Foreign GPs need to find bridge with Korean LPs

The biggest challenge for Korean LPs looking to invest abroad is that of up-scaling their private equity allocation in a short space of time, panellists at PEI's Global Alternative Investment Forum said.

Cultural and language issues are not the primary barrier in working when foreign GPs work with Korean LPs, according to James Ahn, managing director at Clayton, Dubilier and Rice in Korea, speaking at the PEI Global Alternative Investment Forum 2012 in Seoul. 

Ahn was on a panel that discussed the differences that can arise when foreign partners want to work with Korean LPs.

“Korean LPs have been investing only three to five years. They are scaling up quickly and the stress of scaling can create issues,” resulting in a resource bottleneck. 

“If you have a deadline for investment, they likely will not be able to meet that if internal processes are not set up to move fast. Show goodwill, bridge their internal processes with yours. Something like that goes a long way [to building the relationship].”

Ahn also suggested a foreign manager could offer a Korean LP a co-investment opportunity before they come into the fund.

Another issue was that LPs are used to the role they have had when investing in domestic funds. 

Typically, ninety percent of capital in a domestic fund will be from two-three Korean LPS, Ahn said, allowing LPs to dictate terms.

“Domestic LPs want a lot more oversight and control because they are used to it. It will take time for them to adapt to global standards.”

Julie Ahn, managing director of the investment department at DTZ Korea, added: “The potential [for overseas investment] is huge but due to the uncertainties of the global economy, LPs are hesitating to invest,” she said.

She said the National Pension Service has 6.2 trillion KRW (4.2 billion; $5.3 billion) invested in overseas real estate. In 2007, the figure was 200 billion KRW. Korea Life Insurance has 1 trillion invested in overseas real estate.

Foreign GPs first need a demonstrable track record and they also need to build a local relationship. “Whether you have a local presence or not, someone has to be here as a bridge to build the relationship,” she added.

The Lone Star Funds debacle, the panelists said, had no significant impact on the relationship between Korean LPs and foreign GPs. Ahn from Clayton, Dubilier and Rice called the saga “headline risk”, suggesting it was an anomaly. Lone Star was a big transaction in a highly-regulated sector that made a huge amount of money, he said.

“It doesn’t make Korea any less attractive.”