Asia’s Private Equity News Source avcj.com April 9 2013 Volume 26 Number 13

FocusFocus

The octopus effectKorea is trying to rein in its conglomerates - what does it mean for PE? Page 9

No more red carpetForeign PE and Korea’s financial sector Page 14

Robust incumbents The chaebol cross-ownership challenge Page 11

Then and now: Which foreign PE firms are most prolific in Korea?

Page 13

Jason Shin, managing partner at Vogo Investment

Page 12

Hats off to Korea’s modern, multi-faceted private equity market

Page 3

Affinity, Anchorage, Capital Dynamics, Carlyle, CBC, CDIB, Cerberus, CITIC PE, IFC, Lunar, NSSF, OTPP, PAG, Polaris, Temasek, Unitas

Page 5

Editor’s ViEwpoint

nEws

data analysis

industry Q&a

Pre-conference issue AVcJ PriVAte equity And Venture cAPitAl forum KoreA 2013

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Number 13 | Volume 26 | April 09 2013 | avcj.com 3

Editor’s ViEwpointallen.lee@incisivemedia.com

of reAders who hAVe been following Asia’s private equity markets for some years, few would contest South Korea’s place as one of the more important locations for international investors. After all, apart from maybe Australia, it has been the region’s richest source of buyouts, in terms of investments and exits.

It is no surprise that any discussion on buyouts still features the early takeovers of distressed banks and bankrupt conglomerates but these are pretty much things of the past. The deals that followed were standard acquisitions of good companies that were transformed by their private equity owners into even better ones. Obviously, the market has transitioned many times.

Present day private equity in South Korea is a multi-faceted ecosystem, where local GPs and LPs compete with their international counterparts for allocations and deals. Some might argue this is not the case, but in the interests of the long-term health of the market, it should be. Dialogue between the different groups is therefore critical.

As with all developing markets, there are growing pains and as covered elsewhere in this magazine, a number of issues need to be tackled for the market to continue to mature. The (over) simplified answer – heard many times, having covered these markets for many years – is that development will take time, but fundamentally, an economy of South Korea’s size will generate enough deals to sustain a private equity industry of reasonable size. The details differ in other markets but the message is the same: As with the entrepreneurs they seek to support, the best GPs will be able to compete effectively.

Take China, for example. While renminbi-denominated funds appear to be favoured by the majority of entrepreneurs, GPs managing US dollar vehicles – who offer the right combination of capital and value-add – are still investing prolifically into similar companies. In fact, with the current lack of liquidity in the public markets,

local GPs are looking to work closely with their offshore counterparts. In time, similar things should happen in South Korea.

The same argument applies to fundraising for South Korea-focused vehicles. While local LPs have historically been the major capital providers for domestic funds, they are maturing fast and now making local and international allocations. This may create a void in the domestic fundraising base, but international LPs are well positioned to fill it. As it stands, they have allocated to few South Korean funds, largely put off by sparse track records. Once again, in time this should change.

As I sit at my desk writing this viewpoint piece, I have just received a news alert saying that North Korea has warned foreigners in South Korea to take evacuation measures in case of a conflict on the peninsula. However, my conversations with Korean GPs in the past few days and as recently as this morning indicate that it is business as usual in Seoul. Most say the situation has been blow a bit out of proportion by the foreign media. Hopefully, any concerns will have abated by the time you read this.

Allen LeePublisherAsian Venture Capital Journal

A multi-faceted market

Managing Editor Tim Burroughs (852) 3411 4909

Staff Writers Andrew Woodman (852) 3411 4852

Winnie Liu (852) 3411 4907

Creative Director Dicky Tang Designers

Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

Senior Research Manager Helen Lee

Research Manager Alfred Lam

Research Associates Herbert Yum, Jason Chong, Kaho Mak

Circulation Manager Sally Yip

Circulation Administrator Prudence Lau

Manager, Delegate Sales Pauline Chen

Senior Marketing Manager Rebecca Yuen

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Publisher & General Manager Allen Lee

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The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of

AVCJ Group Limited. ISSN 1817-1648 Copyright © 2013

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The following appears as a maTTer of record only

The undersigned served as the exclusive global strategic adviser

february 2013

www.anchoragecapital.com.au

a Special Situations private equity fund focusing on underperforming businesses with significant profit improvement potential in Australia, New Zealand and Southeast asia.

Anchorage Capital Partners II

A$250,000,000

Number 13 | Volume 26 | April 09 2013 | avcj.com 5

The following appears as a maTTer of record only

The undersigned served as the exclusive global strategic adviser

february 2013

www.anchoragecapital.com.au

a Special Situations private equity fund focusing on underperforming businesses with significant profit improvement potential in Australia, New Zealand and Southeast asia.

Anchorage Capital Partners II

A$250,000,000

ASIA PACIFIC

NMSIC commits to Affinity Fund IVNew Mexico State Investment Council (NMSIC) has agreed to invest up to $75 million in Affinity Equity Partners’ fourth pan-Asia fund. The vehicle reached a first close of $1.5 billion in early March and has a hard cap of $3.5 billion.

OTPP private capital unit realizes $5b, reinvests $3b Teachers’ Private Capital (TPC), the private equity fund and direct investment arm of Ontario Teachers’ Pension Plan (OTPP), saw $5 billion in gross realizations and $3 billion in reinvestments in 2012, with 13 new direct deals and 12 commitments to new or existing partnerships – eight buyouts and four VC and growth.

AUSTRAlASIA

TA, Updata to invest in software specialist NintexTA Associates and technology-focused GP Updata Partners plan to make a significant investment in Nintex Group, an Australia-based software provider. The PE firms will support Nintex in its global growth initiatives, including organic expansion and strategic acquisitions.

Anchorage closes Fund II at $260m hard capAustralia-based special situations and turnaround specialist Anchorage Capital Partners has reached a first and final close on its second fund at the hard cap of A$250 million ($260 million). The vehicle, which came in oversubscribed, spent less than six months in the market. More than 50% of fund commitments were sourced from Australian institutions.

