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Michael Byung Ju Kim nonetheless remembers the dialog that satisfied him to arrange his personal personal fairness agency in his native South Korea.
Educated within the US, Kim labored on Wall Avenue for Goldman Sachs and Salomon Brothers earlier than becoming a member of world personal fairness big Carlyle, the place as Asia president he led the agency’s Asian push within the early 2000s.
However a gathering in 2005 with Ho Ching, then chief government officer of Singaporean state holding firm Temasek, impressed him to strike out on his personal.
“Ho Ching, whom I tremendously admire, inspired me to create an Asian agency, owned and operated by Asians, for Asia,” says Kim. “However somewhat than arrange store in Singapore, the Korean in me received out, so we arrange right here in Seoul.”
Seventeen years later, Kim’s personal fairness agency MBK Companions is sitting on $25.6bn of belongings underneath administration — an annual enhance of 29 per cent because it was based shortly after his dialog with Ho. Its sale of a 12.5 per cent stake to New York-based Dyal Capital earlier this yr valued the corporate at $10bn — equal to publicly listed TPG, America’s fifth-largest PE agency.
The rise of MBK, which invests in Korea, Japan and China, illustrates the dramatic progress in scale and class of the South Korean personal fairness market within the a long time because the Asian monetary disaster of 1997.
In 2021, South Korea’s personal fairness deal worth doubled to a report excessive of just about $30bn, exceeding neighbouring Japan by about $2bn and trailing solely China and India by way of complete deal worth within the area, in line with estimates by Bain & Firm. Investor exits additionally jumped 225 per cent from the earlier yr to $21bn.
“Korea has assumed disproportionate significance as a buyout market in the previous couple of years,” says Iain Drayton, head of Goldman Sachs’ funding banking division in Asia ex-Japan.
“The financing is there, the conglomerates are restructuring, and you’ve got numerous family-owned companies going by way of succession. Consequently, the nation has develop into a magnet for personal fairness — it’s one of many best-kept secrets and techniques in Asia.”
Personal fairness’s progress in Korea displays the transformation within the nation’s as soon as tumultuous relationship with overseas capital, because it liberalised its economic system and adopted monetary practices from overseas. It additionally mirrors the broader fortunes of the nation itself, 25 years after worldwide collectors all of the sudden withdrew the short-term financing upon which Korean trade had come to rely, leaving banks and overleveraged conglomerates on their knees.
At the moment, native personal fairness companies arrange lower than 20 years in the past are going toe-to-toe with world gamers as Korean firms, now flush with money, plot new forays into overseas markets.
Kim, often called the “godfather of Asian personal fairness,” says companies like his have helped the nation carve out a precious and distinct area of interest for itself within the area. “Once we started in 2005, world institutional buyers would scratch their heads and say ‘we get China, we get Japan, however why Korea?’” he says. “Now they perceive that in comparison with the bigger markets of China and Japan, Korea will not be too dangerous and never too low-growth. That’s why we name Korea the Goldilocks nation.”
‘A interval of disgrace’
Within the aftermath of the Asian monetary disaster, a variety of overseas funds swooped in to take over distressed Korean monetary establishments.
In January 1999, Newbridge Capital, a three way partnership between TPG, Blum Capital and Acon Investments, paid roughly $500mn for a 51 per cent stake in Korea First Financial institution, which had been nationalised two years earlier than. The next yr, a consortium headed by Carlyle — then led in Asia by Kim — paid $412.3mn for 40 per cent of KorAm, one other main South Korean financial institution.
To Korean critics, these overseas “vulture funds” have been feasting on the nation’s misfortune at a second of acute vulnerability. Public anger erupted after Texas personal fairness agency Lone Star Funds paid $1.2bn in 2003 for a controlling stake in Korea Trade Financial institution, regarded by many in Seoul because the jewel within the crown of the Korean banking system.
“Lone Star turned synonymous with what many noticed as a interval of disgrace and leakage of nationwide wealth,” says one Korean financier. “It acquired actually ugly.”
The Korean monetary authorities tried to declare Lone Star’s acquisition of KEB unlawful, in impact killing a proposed 2006 sale of the financial institution to HSBC. Prosecutors additionally accused Lone Star executives of tax evasion and inventory value manipulation, sending nation supervisor Paul Yoo to jail in 2008. The senior finance ministry official who accredited the transaction was imprisoned.
In 2012 Lone Star fought again, taking motion on the World Financial institution’s worldwide arbitrator to demand $4.7bn from the Korean authorities in losses incurred from its delay of the HSBC deal and the unfair imposition of taxes. A ruling is anticipated this yr.
