The pain isn't over yet, but radical economic restructuring has finally fuelled a flurry of big buyouts, and even some exits.
It may not be a long time in a country's history, but the past four years have been one of catharsis and revival for South Korea. As Richard Blum, Chairman of Blum Capital Partners, put it recently: “It seems like every other day some deal is brewing in Korea.” In fact, South Korea stands out as a singular exception -especially in major buyouts and exits – to the overall slowdown in Asian private equity of late. Tang Kok Yew, UBS Capital's Asia-Pacific Chairman concurs: “Today Korea is the biggest market for deals in Asia.”
AVCJ's research data shows that private equity investment in Asia plummeted by 33 per cent to $5.14bn in 1H02 from $7.7bn in the corresponding period of last year. However, South Korea alone accounted for 36 per cent of the investments in 1H02. The $1.9bn invested in South Korea in the first half of this year has surpassed the country's tally for all of 2001.
The upsurge in private equity has essentially mirrored the country's macro-economic growth in the past couple of years. Koreans have been producing more, exporting more and consuming more. From the negative numbers of the late 1990s, GDP increased by three per cent last year and projections for 2002 range from six to 6.8 per cent. “The consumption-led recovery has created a favourable foundation for the fundamentals of the economy,” remarks Michael B. Kim, President of Carlyle Asia.
‘Welcome to our foreign friends’
So the foreign buyers have succeeded in South Korea. “Yes, we like Korea as a core market and we continue to like it,” remarks Marcus Thompson, Chief Investment Officer, HSBC Private Equity (Asia). Interestingly, Thompson is not into the Korean banking sector buyouts. That comes under the purview of the parent bank, HSBC, itself and not its private equity arm. But there is no dearth of foreign funding aimed at South Korea. HSBC Regional Private Equity Fund 3 has been launched with a target of $700m, so a good bit of that could flow into South Korea in the coming years. The Carlyle Group has $750m dedicated to Asian buyouts. Ilshin Investment, in partnership with Australia's Henderson Group, has raised $35m recently for a Korea fund wlth an ambitious target of $800m
Ilshin's Koh says that, in any event, there is enough capital available locally. Of the 130 local VCs, only about 30 are active in dealmaking; they and the others who are sitting on cash could be tapped for further local investment.
So which are the preferred sectors the new money would pour into? In recent years, IT/telecoms and electronics/computers have together received almost two thirds of the private equity investments – a trend likely to continue. Major foreign investment banks and funds are seeking good buyouts in most sectors, but they also have their preferences based on their expertise. Major deals on financial sector buyouts will make headlines for a year or more. HSBC prefers the domestic consumption sector, manufacturing and construction-related companies.
The cash-flow mantra
Kim of the Carlyle Group quips: “We go into the areas where we have expertlse and experience. You can say we are mostly in the boring, unsexy sectors of the old economy. What we really look for are companies with good cash flow and good management, and then we take control of the target company.”
Even the major investment houses with their financial clout, cannot escape the reality of the market. A couple of years after the 1998 financial meltdown, they had easy pickings in distress sales with high margins. In the past year or so, deals in most sectors have been fully priced. And with the competition by bidders getting more intense, margins will continue to shrink.
Before 1998, mid-sized European banks and investment houses – by global standards, that is – were quite active in Korean private equity. In recent years, deals have grown bigger and more complex. “To structure such large and complicated deals requires different deal-making skill-sets,” comments Tang of UBS Capital. American-style mega deal-making, with reams of legal documentation, has entered Asia. That explains the predominance of American houses such as JP Morgan, UBS, Goldman Sachs, Newbridge Capital and Carlyle. And this trend of dominance by the bigwigs is likely to continue.
A grab-bag of high-profile deals currently brewing and likely to materialize in the coming year includes: Korea T Express, a logistics company (JP Morgan); Powercomm, a telco, (Carlyle); Cho Hung Credit Card (GE Capital and Citigroup). And more imminently of course, the financial sector auctions of Seoulbank, Woori Finance Holdings and Cho Hung Bank Korea is well along the comeback trail.
