Worth another look

Last month's issue of PEI included the results of our annual awards for 2008. Amid many fascinating outcomes, one that may have escaped attention was the recognition that South Korea can be a lucrative playing field for private equity firms.

Let's consider a couple of examples. First: Himart, the South Korean electronics retailer, which won the Asian exit of the year award for its backer, Hong Kong-based Affinity Equity Partners. The firm's sale to South Korean conglomerate Eugene Group delivered an internal rate of return of more than 100 percent to Affinity and its investors and replaced a $200 million equity cheque written at the time of the deal two-and-a-half years earlier with one for $2.1 billion.

Second: HSBC Private Equity (Asia) picked up the Asian mid-market firm of the year accolade based partly upon its reputation for astute investments in South Korea. Towards the end of last year, the firm closed its latest fund ahead of target on almost $1.5 billion. This was on the back of the prior (fifth) fund, which had put 40 percent of its capital to work in South Korea. Reflecting on what at the time was clearly a bold decision, a market source said: “Everybody left Korea. That's why they stayed there.”

The reason why “everyone left” and why South Korea has tended to be seen as one of the developed world's least desirable private equity locations is, in part, the well-documented rigour with which the country's authorities went about investigating allegations of accounting malpractice at a number of firms including Lone Star, the Texan investment group.

Ever since then, South Korea has been accorded pariah status in the private equity ranks. The extent to which this is fair is debatable. On the one hand – contrary to popular misconception – private equity was not singled out. There was in fact a wide-ranging probe into standards of corporate governance that encompassed some of the country's largest companies and most prestigious brands. On the other hand, the authorities did seem to act with a particular zeal towards foreign investment groups – perhaps encouraged by the loudly voiced opinion of the man in the street that the country was being ransacked by outsiders. You can't entirely blame GPs for having packed their suitcases rather than hung around to debate the niceties.

Some of those that did stay, however, have found South Korea to be a happy hunting ground. For one thing, the country's conglomerates (chaebol) have long been under pressure to divest parts of their sprawling empires. The potential for deal flow from this source was illustrated when CCMP Capital Asia (now Unitas Capital) acquired the Buy the Way convenience store chain from Tongyang Orion Group in 2006. Here, the private equity firm

has helped its portfolio company to expand and consolidate. Given the pressures on corporate balance sheets arising from the global financial crisis, the rationale for deals like this has surely increased (“Chaebol face restructuring” said a February 2009 headline in the Korea Times).

Meanwhile, South Korean entrepreneurs are believed to be shedding their suspicions of private equity motives and are instead seeing the allure of cash injections, additive human resource and strategic guidance. The success of Sun Jong-gu, the former Daewoo executive backed by Affinity at Himart, may provide inspiration to others.

Furthermore it has been notable that, amid all the doom and gloom, South Korea has provided a few bright spots this year. Australia's Macquarie Group and local bank Woori announced the launch of a new $1 billion fund for investment in South Korean infrastructure and renewable energy. Meanwhile, Seoul-based private equity and secondaries fund manager STIC revealed that it had achieved a net IRR of more than 33 percent from its IPO of biotech firm Medy-Tox.

Perhaps the biggest stir was created by the prospect of South Korea's second-largest beer maker, Oriental Brewery, being sold by owner Anheuser Busch InBev for around $2 billion. Private equity firms Affinity Equity Partners, MBK Partners, Bain Capital, Carlyle Group and Kohlberg Kravis Roberts were all reported to be among the interested parties.

At the time of going to press, it appeared that the sale was losing momentum as the weakening economic environment placed a question mark over the valuation. While South Korea may have more to offer private equity investors than many think, an ability to defy the global downturn may be an unrealistic expectation.