However whereas components of Korea’s monetary regulatory institution have been looking for to make an instance of Lone Star, others noticed within the actions of the overseas personal fairness teams one thing to emulate.
These advocates say the overseas PE companies recapitalised Korea’s main banks at their very own threat, introducing fashionable threat evaluation programs and credit score self-discipline to monetary establishments that for many years had lent recklessly to politically related conglomerates.
They have been rewarded with good-looking earnings within the course of: Carlyle greater than doubled its cash promoting its stake in KorAm to Citibank in 2004, whereas Newbridge made a $1bn revenue promoting its stake in Korea First Financial institution to Commonplace Chartered in 2005. Lone Star would finally promote its stake in Korea Trade Financial institution to Hana Monetary Group for $3bn in 2012.
“The gross sales mirrored the worth that was created,” says Kim. “The authorities recognised the contribution made by personal fairness and, within the face of a cultural backlash in opposition to the overseas companies, set their sights on fostering an area PE trade. It was a direct outgrowth from the monetary disaster.”
Delivery of an trade
Till 2005, Korean funding teams had been restricted to elevating cash from buyers on a project-by-project foundation. However after the enactment of a brand new capital markets regulation, they have been in a position to elevate “blind swimming pools” of money to deploy as they noticed match.
These new Korean-registered “basic partnerships” loved tax benefits over their overseas opponents, in addition to better freedom to accumulate belongings topic to overseas possession restrictions. Two months after the regulation got here into drive, Kim and his former workforce from Carlyle launched MBK.
The brand new companies additionally benefited from the willingness of Korea’s big pension funds, together with the mighty public National Pension Service (NPS), to spend money on native gamers even when that they had restricted expertise within the trade.
This was due partially to the weak efficiency of Korea’s public markets, weighed down by longstanding investor concerns over poor company governance. The NPS elevated its PEF investments greater than tenfold between 2007 and 2017, in line with a examine by McKinsey.
“The Capital Markets Legislation enabled the creation of funds, but when there was no sizeable institutional investor supporting that, it will have been unattainable,” says Park Chung Ho, Korea co-lead for US-based funding agency KKR.
He provides that the NPS’s emergence as a key institutional investor in world personal fairness since 2005 had “modified the narrative” in regards to the sector in Korea itself.
“Personal fairness was now not exterior the realm of what Korean establishments or Korean gamers had entry to. It began to be seen as one thing from which the nation may benefit.”
Most significantly, there have been offers to be made. South Korea had rebounded from the Asian monetary disaster so rapidly that the nation paid off its 15-year loans inside two years. The disaster had additionally pressured radical restructuring on the surviving Korean conglomerates, creating alternatives for carve-outs and progress.
“The capital that had been invested in these export-oriented manufacturing companies over a long time didn’t simply disappear throughout the Asian monetary disaster,” says Park. “It was in belongings, in infrastructure and in manufacturing capabilities. There was numerous idle capability that was able to churn when the market picked up.”
Beneath stress from Korea’s high inheritance tax rates, founders of a complete era of medium-sized firms and bigger enterprise teams have been seeking to divest and promote, powering the rise of latest native PE gamers corresponding to IMM and Stic Investments, each of which had begun life as company restructuring specialists within the late Nineteen Nineties.
When the worldwide monetary disaster struck in direction of the tip of the 2000s, there was a brand new spherical of alternatives as multinational companies headed for the exit.
It was on this context that KKR’s newly minted Seoul workplace acquired South Korea’s Oriental Brewery from a debt-laden Anheuser-Busch InBev in 2009. The $1.8bn deal, executed in partnership with Hong Kong-based Affinity Fairness Companions, marked the return of worldwide personal fairness to the Korean market and compelled world buyers, a lot of whom had been delay Korea by the Lone Star saga, to offer the nation a re-examination.
KKR would go on to make a fivefold return on its funding, promoting Oriental Brewery back to AB InBev in a $5.8bn deal in 2014 and serving to to propel Joseph Bae, then head of KKR in Asia, to the place of worldwide co-chief government.
The next yr MBK purchased Korean retailer Homeplus from Tesco, which was at the moment reeling from an accounting scandal, for $6.1bn — the biggest M&A transaction in Korean historical past. In 2021, it made billion-dollar returns from divestments in Korea, Japan and China respectively — constituting a 3rd of the 9 largest PE exit offers throughout the three nations that yr.
A busy future
Traces of the Lone Star controversy stay in Korea’s public discourse. Throughout his nomination course of earlier this yr, Korean prime minister Han Duck-soo was pressured to disclaim any involvement within the Lone Star case when working for the Texas fund’s Korean regulation agency.
