Korea warms up in 2012

Korea was the only major Asia Pacific market with an increase in deal value in 2012. In addition, the competitive landscape is evolving and domestic LPs plan to diversify investments abroad.

Korea has been the surprise market of 2012. Total deal value almost doubled this year to $3.8 billion from $1.9 billion in 2011, according to data from Mergermarket, and average deal size more than quadrupled to $290 million.

But the data doesn’t reveal the underlying trends developing in Korea. Though deal flow is driven by conglomerate divestitures, a changing competitive landscape may be unlocking opportunities for private equity firms.

The chaebols – family business conglomerates – have been able to out-compete private equity on deals. But due to government initiatives to reign them in and financial trouble at some, they are beginning to pull back as competitors, according to several industry sources. 

More evidence came in a key deal in August when Seoul-based MBK Partners acquired Woongjin Coway, a Korean water purification company that was divested from conglomerate Woongjin Holdings, for $1.2 billion.

It wasn’t the size of the deal that stood out, but the characteristics. MBK not only beat out the large family-owned conglomerates Lotte Group, SK Group and GS Group, but the firm demanded and received management rights for a 30.9 percent stake.

Hae-Joon Joseph Lee, partner and senior managing director of IMM Private Equity predicts that collectively, the chaebols will no longer easily take the lion’s share of deals in Korea.

Another notable market condition is liquidity. “Financing is readily available because right now Korean financial institutions are flooded with liquidity,” Charles Huh, head of Standard Chartered Bank’s private equity division in Korea said. “So for any of these large deals, be it majority or minority, it is feasible to get financing locally for very, very attractive terms.”

Korea seemed ripe enough this year to startup Seoul-based private equity firm Anchor Equity Partners, founded by several Goldman Sachs veterans in August. 

“We think the current fund vintage for Korea will be great because we suddenly started to see a lot of dealflow,” Sanggyun Ahn, Anchor’s managing partner said. Valuations have come down significantly since 2008-2009 and the trend is for the chaebols to reduce their involvement in domestic deals.

“There is more deal flow as the chaebols step off the pedal,” he said. 

On the LP side, Korean institutional investors are taking steps to diversify offshore. For example, the Government Employees Pension Service, a $6 billion Korean pension fund, hopes to increase its allocation to foreign alternatives to 6.8 percent from 1.7 percent next year, and the fund’s first choice of investment is private equity, according to its head of alternative assets Hyuk-Do Kee.

“If there’s one big emerging trend, it will be Korean LPs not only investing in private equity in Korea but across the region and globally,” added Scott Hahn, co-founder, Hahn & Co, which closed two controlling stake deals in Korea in 2012. “You’ll see increased activity among existing LPs and as well as new ones.” 

Another big event was Lone Star Funds finally exiting its contentious investment in Korea Exchange Bank in February. But shortly after, the firm said it would launch an international arbitration claim against the Korean government in November, claiming it had suffered billions of euros in damages as a result of what it characterised as “arbitrary and discriminatory conduct” on the part of regulators and “unlawful interference with Lone Star’s rights” as KEB’s major shareholder. 

Activity in Korea may be picking up, but it still has to contend with the perception – whether right or wrong – that it is a nationalistic market that does not welcome foreign investment. Depending on how the arbitration claim unfolds, the volume could be turned up on that view, particularly if dealflow continues to increase in 2013.