, at least, is confident that they will.

“We don’t think there’s a bubble in the pre-IPO market yet,” he said.

[By Heejin Kim]