Korean investors have spent the last seven years watching American and European private equity investors feeding off their country's assets, but have been unable to get in on the act themselves.
Prohibitive rules were introduced following the 1997 currency crisis. By imposing limits on the stake Korean investors could own in a business – effectively biasing the system in favour of international investors – the government hoped to attract foreign money to the country for economic reconstruction. With domestic private equity funds effectively banned, only mutual funds were allowed to engage in M&A activity and portfolio investments.
International investors, attracted by the combination of advantageous regulations and a well-developed infrastructure, have had a field day. Overseas firms have gained controlling shares in three of the country's top six banks. Spec Watch Korea, a group which exists to monitor foreign investment in the country, estimates that foreign capital currently controls more than 65 percent of Korea's banks and 50 percent of its blue-chip companies.
This year has seen Citicorp Venture Capital and CVC Asia Pacific acquire $803 million (€605 million) worth of assets from Korea's Hynix Semiconductor. 2004' s most impressive exit was The Carlyle Group's $2.7 billion sale of Korea's KorAm Bank to Citigroup, which generated a return of around 2.2 times Carlyle's original investment.
However, the days of Western hegemony in Korean private equity may well be numbered. New rules will allow Korean investors to set up their own private equity funds for any purpose. What's more, to encourage the fledgling Korean private equity sector, the new funds will be exempt from holding company and fair trade rules for a period of ten years. To prevent amateur investors from making hasty and ill-advised investments in these funds, though, there will have investment thresholds of 2 billion won ($1.9 million; €1.44 million) for individuals and 10 billion won for institutions.
The government's hope is that the new rules will funnel more money into corporate restructuring and social overhead capital, as well as allowing Koreans to benefit from the country's M&A boom.
Local fund managers are already lining up vehicles to take advantage of the new rules. The Korea Development Bank is hoping to attract between 300 billion and 1 trillion won to its new fund (due to be launched in December), while Kookim Bank has announced plans to launch a 300 to 500 billion won fund in the New Year.
No doubt the heat will be turned up – but not necessarily to the max. The funds have been given leeway to invest outside Korea, thus ensuring just a little warm air will escape.