Affinity Equity bets big on Korea's car rental market

Car rental companies resemble financial services firms. Buying cars with borrowed money, renting them out and selling them to used car dealers are like managing the borrowed money and recovering them.

But Min Byung-chul, head of Affinity Equity Partners’ South Korean operations, defines the car rental business broadly: It offers services throughout the life cycle of a car from its roll-out to when it is scrapped.

“The core of Affinity’s value-up strategy for SK Rent-a-Car is transforming car rental services from a simple financial business to the management service through the life cycle of a car,” said Min, who also goes by his English name Charles Min.

In June, Affinity bought out SK Rent-a-Car, South Korea’s No. 2 car leasing company for 820 billion won ($615 million) from SK Networks Co.

The takeover marked the private equity firm’s first buyout since Partner Min took over as the head of its Seoul office last year upon the departure of its founding members, including former Chairman Park Young-taeg and Managing Partner Lee Chul-joo.

Back in 2014, Min had spearheaded Affinity’s bid for Lotte Rental Co., South Korea’s No. 1 car rental company. But it lost out to retail juggernaut Lotte Group that acquired then KT Rental for 1.2 trillion won the following year.

But Min had never given up on his pursuit of car rental companies. He had offered to buy SK Rent-a-Car before it was put on the market. Its talks with SK Networks to buy the rental car unit had faltered. But it finally pulled off the deal.

GROWTH POTENTIAL

Affinity Equity is betting big on the growth potential of the car rental business.

With the high penetration of automobiles, cars are no longer something to own in South Korea. Like smartphones, drivers are getting used to replacing their cars with new ones.

They also choose long-term rentals over buying cars and paying in installment.

Moreover, the private equity house believes the car rental business will grow beyond the traditional business model: Renting vehicles, getting them returned and selling them to used car dealers.

SK Rent-a-Car could deal with aftersales services for automobiles it rents and collect and manage data on its customers and their driving history, as well as offering second-hand car rental services, without outsourcing them. Last year, it entered the certified used car market.

It also could replace cars for customers with new models every six months or one year. On weekends, its corporate customers may rent their cars sitting idle in parking lots to make money.

To broaden SK Rent-a-Car's business horizon, Affinity is seeking bolt-up acquisitions of aftersales service companies and used car-trading platforms, instead of chasing small-to-medium sized car rental companies.

In the short term, separation from SK Group could downgrade its credit rating and thus raising financing costs, while losing affiliated customers under the country’s No. 2 conglomerate.

But Affinity shrugged off such concerns. Its split-up from the business group would rather increase its operation efficiency. It may outsource some operations at reasonable prices away from sister companies it had relied on.

SK Rent-a-Car could also go bolder in venturing into new businesses, which it found difficult to pursue in a bureaucratic organization.

Founded in 1998, Affinity Equity manages about $14 billion in 11 countries across Asia Pacific.

Its portfolio companies in South Kore include Serveone Co., a product sourcing and maintenance service provider; Lock&Lock Co., a food container maker; and Burger King’s operations in South Korea and Japan.

In 2014, Affinity and KKR & Co. netted about $4 billion together from the $5.8 billion sale of South Korea’s Oriental Brewery to Anheuse-Busch InBev. That marked the most lucrative exit deal in South Korea's private equity industry.

Write to Jong-Kwan Park at pjk@hankyung.com
 

Yeonhee Kim edited this article