GRATER CHINA

CITIC PE in carve-out of TNT’s China road business CITIC Private Equity has agreed to buy TNT Express’ China road operations for an undisclosed sum. It is one of several divestments expected from the Netherlands-based logistics provider, which is seeking to cut costs and refocus on its core European market after a takeover attempt

by UPS was blocked by competition authorities. The transaction is expected to close in the second half of 2013 with settlement of part of the purchase price to be cleared in 2014.

PAG special sits backs China property developerPAG will invest in real estate developer China South City Holdings through the purchase of

HK$975 million ($125.6 million) in convertible notes. The proceeds will be used to support properties under development and refinance a portion of existing debt. PAG Asia Opportunity Fund will subscribe to convertible notes with a conversion price of HK$1.56 per new share.

NSSF assets top $178b in 2012China’s National Council for Social Security Fund (NSSF) reported a 7% investment return in 2012, its best performance in three years, as total assets under management topped RMB1 trillion ($178 billion) for the first time. The fund’s investment income came to RMB64.5 billion, with the 7% return beating a lackluster performance of 0.84% in 2011 and 4.22% in 2010.

CDIB Capital makes duty-free purchaseCDIB Capital has invested $19.9 million in Dubai-based travel retail operator Flemingo International. Founded in 1997, the company is one of the largest players in Dubai’s duty-free industry. It operates more than 120 outlets in 26 countries in Asia, Africa and Europe.

CBC provides Series C round for China’s MiaozhenChina Broadband Capital (CBC) has led a Series C round of funding worth $10 million for Chinese big data specialist Miaozhen Systems. Investors also include Redpoint Ventures, KPCB and WPP Digital. Miaozhen provides cloud-based third-party advertising technology.

Capital Dynamics partners with Diligence CapitalCapital Dynamics has formed alliance with China-focused fund-of-funds manager Diligence Capital in a bid to expand its geographic footprint in the world’s second-largest economy. It will adopt Diligence Capital’s Chinese name when conducting activities relating to China, while Diligence Capital will operate under the English brand name Capital Dynamics China.

lunar Capital boosts operating partner teamLunar Capital has appointed Eric Yiming, a long-serving China and Asia executive with Sampoerna Tobacco Group, Heineken and Tropicana, as a sector partner. He will focus on the food, beverage and fast-moving consumer goods industries.

Carlyle passes $1b mark on fourth Asia buyout fundThe Carlyle Group has raised more than $1 billion for its fourth Asia buyout fund, having reached a first close of $700 million last December. The private equity firm is targeting a final close of $3.5 billion towards the end of 2013.

Carlyle Asia Partners IV launched in May of last year. If the target is reached within the desired timeframe then the fundraising process would be quicker than that of its predecessor, which closed at $2.55 billion in April 2010 after about two years in the market. However, Carlyle’s progress

suggests investor appetite for pan-regional funds is bifurcating.

While KKR is expected to announce a final close of $6 billion on its second Asia fund imminently, TPG Capital is said to be on about $1.5 billion for its sixth regional vehicle, having launched shortly before KKR in April 2012, targeting $4 billion.

Bain Capital took just over a year to accumulate $2.3 billion for its second Asia fund, which closed in July of last year, and Morgan Stanley Private Equity Asia took less than six months to reach a first close of $750 million on its fourth vehicle, which launched last summer and has a full target of around $1.5 billion.

Of the large pan-regional firms currently in the market, MBK Partners took two months to reach a first close of $1.25 billion on its $2.25 billion third fund, while Affinity accumulated commitments of $1.5 billion for its fourth fund, which has a hard cap of $3.5 billion, within five months.

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avcj.com | April 09 2013 | Volume 26 | Number 136

NORTH ASIA

Phonenix exits Japan’s TEAC to Gibson GuitarDistress specialist Phoenix Capital has agreed to sell its entire holding in Japanese-listed audio equipment manufacturer TEAC to Gibson Guitar for 4.88 billion yen ($51.9 million). It will exit 157.5 million shares - or a 54.4% stake - TEAC at JPY31 apiece.

Polaris acquires Japanese salon operatorPolaris Capital has acquired a majority stake in Japanese salon and sports club operator Socie World for a reported JPY3 billion ($32 million). Citigroup Capital Partners has now exited the company.

Cerberus boosts Seibu tender offerCerberus Capital Management wants to raise its stake in Seibu Holdings by up to 12% to 44.7% and nominate nine members of the Japanese rail and hotel operator’s 18-strong board. The move has escalated a row between the PE firm and Seibu that dates back to a dispute over the timing and pricing of an IPO last year.

SOUTH ASIA

eBay leads $50m round in India’s SnapdealOnline e-commerce giant eBay has led a Series C round of funding worth a reported $50 million for New Dehi-based online marketplace Snapdeal. The deal also featured existing investors IndoUS Venture Partners, Nexus Venture Partners and Bessemer Venture Partners.

VC-backed Just Dial wins IPO approvalIndian search engine Just Dial has won approval for its IPO, putting VC backers Sequoia Capital, SAIF Partners and Tiger Global on course for a partial exit. The company, which plans to sell 9.55 million shares, abandoned a previous attempt to list last year due to market uncertainty.

NVP pumps another $8m into PepperfryNorwest Venture Partners (NVP) has led a second

round of funding for Mumbai-based online lifestyle store Pepperfry.com, putting in $8 million. NVP has now committed a total of $13 million to the company so far, having previously invested $5 million in 2011.

Hassad backs Bush Foods, Standard Chartered exitsHassad Food, a unit of Qatar Investment Authority (QIA), has acquired a majority interest in India-based basmati rice producer Bush

Foods Overseas. The transaction facilitates the exit of Standard Chartered Private Equity (SCPE), which invested INR1.1 billion ($20 million) in the company two years ago. Hassad paid $100 million for a 51% stake in Bush, giving SCPE money multiple of 3x.

Satin Creditcare raises new funding, lok Capital exitsSatin Creditcare Network, a New Delhi-based microfinance institution has raised INR410 million ($7.49 million) from three VC firms. The transaction facilitates the exit of Lok Capital. The new VC participants are MicroVest II, ShoreCap II and Danish Microfinance Partners K/S.