V. G. Kulkarni is the managing editor of Asian Venture Capital Journal (www.asianFN.com). The article appeared in the August edition of AVCJ
Schroder Ventures spins off Japanese arm
Management at the Japanese subsidiary of Schroder Ventures have completed a management buyout of the business, acquiring the 30 per cent stake currently owned by the UK investment house.
Schroder Ventures Japan was established as a joint venture between Schroder PTV Partners and current chief executive Nobuo Matsuki in 1985. The firm will now be known as MKS Consulting.
The management buyout coincides with the raising of a new fund, which held a first close in August at $80m. The new structure of the fund is designed to make it easier to acquire interests in Japanese corporations.
Schroder Ventures Japan managing partner Takaaki Kawashima is aiming to attract between ten and twelve institutional investors for the domestic tranche of the debut fund. The international tranche will be provided by around half that number. Schroder Ventures International Investment Trust (SVIIT) will invest $50m in the vehicle.
General Atlantic invests $100m in India
General Atlantic, the US-based private equity house specialising in information technology investments, has made its largest bet in
Asia to date, investing $100m in a minority stake in IT consultancy and solutions provider Patni Computer Systems.
Mumbai-based Patni, which employs 5,000 software professionals throughout India, will use the capital injection to fund internal growth and expansion through selected strategic acquisitions globally. Patni plans to invest in multiple locations in Europe and Australia in the current financial year.
General Atlantic partner John Wong said the firm was happy with its largest investment in Asia, describing the firm and the broader Indian market as having great growth potential. “We believe that India represents a tremendous market opportunity. This is particularly true now, when companies are focused on reducing costs and improving processes.”
Wong, along with fellow General Atlantic partner William Grabe, will join the Patni board of directors. General Atlantic was founded in 1980 and has over $4bn in committed capital. One third of its 60 portfolio investments are based outside the United States.
CVC exits Australian construction firm
UK private equity firm CVC Capital Partners has abandoned plans to float its Australian construction materials business Laminex Group in favour of a trade sale.
New Zealand-based construction firm Fletcher Building has agreed to pay A$645m (€360m) for the business, which CVC acquired in 1998 as part of its acquisition of Amatek in a A$1.6bn leveraged buyout. In the 2002 financial year, Laminex posted ebitda of A$88m, net profit of A$57.6m, and revenue of A$608m.
CVC had originally planned to spin the Laminex Group out of Amatek via a flotation of the business on the Australian Stock Exchange. However the trade sale enables CVC to make a complete exit from Laminex instead of retaining a 20 per cent stake after flotation. The A$450m listing would have been one of the largest to take place in 2002.
Amatek has a group turnover of approximately A$1.2bn and is predominantly owned by funds managed and advised by CVC Capital Partners, one of the UK's largest private investment partnerships. Funds managed by Donaldson Lufkin and Jenrette Merchant Banking Partners also own equity in Amatek.
Newbridge takes minority banking stake
US-based venture capitalist Newbridge Capital has reached agreement on the acquisition of a 15 per cent stake in China's Shenzhen Development Bank for $180m. The acquisition makes Newbridge the Shenzhen's largest shareholder.
Newbridge beat off competition from a number of leading financial institutions, including HSBC and JP Morgan Chase. The acquisition is the second banking investment made by Newbridge in Asia, following its acquisition of a 51 per cent stake in Korea's First Bank for $416m in 1999.
ICG in Korean cinema deal
Intermediate Capital Group, the London-based mezzanine provider which is currently raising a $150m Asian mezzanine fund, has invested in a Korean cinema deal led by CVC Asia Pacific.
ICG backed the acquisition of a 50 per cent interest in a Korean Cinema joint venture from Australian media and entertainment company Village Roadshow. The stake was acquired by Asia Cinema Holdings, a portfolio company owned by funds advised by CVC Asia Pacific. 3i also participated in the financing of the deal.
Village Roadshow said the sale its 50 per cent interest was part of a restructuring programme ongoing at the ASX-listed firm to redeploy funds in other areas in the region.
The sale represents a strong return for Village Roadshow, which originally invested A$60m in the joint venture. Village Roadshow's partner, CJ Entertainment, will retain its 50 per cent interest in the business.