Buyout firms in 2000 took their funds to South Korea intent on seizing some of the action that was too good to ignore. General partners saw an opportunity to take advantage of assets that were being divested by the chaebols (major industrial conglomerates) and a government that was opening its doors to Western fund managers in an attempt to jump start a lagging economy.
Industry observers point to a number of reforms made by President Kim Dae-Jung that, they say, makes the region “sexier” than it has been in past years. Some of the reforms include privatizing state-owned companies, recapitalizing heavily indebted financial institutions, restructuring certain chaebols and relaxing the limits of foreign shareholding in Korean companies.
In addition, the Korean government also has restructured the banking and fund management sectors as well as attempting to implement greater transparency in accounting practices and corporate financial management.
Seoul Searching
All of these governmental initiatives have buyout pros brushing up on their Korean in anticipation of future negotiations with Korean executives over a Korean barbecue. Just last month Warburg Pincus & Co. committed an estimated $370 million for a 20% stake in LG Capital Services Corp., representing the firm’s largest investment in Asia to date.
Warburg acquired its stake in LG Capital Services, South Korea’s largest credit card issuer, from LG Industrial Systems, a member of the LG Group, which is one of the top three conglomerates in the Republic of Korea.
Warburg Pincus has also invested undisclosed amounts in other Korean assets such as Little Brenn, which is a retailer of children’s clothing, and in North Pole, an international manufacturer of camping tents and outdoor furniture.
The bulk of Warburg Pincus’ activities in the region has been restructuring and reorganization efforts in disparate industries, says Chip Kaye, a managing director at Warburg Pincus. “Korea has spawned interesting middle market entities and valuations have come down across the board,” he says.
Kaye says prior to the crisis in Korea, private equity investing there was difficult, if not illegal, and it was only when the rules began to change that Warburg Pincus really started to invest in the region at the end of 1998.
“It was very difficult for a foreigner to inject meaningful capital and own a meaningful percentage of something,” Kaye says. “The government has completely changed now as part of their efforts to attract foreign capital. Now the rules are essentially quite open.”
As evidence of the increasing competition for South Korean assets, The Carlyle Group outbid Newbridge Capital for a controlling stake in Ssangyong Information & Communications Corp. (see story p. 6), which had an ultimate deal value of $248 million. Carlyle backed away from its initial bid in October, which allowed Newbridge Capital to make its own offer of $240 million for the computer network integration business. Newbridge Capital, which is an affiliate of Texas Pacific Group and BLUM Capital Partners, has also been active in the region with its purchase of Korea First Bank last year.
Carlyle is no stranger to investing in Korea. The firm was part of an investment group that bought 40% of KorAm Bank of Korea in September for $300 million. Another group that participated in the investment was CDP Capital International, which is a subsidiary of the Caisse de depot et placement du Quebec. “This investment will allow KorAm Bank to take advantage of opportunities arising out of the restructuring and consolidation of the banking sector taking place in Korea,” said Jean Lamothe, President of CDP Capital.
Earlier in the year, CDP Capital and CDP Capital Communication, which is another subsidiary of Caisse de depot et placement du Quebec, along with partners in Korea created a $500 million fund that targets infrastructure investments primarily in telecommunications, transport, oil and gas, as well as water and environmental sectors in South Korea. Carlyle also has a $750 million fund dedicated to investing in opportunities in Asia.
Other groups that have Asian or Pan Asian funds include Chase Capital Partners, which rounded up $1.1 billion in May to close out Chase Capital Partners Asia (CCP Asia), its debut Asia-focused buyout fund and H&Q Asia Pacific held a final close for its debut Korea private equity fund, Korea Growth and Restructuring Fund LP, on $101 million. Both investment vehicles have been active as Chase Asia Equity Partners teamed up with UBS Capital last January to buy the chassis-making business of Mando Machinery Corp., one of South Korea’s largest auto parts makers, in a deal worth $446 million in debt and equity. The Chase Asia and UBS deal was one of the largest private equity transactions in South Korea. H&Q Asia acquired Ssangyong Investment & Securities Co., which is one of many divisions of Ssangyong Group, one of the giant South Korean chaebols. Ssangyong has interests in businesses ranging from cement to ski resorts.
The appetite for Korean assets is also apparent among European private equity players. In October, CVC Capital Partners Asia Pacific Ltd. along with the Carlyle Group, PPM Ventures and Asia Investors LLC planned a buyout of the networking, switching and fiber optic cable businesses of Korea’s Daewoo Telecom Ltd., which will be incorporated in Korea as Mercury Corp.
A Change of Heart
GPs that have done business in Korea have praised Korean executives for their willingness to take the Western investment philosophy more to heart than their Asian counterparts. In a previous interview with Buyouts, Daniel Mintz, a managing director at Olympus Capital Asia Holdings, said, “Both the Korean government and the private sector have made dramatic changes in their practices in terms of what they’re willing to do to bring in foreign capital.”
Last February, Olympus Capital entered into a joint venture with Korea Exchange Bank Credit Services Co. (KEBCS), the credit card subsidiary of Korea Exchange Bank. The $120 million transaction involves two phases of investments on the part of the Olympus Capital consortium, which includes Samsung Life Insurance, Central Development Investment Bank of Taiwan and other limited partners. The initial round of investment was $90 million with an optional second round of financing valued at approximately $30 million in two years.
“I don’t think Japan had the same sense of urgency as Korea and that has translated into fewer opportunities there,” says a GP at a well known buyout firm. “In our experience, we have found more Korean managers and management groups that have been prepared to understand that they would rather right the ship and get it on track and move on as opposed to simply finding a way to delay the problem. Japan continues to play itself out and I think there will be opportunities there as well. To date, however, that has not yet happened.”
Warburg’s Kaye adds that the process of instilling a sense of corporate accountability and transparency, as well as the return on capital concept take time to complete.
“I think the [Korean] government has remained supportive, but you can’t win every battle immediately and you have to allow these things to play out, which isn’t to say there aren’t still significant challenges and obstacles to overcome. I would argue that the progress has been quite reasonable and would hope that it continues,” he says.
The Great Wall
However, investing in South Korea can be a major headache for many Western GPs without the right approach. Issues such as accounting practices, weak legal protections, the scarcity of debt financing for transactions and the closed nature of the Asian family business community can discourage.
“It’s a challenging place, but if you know how to manage situations and empathize with the culture there, it can be a rewarding plan,” said UBS Capital President David Lai. “If you don’t, then it can be a brick wall.”
H&Q Asia Pacific Chief Financial Officer Purvi Ghandi said, “[A colleague] and myself have been involved in several deals in Japan…and the culture there is very different from even Korea. If you don’t understand that you could easily lose a deal or could be swindled into paying a very, very high valuation, as well.”
Kaye says that investing in South Korea “takes a lot of patience, a unique blend of local knowledge as well as global experience in dealing with these kinds of situations.”
He argues that while there has been continuous progress in the region over the last few years, there are consistent challenges and obstacles that cannot be solved overnight. “So it is not a process of buying the stock today and selling it tomorrow,” he says. [Rather], it takes a much greater degree of time and care.”
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