Zephyr Peacock reaches second close on Fund IIIIndia-focused GP Zephyr Peacock has reached a second close of $70 million on its third fund. The vehicle, which launched in November 2011, has a final target of $150 million. A first close of $50 million came one year ago.

SOUTHEAST ASIA

IFC may anchor Thailand-focused lakeshore fundThe International Finance Corporation (IFC) is considering a commitment of up to $20 million to Lakeshore Capital Fund I, a Thailand-focused GP that is seeking to raise $100 million. The fund will target small- and medium-sized enterprises (SMEs), predominantly in the services, retail, food and manufacturing sectors.

Malaysia plans $500m global halal fundMalaysia-based specialist private equity firm Azka Capital will manage a MYR1.55 billion ($503 million) fund focused on global opportunities in the halal industry. It is expected to acquire companies in the food and agri-business sector and reorient them so they are halal-compliant.

Temasek sets up dedicated lNG investment unitTemasek Holdings has set up an investment unit dedicated to liquefied natural gas (LNG) assets. The move comes as the Singaporean investor seeks to increase its energy exposure in recognition of Asia’s strategic interest in securing natural resources. The new entity, Pavilion Energy, has S$1 billion ($806 million) in initial capital.

Unitas sees 3x return on Exego turnaroundUnitas Capital has secured a 3.3x return on its investment in Australian car parts supplier Exego, after selling the business to US-based Genuine Parts in two tranches worth a combined $950 million, including debt. The private equity firm is understood to have gained $440 million on an initial investment of $192 million.

Genuine Parts bought 30% of Exego – best known for operating auto repair stores under the Repco brand – for $150 million last January. It agreed to pick up the remainder of the business for $800 million, a valuation said to equate to 9x EBITDA, once the company reached certain earnings thresholds. These were met last month.

“We reached the threshold at least one year ahead of what we had expected,” said John Lewis,

Unitas’ CEO. “Genuine Parts was willing to pay a higher multiple of a higher underlying level of profits, once they had been in the business for a while. For us, it was a significantly better gain than if we had sold the whole company at the beginning. For them, it was a low-risk approach.”

The private equity firm acquired the business in 2006, three years after it was taken public. While the brand was well known in Australia and New Zealand, the company was in operational and financial disarray, having lost its way after the previous CEO and management cashed out in through the public offering. Unitas saw an opportunity for a turnaround.

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Creador I, LLC

This announcement appears as a matter of record only.

Creador is a private equity firm focused on long-term investments in growth-oriented businesses in Indonesia,

India and Malaysia

www.creador.co

130,000,000$

PT Creador

One Pacific Place15th FloorJl. Jend. Sudirman Kav. 52-53Jakarta 12190Indonesia

Tel: +62 (21) 2550 2529

Fax: +62 (21) 2550 2555

Cyril NoerhadiSenior Managing DirectorEmail: cyril@creador.co

Portfolio Companies:

Head Office:

Creador Mauritius

IFS Court TwentyEight Cybercity Ebene Mauritius

Tel: + (230) 467 3000

Fax: + (230) 467 4000

Email: ifs@ifsmauritius.com

Other Offices:

Creador Sdn Bhd (922073M)

Lot 8.02B (East Wing)8th Floor, Menara BRDB285, Jalan Ma'arofBukit Bandar Raya59000 Kuala LumpurMalaysia

Tel: +60 (3) 2182 6888

Fax: +60 (3) 2182 6889

Brahmal Vasudevan Founder & CEOEmail: brahmal@creador.co

Creador Advisors India Private Limited

Office No. 651, Regus Citi CentreLevel 6, Chennai Citi Centre10/11, Dr. Radhakrishnan SalaiMylapore, Chennai 600004India

Tel: +91 (44) 4221 8532

Anand Narayan Senior Managing DirectorEmail: anand@creador.co

Number 13 | Volume 26 | April 09 2013 | avcj.com 9

Creador I, LLC

This announcement appears as a matter of record only.

Creador is a private equity firm focused on long-term investments in growth-oriented businesses in Indonesia,

India and Malaysia

www.creador.co

130,000,000$

PT Creador

One Pacific Place15th FloorJl. Jend. Sudirman Kav. 52-53Jakarta 12190Indonesia

Tel: +62 (21) 2550 2529

Fax: +62 (21) 2550 2555

Cyril NoerhadiSenior Managing DirectorEmail: cyril@creador.co

Portfolio Companies:

Head Office:

Creador Mauritius

IFS Court TwentyEight Cybercity Ebene Mauritius

Tel: + (230) 467 3000

Fax: + (230) 467 4000

Email: ifs@ifsmauritius.com

Other Offices:

Creador Sdn Bhd (922073M)

Lot 8.02B (East Wing)8th Floor, Menara BRDB285, Jalan Ma'arofBukit Bandar Raya59000 Kuala LumpurMalaysia

Tel: +60 (3) 2182 6888

Fax: +60 (3) 2182 6889

Brahmal Vasudevan Founder & CEOEmail: brahmal@creador.co

Creador Advisors India Private Limited

Office No. 651, Regus Citi CentreLevel 6, Chennai Citi Centre10/11, Dr. Radhakrishnan SalaiMylapore, Chennai 600004India

Tel: +91 (44) 4221 8532

Anand Narayan Senior Managing DirectorEmail: anand@creador.co

coVEr storytim.burroughs@incisivemedia.com

mbK PArtners wAs not the first choice investor for water purifier manufacturer Coway. KTB Private Equity appeared to have won the race last July, agreeing to put up 60% of the equity required for the KRW1.2 trillion ($1.1 billion) deal with Woongjin, Coway’s parent, contributing the rest. The question was, in the absence of a fund large enough to accommodate a transaction of this size, could KTB find the capital?

“They couldn’t get the money, MBK knew they couldn’t get the money, and so it waited for Woongjin to come back with more favorable terms,” a source familiar with the transaction told AVCJ last year. “And that’s what happened – they came back and it resulted in a much larger deal, which entailed a full transfer of control.”

