Lone Star Fund IV paid $1.5m for lobbyists

As the US and South Korea finalised a new free trade agreement, Lone Star’s troublesome exit of Korea Exchange Bank prompted the firm to hire two lobbyists for $1.5m through its 2002 fourth fund.

Lone Star Funds used its Fund IV vehicle to pay two lobbyists a combined $1,551,667 to assist with its exit of portfolio company Korea Exchange Bank, according to multiple sources.

It is unclear whether the firm used revenue generated by fund management fees or another source to pay the lobbyists.

Lone Star Funds declined to comment on this story.

Clerk of the House of Representatives lobbying reports indicate that Lone Star Fund IV paid Michael Solon of Capitol Legistics $791,667 and The Velasquez Group $760,000 between the third quarter of 2011 and the first quarter of 2012. The reports do not disclose why the Lone Star Fund IV retained the firms except for “potential impact on relationship [sic] between the countries stemming from treatment of American investment in Korea”.

According to two market sources, the firm was specifically concerned with Korean regulators’ treatment of its eight year investment in KEB, and how that could be influenced by a new US-South Korea free trade agreement being considered by Congress at the time.

Capitol Legistics and The Velasquez Group declined to comment. 

The problems with KEB

Lone Star’s investment in KEB was successful, but packed full of challenges unrelated to company performance. 

The firm acquired KEB in a 2003 transaction that valued the company at £1.3 billion (at the time worth €1.4 billion; $1.6 billion), according to press reports. The firm attempted to sell the bank three years later for $7.3 billion, prompting concerns among South Korean regulators that Lone Star would generate a tax-free return on the deal. The controversy and subsequent lawsuits eventually led to the three-year imprisonment of the firm’s regional chief, Paul Yoo, and a $21 million fine.

After several aborted exits, the firm finally cleared a final regulatory hurdle and finalised the sale of KEB to Hana Financial Group for 3.9 trillion won (€2.8 billion; $3.5 billion) in February, according to multiple press reports.

But convincing regulators to allow the sale may have had something to do with then-ongoing free trade agreement negotiations between the US and South Korea. At the very least, the firm engaged the lobbyists through its fourth fund “to make sure that provisions of the free trade agreement were being followed in spirit,” said one market source. “Specifically, the ability of someone to sell a bank.”

The free trade agreement

While Lone Star was stuck in regulatory purgatory with its sale of KEB, the US and South Korea were in the process of forming a new free trade agreement that would reduce South Korean tariffs and tariff quotas, improve access to South Korean markets and, most importantly for Lone Star, “ensure greater transparency and fair treatment for US suppliers of financial services,” according to the US Treasury Department.

The hiring of lobbyists assisted the firm in relaying the message that “holding up the sale was not in Korea’s best interest,” said another market source, who added that the message to South Korea was: “There’s a free trade agreement being negotiated, this can’t look good for you.”

The lobbyists’ role in the process included helping Lone Star argue their case to those with influence over South Korea’s regulatory process, the source said.

Although it is unclear how much direct influence the lobbying firms ultimately had in KEB’s eventual sale, Fund IV’s contractual obligation to both Capitol Legistics and Velasquez Group concluded following its exit of the bank, according to sources.

The new version of the US-Korea Free Trade Agreement was approved by Congress on 12 October, 2011. It was approved by South Korea’s National Assembly a little more than a month later, according to the Treasury Department. The agreement took affect 15 March.

KEB’s effect on Fund IV

The KEB debacle has proven to be a hot-button issue in South Korea’s political arena, with one Korea Times report indicating that the opposition Democratic United Party is opposed to the new free-trade agreement at least in part because it opens the government to lawsuits from foreign companies that believe they were slighted by the regulatory process, as Lone Star has threatened to do.

The possibility of a lawsuit would have more to do with the investment’s legal troubles rather than its returns; even before the final exit to Hana, Lone Star had already made back its invested capital through a series of dividends, according to reports.

Fund IV’s other investments appear to have also done very well. As of 31 December – prior to its final exit of KEB – Fund IV was generating a remarkable 30.5 percent internal rate of return since its inception, according to Fresno County Employees Retirement Association documents.