MBK Partners, one of Asia’s largest private equity firms, is facing its biggest-ever challenge after placing Homeplus into court-led rehabilitation, reigniting criticism of the firm's strategy of putting return maximization above all else.

Now industry experts are beginning to question whether the 20-year-old PE firm's approach is all it's cracked up to be. They say its handling of Homeplus highlights the risks of leveraged buyouts and the firm’s controversial financial maneuvers that pushed the retailer to the brink of default.

MBK acquired Homeplus in 2015 for 7.2 trillion won ($4.9 billion) via a leveraged buyout, funding 56 percent through loans using Homeplus' real estate as collateral.

Under the control of the private equity firm for 10 years, Homeplus has faced worsening financial distress, with operating losses for three consecutive years and a staggering debt-to-asset ratio that exceeded 3,000 percent in 2023.

“MBK has damaged the company’s future growth foundation in order to recover its investment in a short period of time,” the labor union of Homeplus said, adding that MBK implemented a large-scale restructuring for the purpose of reducing costs.

Two ratings agencies lowered the rating of its corporate bonds to A3- on Feb. 28, citing weakening profit-generating capabilities, excessive debt, and increasing uncertainty about mid- to long-term business competitiveness.

Just four days following the rating downgrade, MBK filed for rehabilitation, anticipating challenges in securing short-term funding, without prior negotiations with creditors or any self-rescue plans to stabilize the firm.

MBK has faced speculation that its sudden application for the corporate rehabilitation of Homeplus may have been intended to alleviate 4 trillion won in lease liabilities by freezing debts under bankruptcy proceedings.

“I suspect that there was a strategic decision (made by MBK) to classify the lease liabilities incurred after the asset sale as financial liabilities, allowing them to focus on repaying the debt acquired during the purchase of Homeplus,” said Seo Ji-yong, a professor of business administration at Sangmyung University.

MBK quickly raised cash by selling off the sites and buildings of Homeplus stores across the country in order to pay off loans and interest.

After the sale, Homeplus had to begin paying rent for properties it once owned because it leased them back, which added to the fixed costs on its balance sheet.

“Much of the acquisition financing borne at the time of acquisition by MBK seems to have been reduced by selling assets, but in reality, the form of debt has only shifted from general borrowings to (Homeplus') lease liabilities,” said Kim Sang-man, a researcher at Hana Securities.

Homeplus is not the sole underperformer within MBK's portfolio. The firm has encountered challenges with several of its portfolio companies in recent years, raising concerns about its competence in managing these investments effectively.

In 2013, MBK acquired outdoor wear brand Nepa for 1 trillion won through a special purpose company. But over the past decade, the fashion house has struggled with its net profit turning to a loss in 2023.

MBK offloading the burden of acquisition financing worth 480 billion won on the label is stated as a major factor that pulled back the brand’s growth and put it under a financial strain.

Young Hwa Con & Eng, a steel and metal structure manufacturer, is also considered a case of MBK’s management failure.

MBK acquired the company at 100 billion won in 2009. Like Homeplus, Young Hwa Con & Eng filed for corporate rehabilitation in 2016 and was eventually sold at half the initial price, 50 billion won.

Finding exits for its assets has been challenging for MBK, too.

Prior to Homeplus’ bankruptcy, MBK was struggling to find a buyer for Homeplus Express, the supermarket unit under the retailer. Though some retail giants were mentioned as potential buyers in the early stage, MBK made little progress with the sale.

Private equity funds are placed under relatively eased regulations when compared to other financial companies here — such as being exempt from making regulatory filings — as they are regulated by their limited partners.

The snowballing controversy surrounding MBK has brought up the need to tighten regulations related to private equity funds, with even top regulators mentioning the need for reform.

Some believe the current spotlight on MBK may push back the growth of the overall private equity scene here, suggesting tightened regulations could undermine the principles of private funds and limit autonomy.

"Preliminary regulations should be minimized considering private equity funds are supposed to function as catalysts in the capital market,” Lee Hyo-seob, senior research fellow at Korea Capital Market Institute, said.

“Mandating follow-up reporting and limiting excessive leveraged buyouts are plausible. But the funds would not be able to fulfill their true functions under excessive rules.”

In the meantime, private equity firms are concerned about pooling funding from limited partners amid the hostility against the investment vehicle.

“The ‘dine and dash’ perception of PEFs is likely to intensify. Such perception is concerning as limited partners might be pressured to fund,” an official from a local private equity firm said.

By Park Han-na (hnpark@heraldcorp.com) and Im Eun-byel (silverstar@heraldcorp.com)