But the story didn’t end there. Just over a month after an agreement was reached for the 31% stake, Woongjin filed for bankruptcy. The company had been relying on the proceeds of the deal to pay down debt incurred in parts of its empire, but MBK’s capital didn’t come quick enough. The PE firm faced the prospect of, at best, a delay, and at worst, a cancellation.

Fortunately, the court tasked with overseeing the bankruptcy proceedings decided the agreement should be honored, bringing a near one-year process to an end in January.

Buoyed by the Coway transaction, private equity investment in South Korea reached $6.9 billion in 2012, more than the previous two years combined. Only two other countries in Asia – the relatively small Mongolia and New Zealand.

But for all that Korea punches above its weight as a PE destination, the market remains patchy and immature in some respects: domestic buyers, though many in number, don’t necessarily have the capital to come through on deals; and the deal flow itself, particularly that driven by conglomerates making divestments, doesn’t quite live up to the hype.

Who’s selling?Of last year’s total, nearly 40% came through three deals – Coway, plus two long-expected divestments of stakes in Kyobo Life Insurance. Scott Hahn, managing partner at Hahn & Co, which spun-out from Morgan Stanley Private Equity Asia, doesn’t expect a similarly heady 2013.

“We are not seeing anything in the pipeline to indicate that,” he tells AVCJ. “There are a couple of large transactions that are distressed sales by distressed business groups or creditors. There are a couple of chaebols currently in trouble but it remains to be seen whether that leads to actual sales or whether they get assistance from other government-backed financial institutions to keep their businesses afloat.”

There is no shortage of conglomerates, or chaebols, mooted as potential sellers, most of them drawn from the second and third tiers of

corporate Korea. STX Group, a shipping, trading and shipbuilding titan struggling to meet its debt obligations in the face of weak dry-bulk freight rates and sluggish demand for new vessels, is the most obvious. Industry participants point to Kumho Asiana Group, Tongyang Group, Woongjin and even government-linked steelmaker Posco as other potential deal sources.

Conglomerates divest assets for a number of reasons: Kumho, Tongyang and Woongjin have offloaded subsidiaries in recent years after running into distress; Posco was one of the Kyobo Life sellers because it picked up the asset through the acquisition of Daewoo International and never planned on keeping it; Doosan Group exited Burger King to Vogo Investment last year to complete its strategic transition from food and beverage to heavy industry.

However, the pressure point currently being

felt by all chaebols is political. Keen to restrain the growth of conglomerates, which is thought to come at the expense of small- and medium-sized enterprises (SMEs), the government is taking action. Numerous policies have been suggested, from fines for violating fair trade laws to restricting the cross-shareholding structures that hold chaebols together. The goal is to prevent the octopus-like tendencies that see these companies expand beyond their core businesses.

“There are a lot of bad practices among the chaebols,” says Taigon Kim, senior partner and

head of South Korea, Headland Capital Partners. “For example, the founder might set up a logistics company, hand control to his children, and then give it all the logistics contracts from the parent group. The company grows very quickly, squeezing out SMEs. Then the children sell some shares and invest the proceeds in the parent group. It’s an immoral but legally legitimate way of inheriting wealth.”

Overreaching has also sent various chaebols to the brink, prompting divestments that are used to pay down debt in the hope of staving off bankruptcy. What makes the assets attractive is that they are often untainted by underperformance elsewhere in the group.

Woongjin’s error was to invest heavily in solar energy at a time when its construction and finance units were struggling, but Coway was still a strong business; Kumho’s problems stem

Young pretender?South Korea was the only significant PE market in Asia to see an uptick in deal flow last year. Investors have high expectations; uncertainty among local conglomerates – and local GPs – could make or break them

Foreign vs domestic PE in Korea by deal value and volume

Source: AVCJ Research

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Foreign PE - buyouts Foreign PE - other Domestic PE

US$

mill

ion

8,000

6,000

4,000

2,000

0

avcj.com | April 09 2013 | Volume 26 | Number 1310

from a highly leveraged acquisition of Daewoo Engineering & Construction in 2006, not from any problems at Kumho Rent-A-Car, which was sold to MBK and Korea Telecom two years ago.

Even if assets do come to market, there is unlikely to be a flood of PE deal flow; rather, companies will be squeezed into submission by lenders and regulators. Also, there is no guarantee that the assets will be worth buying. STX has yet to find any takers for its shipping unit and Hahn & Co. recently pulled out of buying bankrupt Korea Line when it emerged that certain liabilities wouldn’t be removed from the balance sheet, which made the deal too risky.

As one regional buyout executive observes, Korea’s chaebols go through cycles, making big acquisitions and then divesting assets because they have too much debt, before starting over again. For private equity investors, it is a case of getting in at the right time at the right price. “Some of these people are greedy so the assets won’t be as cheap as people think they might be,” the buyout executive adds.

Seeking valueThe valuation proposition is complicated by the fact that, among the mid to large buyout deals, Korea has become a phenomenally efficient market, with carefully intermediated auctions bidding up prices. “Assets are known to be on the market even before it goes to a sell-side advisor,” says Peter Whang, founder and CEO of Joshua Tree, which spun-out from AIG’s former Korea PE operation last year.

Joshua Tree’s response is to focus on minority deals in the small- to mid-cap growth space where it sees more inefficiency and therefore a better chance of delivering strong returns. For Hahn & Co. and Headland, buyouts remain the primary focus and, although both firms consider chaebols divestments, their meat and drink is supporting corporate transition in smaller entities: succession planning, industry consolidation, and expansion into new markets.

Another regional buyout fund manager, who has bought assets from chaebols in the past, says that these deals only account for one third of deals that come under consideration. The remaining two thirds is split between succession planning buyouts and significant minority stakes in expanding businesses, with the latter becoming more prominent.

