Koreas National Tax Service (NTS) is reportedly considering adding Newbridge Capital to its list of foreign private equity firms under investigation.
The action, as recently reported by the Korean Herald, is based on Newbridges acquisition and sale of Korea First Bank (KFB). Newbridge, which acquired KFB in 1999, sold the bank to U.K.-based Standard Chartered Bank in the fall of 2004. Newbridge Managing Partner Dan Carroll told PE Week that the $3.3 billion sale earned the private equity firm $1.5 billion. The firm manages about $1.7 billion in assets from offices in the United States, Asia and Australia.
The investigation is yet another example of how American private equity firms are increasingly being scrutinized by Japan, Korea and China as more and more foreign investment activity takes place in those countries. For example, in early April, investigators from the NTS showed up at the Seoul offices of Lonestar Partners and The Carlyle Group demanding access to documents and files that were summarily carted away in what a Korean private equity professional described as an invasion.
The Carlyle Group, Lonestar and Newbridge along with Cerebrus, H&Q Asia Pacific, Ripplewood Holdings and Warburg Pincus have been spectacularly successful in the Asian PE markets. The Carlyle Group, for example, is noted for buying and selling Koram Bank last year for a reported 6X return.
The investigation of Newbridge comes as Koreas Finance Minister Han-Duck-Soo has been on a good will press tour in London and New York to tell investors that Korea welcomes their participation. During his London trip, Han was reported as saying that Korea welcomes foreign investors, and he emphasized that the government has never been hostile to foreign funds when they earn returns legitimately.
But part of the reason for the rising resentment over the success of U.S. private equity firms was caused by Korea itself. Until recently, the government allowed only foreign firms to invest in private equity within Korea. In December, the government began to reverse that trend as Korea instituted a regulation that allowed domestic firms to invest in private equity within the country for the first time. As was reported (see PE Week, 11/22/04), the new regulation was intended to encourage the development of the domestic private equity industry, which has seen foreign buyouts firms, such as Newbridge and The Carlyle Group, come into the country and do quite well for more than five years.
Meanwhile, observers of Asian private equity are waiting to see what happens in China and Japan as both countries are looking at forming tax regulations that would impact private equity firms doing business in these countries.