However Younger Ki Kim, head of funding banking for JPMorgan in Seoul, says that native personal fairness’s rise because the 2005 capital markets regulation has lengthy since reworked the best way the trade is perceived by Korean enterprise house owners.
“When PE was concerned primarily with distressed belongings, there was a sure stigma for founders — it was related to failure,” he says. “However now it’s related to success — the discuss of ‘vulture funds’ is lengthy gone.”
Sung Tae-yoon, professor of economics at Yonsei College in Seoul, provides that the trade has tailored to Korea’s regulatory, financial and political setting by avoiding the sorts of cost-cutting practices and lay-offs which have tainted the trade’s fame in different components of the world.
“They’ve been much less aggressive about company restructuring as a result of retaining the workforce is usually a situation for his or her acquisition because of the inflexible labour market,” says Sung.
Sung provides that non-public fairness is seen comparatively favourably in Korea due to the reminiscence of the cronyism and outdated practices of the nation’s banks within the lead-up to the Asian monetary disaster.
Personal fairness companies each native and world have purchased up chunks of extremely diversified conglomerates corresponding to SK Group, Hanwha Group and Doosan Group, whereas growing investments within the Korean credit score, actual property and insurance coverage sectors. Business executives say medium-sized Korean firms in sectors starting from client items, infrastructure and manufacturing to ecommerce, fintech and software program provide potential pickings for the long run.
However financiers say that buyers hoping to feast on big carve-outs from main chaebol corresponding to Samsung, Hyundai and LG are more likely to be disenchanted. Partially, it’s because not like their Japanese counterparts, the Korean conglomerates already went by way of a interval of acute disruption within the aftermath of the Asian monetary disaster.
“It doesn’t strike me that we’ll see the identical kind of deep surgical procedure on the chaebol that we’ve seen on a number of the keiretsu in Japan,” says Drayton of Goldman Sachs.
As a substitute, he says, the subsequent frontier for personal fairness in South Korea is more likely to be the chance to companion with Korean companies as they give the impression of being to deploy their very own capital overseas.
Spooked by regulatory caprice in China, restricted by western export controls and enticed by the prospect of US and European subsidies, Korean firms are making a push into western markets in sectors starting from semiconductors to EV batteries and defence tools.
The chaebol are main the cost. Samsung Electronics, the world’s largest reminiscence chipmaker, is investing $17bn in a brand new foundry in Texas, whereas SK Group chair Chey Tae-won has introduced $52bn in US investments between now and 2030. In Might, Hyundai introduced a $5.5bn funding to construct its first devoted EV plant and battery manufacturing facility within the US.
Talking earlier than his abrupt resignation this month as world chief government of Carlyle, Kewsong Lee advised the Monetary Occasions that “an infinite quantity of capital will probably be required in terms of semiconductors, to vitality transition, to various types of vitality and electrical batteries, to the subsequent era of mobility.”
Lee mentioned that there have been “fixed conversations” occurring between world PE companies and a youthful era of chaebol leaders, a lot of whom have been educated within the US and are “very open to those sorts of partnerships”.
“There’s going to be numerous Korean corporates going abroad — they’re in search of progress exterior of Korea, and the US is providing a compelling technique,” says Park Chung Ho of KKR, citing his agency’s $2bn funding final yr in SK Group’s plans to increase its share of the worldwide hydrogen market.
Native personal fairness companies are additionally hoping to benefit from the corporates’ overseas push. Music In-jun, founder and CEO of IMM, factors to its acquisition of Air First, previously German Linde Group’s Korean industrial fuel enterprise, a key provider to Samsung’s chip crops in Korea and doubtlessly overseas, for instance of how Korean funds will begin to enter overseas markets within the chaebols’ slipstream.
A brand new era of boutique Korean PE companies has additionally sprung as much as benefit from the development. Earlier this yr, former IMM PE director Paul Kang and former Apple strategic offers supervisor Hansol Kim co-founded Bricks Capital Administration, a non-public fairness start-up seeded by main Korean firms within the EV battery sector to establish funding and acquisition targets for his or her budding provide chain within the US.
For Korean financiers who bear in mind the Asian monetary disaster and the overseas acquisition of the nation’s monetary establishments within the early 2000s, this Korean push into overseas markets constitutes a gratifying inversion of the narrative of 1 / 4 of a century in the past.
“Individuals within the west overlook that within the late Nineteen Nineties Korea, the tenth largest economic system on the planet, was successfully in sovereign default,” says Kim. “Then once we arrange in 2005, it was mentioned that the centre of the worldwide economic system was shifting to Asia. It was simply an aspiration then — as we speak it’s a actuality.”
Extra reporting by Hudson Lockett in Hong Kong and Music Jung-a and Kang Buseong in Seoul
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