The emergence of independent, Korea-dedicated GPs in the last couple of years – in addition to Hahn & Co. and Joshua Tree, there is Anchor Capital, set up by members of Goldman Sachs’ local PE team – adds credence to the mid-market investment thesis. These GPs have the ability and background to raise capital from overseas investors, stealing a march on many of

their domestic counterparts, on the basis that they can deliver proprietary deal flow.

For foreign LPs, it offers a variation on the pan-regional buyout approach, while for the wider market, it suggests that deal flow is sustainable. Indeed, should the government’s chaebols curbs actually kick in, both strategies could benefit – the pan-regional funds as buyers of divested assets and the country funds as investors in SMEs no longer living in the shadow of big brother.

But, as Headland’s Kim warns, this doesn’t necessarily make deal sourcing any easier. Although entrepreneurs who set up businesses in the 1960s are retiring in greater numbers, it still takes time to convince them to sell. “Last year we acquired YoungToys [a Korean toymaker] and the investment was secured within six months,” he says. “But there are other deals that haven’t closed yet and we have been working on them for three years.”

coVEr storytim.burroughs@incisivemedia.com

spot funds: going solo The single-project or spot funds that feature so prominently in South Korea’s private equity

market are a product of necessity, not choice. Domestic GPs have been required to register with the Financial Supervisory Commission since 2005 and about 100 licenses have been issued. However, industry participants claim that only 10 or so of these firms have actually raised traditional blind pools of capital.

The rest exist on a middle ground peculiar to Asian markets apart from Korea, pitching sellers for assets and, once they’ve reached an agreement, pitching LPs for capital. Should they succeed, the money is placed in a vehicle dedicated to managing one asset. For example, last year Shinhan Private Equity and Stonebridge Capital created the Shinhan-Stonebridge Petro Private Equity Fund, with enough registered capital to cover a spin-out of SK Energy’s SK Incheon Refinery.

For domestic LPs, it is a trust issue. When they first started allocated capital to private equity seven years ago, commitments were spread widely but thinly because there were no track records to back. Since then, few private equity firms have done much to distinguish themselves.

“Many of these GPs have now ceased to exist because they couldn’t perform – some went out of business because they couldn’t source any deals, others invested poorly and their track records are horrible,” says Jason Shin, managing partner at Vogo Investment. “I would say just 10 or so GPs are now considered reliable enough to get money on a discretionary basis. Everyone else with an interest in PE will have to do it some other way and that happens to be project-specific funds.”

The presence of these vehicles adds an interesting competitive twist to the market. On the one hand, these managers are desperate to secure deals and therefore willing to bid up prices; on the other, they often lack credibility in the eyes of sellers because there is no certainty that the promised capital will be forthcoming.

Domestic GPs’ ability to raise sustainable discretionary funds is hindered by the terms on which LPs will let them operate. Korea’s National Pension Service (NPS), by far the most active private equity investor, decrees that first-time funds must have a life of six years, which means GPs must start exiting assets in year four. “Oftentimes the IR clock starts ticking when the fund is initiated, not when the deals are done. As soon as you get the money they want you to spread it as quickly as possible,” says Peter Whang, founder and CEO of Joshua Tree. “Our view is that private equity is a 10-year asset class. We are sensitive to the economics and investment cycles – it’s not the number of deals executed but the quality of deals underwritten.”

This emphasis on speed of deployment is not only rooted in the industry’s venture capital origins, but also LPs’ concerns about paying management fees to GPs who are sitting idle. There are even conditions whereby management fees are cut unless a certain proportion of the corpus is invested in the first two years. NPS has become more flexible with time and it is suggested that the standard fund life could be extended to eight years. This would encourage continuity in management and operating, both of which may have a knock-on effect in terms of performance. LPs are also allocating capital in a more concentrated fashion, as lengthening track records make manager selection more informed process.

Industry participants expect the market to fall in line with international norms as it matures. But there is still an element of chicken-and-egg, which puts pressure on GPs to resign themselves to spot funds or watch from the sidelines. “There is logic to what LPs are doing,” explains Scott Hahn, CEO of Hahn & Co. “They would say, ‘How many PE managers in Korea have consistently delivered returns through business cycles?’ Until GPs in Korea can successfully answer that, longer term discretionary funds will be difficult to raise.”

Number 13 | Volume 26 | April 09 2013 | avcj.com 11

Focustim.burroughs@incisivemedia.com

the Jewels in the sAmsung grouP empire are Samsung Electronics, the world’s largest IT company; Samsung Heavy Industries, the world’s second-largest shipbuilder; Samsung Life, the world’s 14th largest life insurer; Samsung Engineering and Samsung C&T, two of the world’s largest construction companies; and leading advertising agency Cheil Worldwide.

There are many more subsidiaries, but at the heart of the web sits Samsung Everland, a small zoo and theme park company with equity capital of around $10 million. This entity, controlled by the founding Lee family, is in turn the genesis of the many threads of ownership through which the crown jewels are held in place. It is a delicate balance but one that is responsible for collective annual revenues of $250 billion. And it may imminently be torn apart.

The check-box term in South Korea’s presidential election last year was “economic democratization” – shorthand for boosting employment, reducing income inequality and spreading wealth by cultivating small- and medium-sized enterprises. This would come at the expense of the conglomerates, or chaebols, that dominate the economy. Sales at the 10 largest chaebols amount to more than three quarters of GDP, with Samsung Electronics alone accounting for nearly one fifth.

“The current political mood here in South Korea reflects the economic mood - that it is not the best of times, except for a privileged few, and so it’s only fair for the large conglomerates to give some of what they gained back to the public,” says Jasper Kim, founder of the Korea-based Asia Pacific Global Research Group (APGRG). “But the issue is whether any cross-shareholding policy will actually have a real connection and impact on the general public.”

Walking the talkPutting to one side arguments for and against reining in the chaebols, what remains to be seen is how newly elected President Guen-Hye Park implements this policy. Will there be comprehensive action on cross-shareholding or will she work with, rather than direclty against, the chaebols in order to find common ground.

Some private equity investors say a robust policy could stimulate rich deal flow. “Korea has decided to cut the chaebols down to size. They

dominate the economy and the government wants to them to divest non-core assets so that smaller businesses can survive,” the head of a regional buyout fund tells AVCJ. “A lot of deals are coming but they won’t come in one year.”

Cross-shareholding is the means by which the Lee family retains leadership of Samsung’s businesses despite not holding controlling stakes in them. As of mid-2012, Everland directly owned 19.3% of Samsung Life, which held 7.5% of Samsung Electronics and 5.2% of Samsung C&T. Samsung Electronics owned 17.6% of

Samsung Heavy, 2.6% of Cheil Worldwide and 35.3% of Samsung Card. Samsung Card, which was also 26.4%-owned by Samsung Life, held 5% of Everland. Samsung C&T controlled 4.1% of Samsung Electronics, 2.4% of Samsung Card and 1.5% of Everland.

The web stretches on and on, in numerous directions and incorporating numerous subsidiaries, but with the common goal of tying the crown jewels so intricately and intimately to the founders that no amount of public market trading could threaten their hegemony. It is the same in many chaebols, stretching from the likes of Samsung, Hyundai and SK Group all the way down to the second- and third-tier conglomerates.

Samsung makes for a useful example because it is so large and its ownership is reasonably well-documented, through a combination of public market filings and disclosures made in legal disputes. But it is unlikely to start offloading assets to private equity investors.

“Samsung is a poor example because it is so well capitalized everywhere that it probably doesn’t need to sell some of the companies,” says Jason Shin, managing partner at Vogo

Investment. “The problem is second- and third-tier chaebols where the founding families don’t have as much capital. These are families that own 30 different companies with the slimmest shareholdings possible. Without cross-shareholding they would end up owning less than 10%, and that’s where you start getting worried about potential lack of control.”

The implication is that, in order to generate the capital required to beef up their shareholdings to 30-40% in core businesses, the families will have to sell off non-core assets.

Modus operandiIt isn’t clear how the government would structure any alteration to cross-shareholding agreements – the tax implications and capital reallocation costs would be substantial. Last year the ruling Saenuri Party suggested reducing the cap on industrial conglomerate ownership of banks from 9% to 4%, and banning financial companies from having voting rights in non-financial affiliates as opposed to the current ceiling of 15%.

A removal of voting rights equates to a loss of control, so financial companies would have to sell their assets to other non-financial affiliates so that the founders of the parent group retain existing levels of influence. Not all chaebols would have to act, but those without cash-rich affiliates might require additional capital to the support the transition and put other assets on the block.

Not everyone is optimistic, though. APGRG’s Kim notes that, while a chance exists for assets to be purchased by third parties in the event that shares are forced to be sold off, the family founders would find a way to retain majority ownership, which might not appeal to buyers.

Taigon Kim, senior partner and head of South Korea at Headland Capital Partners, expects to see some divestments by chaebols – there is a wider government initiative to prevent companies from straying from their core businesses – but not driven by cross-shareholding reforms.

“Cross-shareholding has been in practice for more than 50 years. The impact of a ban would be huge and it couldn’t be executed without granting tax exemptions, so I don’t think it’s possible,” he says. “The government is promoting holding company structures and many chaebols have already moved in this direction.”

David and GoliathRemoving cross-shareholding structures that hold Korea’s conglomerates together, and arguably suffocate competition, is key to economic democratization. But will it happen and what would it mean for PE?

“The impact of a ban would be huge and it couldn’t be executed without tax exemptions, so I don’t think it’s possible” – Taigon Kim

avcj.com | April 09 2013 | Volume 26 | Number 1312

Q: South Korea is seen as a comparatively transparent and user-friendly market for public equities investors. Why is the perception different for private equity?

A: When you have blue chip stocks routinely owned 50-60% by foreign investors you’ve got to be somewhat transparent. The difference is that a company like Shinhan Financial has up to 60% foreign ownership but the corporate owners don’t feel threatened by these portfolio investors – they don’t take an activist role and they don’t meddle in the corporate governance aggressively. It’s seen as relatively safe money. With private equity, you have one guy, one firm who is going to come in as your partner. They figure that the foreign PE guys are going to be much more difficult to live with.

Q: Does a stigma remain from the bank buyouts completed by foreign PE firms in the wake of the Korean credit crisis?

A: It has been 10 years since the Lone Star, Carlyle and Newbridge bank deals. Corporate owners’ views on private equity have matured and it is now seen as an integral part of the economy. When certain assets go up for sale – Woongjin Coway is a recent example – everyone automatically expects some of the better known PE names to participate in the auction. We are at a point where private equity is seen as a legitimate player.

Q: So in what conditions would a Korean company conclude that a foreign PE firm is difficult to live with?

A: The foreign versus domestic

issue is more important in non-control deals. In those situations, it makes a big difference because the corporate owners tend to be afraid of foreign shareholders for a number of reasons – cultural differences, language differences, expectation differences in terms of management and governance. They feel like they are in bed with someone they can’t understand, so they tend to prefer domestic guys who they can really talk to. One exception would be if the owner wants an equity partner that can provide an overseas network and help him expand his business into other parts of Asia.

Q: Vogo bought the Burger King Korea franchise last September. Did this come about from building up a relationship with the seller?

A: The reason we were able to get exclusivity on that deal was because we knew the seller, Doosan Group, well and they trust us – we don’t have someone sitting in the overseas office who can veto what has been negotiated. I have known the Doosan people for many years and worked with them on previous acquisitions. We went in and said, “We know you are trying to sell; we’ll do it confidentially and very fast. There won’t be any rumors in the market.” They were also confident we could get approval from Burger King’s headquarters, so they gave us exclusivity and we got it done within three months.

Q: Why was Doosan looking to sell?

A: If you go back 15 years, Doosan was primarily a food and beverage conglomerate. Their assets included Oriental Brewery, Coca-Cola Korea, a prepackaged food business and some restaurant chains. The company decided to shift its focus in the late 1990s and early 2000s. This was just after the IMF crisis in Korea and domestic consumption had nosedived. It sold Oriental Brewery and Coca-Cola Korea, used the proceeds to pay down debt and refocused its core business on something more reliable in the long term – heavy industry. Doosan has been making acquisitions in that space for the past 15 years and only two assets remained on the food and beverage side, Burger King and KFC.

Q: Divestments by Korean conglomerates are often highlighted as a potential source of strong deal flow for PE investors. Is this potential being realized?

A: It’s not as active as it should be. Korean conglomerates’ asset sales are driven primarily by need, such as a shift in management focus. Fortunately for us, in the past couple of years certain conglomerates have continued to be distressed and this led to deals such as our investment in Tongyang Life Insurance. We will continue to see these assets coming on sale. One encouraging sign is that some conglomerates out there are preemptively selling before they become distressed, unlike before the global financial crisis.

Q: A lot of domestic PE firms raise capital on a project-specific basis rather than investing through traditional blind pools. To what extent are you competing with these GPs?

A: There have been quite a few project-specific funds. This is because Korean LPs are much more ready and willing to commit capital if a project is identified. The problem with these funds is that it would be difficult to go to a seller like Doosan, promise to do a deal quickly and confidentially, and then turn around and say you have to raise money for it. As a result, they do a lot of public auction deals. A GP gets a commitment from a bunch of pension funds to provide capital on certain terms if the GP succeeds in acquiring the asset. Usually, however, if you don’t have the money in your pocket, you don’t get exclusivity.

industry Q&a | JASoN SHiNtim.burroughs@incisivemedia.com

Home comfortJason Shin, managing partner of Vogo Investment, explains why South Korean company owners’ preference for local partners goes well beyond foreign private equity’s well publicized scrapes

“We went in and said, ‘We know you are trying to sell; we’ll do it confidentially and very fast. There won’t be any rumors in the market’”

Number 13 | Volume 26 | April 09 2013 | avcj.com 13

data analysisAVCJeditorial@incisivemedia.com

Changing times After the Asian financial crisis, foreign private equity investors gained access to an unprecedented stream of buyout opportunities. Few are as prolific these days. While large-cap deals remain on the agenda of some firms, there has been a general shift towards small buyouts or significant minority investments

A�nityCarlyleCVC

H&QHeadlandLone Star

Morgan StanleyStandard Chartered

TPGUnitas

Korea’s most active foreign PE investors

Source: AVCJ Research

19981999

20002001

20022003

20042005

20062007

20082009

20102011

2012

Dea

ls

12

9

6

3

0

Largest private equity investments in Koreadate Value (us$m) deal type investee industry investor status

May-09 1,800.0 Buyout Oriental Brewery Consumer Affinity; KKR Current

Aug-03 1,192.9 Buyout Korea Exchange Bank Financial Lone Star Exit

Sep-03 1,100.0 Restructuring Hanaro Telecom Telecom AIG; Newbridge Exit

Aug-12 1,063.2 Growth Kyobo Life Insurance Financial Affinity; Baring PE Asia; GIC; IMM PE Current

Jun-04 818.6 Buyout Hynix Semiconductor IT Citicorp; CVC Exit

Jun-08 818.6 Buyout Norske Skog Korea Manufacturing Morgan Stanley; Shinhan Private Equity Current

Apr-05 769.7 Buyout Hi-mart Retail Affinity; GIC; Temasek Exit

Nov-02 679.0 Buyout Powercomm Corp. Telecom CDP Asia; KTB; LG Dacom; Softbank Asia Current

Oct-05 500.0 PIPE Hana Bank Financial Goldman Sachs Exit

Dec-00 446.0 Buyout Mando Corp. Logistics Affinity; Unitas Exit

Source: AVCJ Research

avcj.com | April 09 2013 | Volume 26 | Number 1314

Focuswinnie.liu@incisivemedia.com

is south KoreA losing its releVAnt with global buyout firms? The Blackstone Group made its debut investment in the country in 2011 but it wasn’t a control deal. TPG Capital, The Carlyle Group and CVC Capital Partners, once active buyout players, have mustered only one deal between them in the past six years – and that was Carlyle’s acquisition of a minority position in Hyundai Communications and Network. KKR bought Oriental Brewery with Affinity Equity Partners in 2009 for $1.8 billion, but the seller was foreign, Belgium-based AB InBev.

The turning point appears to have been 2006. The previous year foreign players accounted for nearly all of the $3 billion transacted in PE deals, with buyouts alone contributing 60% of the total. This was the last time foreign funds were responsible the majority of capital deployed. It was also the last year that foreign buyouts accounted for any more than one quarter of total deal flow.

The emergence of domestic private equity firms and then the global financial crisis have both played a role in this process. Indeed, foreign GPs have never deployed more than $3 billion in Korea in a single year, but PE investment has comfortably beaten this mark four years in the past six.

What also happened from 2006 was the fallout from foreign PE firms’ investment in Korean banks really began to bite. And it continued to make headlines all the way through last year with Lone Star’s acrimonious and protracted exit from Korea Exchange Bank (KEB). It would appear the buyout firms are no longer welcome, although this view is contested by some industry participants and complicated by other factors.

“Local banks are no longer easy objects for foreign firms to acquire, especially for a controlling stakes – and since the Lone Star deal and its related woes, foreign investors increasing do not favor such deals,” says Eugene So, investment director at fund-of-funds FLAG Squadron Asia. “In the period after the Asian financial crisis in the late 1990s, foreign PE firms made acquisitions supported by capital injections from local governments to save banks. Now these banks are viewed as public assets and so investment is a sensitive topic.”

Negative sentiment is blamed for crushing any hint of foreign involvement in the government’s various attempts to offload its majority stake in Woori Finance Holdings.

“The notion that any private equity firm might acquire the nation’s second-largest bank financial services group is something people have issues with, whether it is sole or multiple bidders,” adds Scott Hahn, managing partner at Hahn & Co. “Even now you have Lone Star in the papers over certain aspects of KEB’s business. The stigma hasn’t gone away; in fact, it is remarkable how it hasn’t gone away.”

Hard timesLone Star’s tenure at KEB is rapidly passing into legend as a worst case scenario for private equity investment. What started out as a turnaround story soured as Lone Star was investigated was manipulating KEB’s stock price around the time of its purchase of a 51% stake for $1.2 billion in 2003.

The private equity firm was eventually found guilty, fined and ordered to sell down its stake, but the real damage was done during the legal proceedings as Lone Star’s attempts to sell KEB were repeatedly blocked. Lone Star, which eventually exited the asset to local player Hana Financial, is currently pursuing an arbitration claim against the Korean government for unlawfully interfering in its property rights.

However, the origin of tensions between foreign private equity and the Korean authorities

is the Asian financial crisis of 1998 and the subsequent Korean credit crisis, which required a $5 billion bailout from the IMF, granted on the condition of financial sector restructuring. The

distressed opportunities that arose were really where global buyout firms gained their first foothold in Asia. The era was characterized by acquisitions of Korea First Bank and KorAm Bank by Newbridge Capital and Carlyle, respectively.

The phenomenal success of these deals didn’t sit well with the government, which cast the private equity firms as having taken advantage of the economic troubles for their own commercial ends. ”Once the economy recovered, they realized the poisonous face of foreign private equity. These firms were described as ‘vulture capital’ and this only intensified after Lone Star,” one pan-Asian GP says. “They didn’t see Korea as long-term market that would generate ongoing deal flow and now it is hard for them to re-enter.”

Taigon Kim, senior partner and head of South Korea in Headland Capital Partners, which was then HSBC’s captive private equity unit in Asia, describes how being part of a bank helped ease the tension. “At that time we were part of HSBC and that brand is strong in Korea,” he says. “Since we became independent we no longer carry the HSBC name but they still own 20% of the GP. They are still an affiliate and we talk to potential clients about our culture and history. They can easily check my track record in Korea.”

Between 2000 and 2006, there were 23 private equity investments in Korea’s financial

Strained relationsGlobal buyout firms have seen less deal flow in South Korea in recent years, with financial services sector activity a shadow of its former self. This doesn’t necessarily mean they are unwelcome

PE investment in Korea’s �nancial sector

Source: AVCJ Research

8

6

4

2

0

2,000

1,500

1,000

500

0

Dea

ls

US$

mill

ion

Value (US$m)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Domestic deals Foreign deals

Number 13 | Volume 26 | April 09 2013 | avcj.com 15

Focuswinnie.liu@incisivemedia.com

services sector, 18 of them by foreign firms. The deal count rose to 34 between 2007 and 2012, but only seven were foreign. This came even as total investment in the sector rebounded from a low of $66.3 million in 2004 to surpass $500 million a year for 2007-2011 and then reach $1.8 billion in 2012, a higher level than during the post-crisis turnaround times. Admittedly, there were two significant foreign deals last year as Ontario Teachers’ Pension Plan (OTPP) and an Affinity-led consortium each picked up stakes in Kyobo Life Insurance.

But to what extent do these numbers reflect a negative feeling towards private equity as opposed to private equity itself losing interest in Korean financial services?

The post-crisis deals were attractive because they came at near fire-sale prices. In normal circumstances, Korea is regarded as a mature economy by Asian standards and its financial services sector is well penetrated; there aren’t going to be many growth investments as might be found in China and India. Furthermore, banks – and savings banks in particular – are under pressure, so it’s harder to make money.

“This is a country where the best financial institutions are trading at 0.7x book value,” says Hahn & Co’s Hahn. “We are talking about the best managed financial groups in the country.”

Industry participants note that there is still room for growth in certain segments of financial services, citing insurance and leasing as examples. Yet the Kyobo Life deal had been around for four years before the latest round of investments, becoming ever cheaper. The selling shareholders, Korea Asset Management Corp. and steelmaker Posco, only took ownership of the asset after its parent, Daewoo, went bankrupt in 1999 and never considered themselves to be long-term investors.

A Corsair Capital-led group bought a 7.41% stake in 2007 at a reported 1.5x book value; when the Affinity consortium came in for a 24%, the valuation was below book value, according to sources familiar with the transaction. A consortium was necessary because individual foreign investors are barred from holding more than 10% of a Korean insurer.

“Historically, financial and credit crises in Korea have resulted in distressed assets being

sold, which have created many opportunities for PE funds to invest. However, I think those sorts of opportunities are tapering off, and in the absence of such macroeconomic crisis or restructuring-driven opportunities, PE activity, particularly for foreign players, seems to be going back to a more normalized level,” says Hyung Jung Ahn, head of the Korea practice at law firm Linklaters.

Rise of local rivalsEven where foreign private equity investors are interested in participating they face increased competition from domestic players. Michael Kim, the former president of Carlyle Asia who led the KorAm Bank deal before spinning out to form North Asia-focused buyout firm MBK Partners in 2005, may be the most prominent example but he is by no means alone.

“There have been some significant developments in the private equity space whereby local teams with previous global private equity experience spin-out to start their own shops with a focus on Korean domestic investments,” says FLAG Squadron’s So. “This is expected to continue and it will provide an interesting story. The market is becoming more sophisticated.”

One of the driving factors behind MBK was the desire to create an Asian firm operating in Asia owned and operated by Asians. It was seen as a local alternative to the global players, but it didn’t take the global players long to catch on to

the benefits of localization, in Korea as elsewhere in the region.

The firms that have built up teams on the ground over 5-10 years – KKR, Affinity and Olympus Capital are frequently mentioned in this context – are still managing to do deals even as the foreign buyout flame has spluttered. Newer entrants that don’t have the advantage of these networks are more likely to struggle. The key issue for firms with a regional platform is how

active they expect to be in Korea and whether this justifies the expense of setting up a full operation in the country.

“Some of these firms haven’t decided that Korea is so compelling that they would allocate so much capital to the country,” one Korea-focused GP observes. “They might end up doing what Baring Private Equity Asia is doing – hire one guy as an advisor to be their eyes and ears, and be happy to look at a couple of deals a year. They aren’t completely shut off from the market but don’t have a heavy commitment on the ground.”

There remains among Korean managers and owners what some describe as an “irrational fear” of foreign investors – private equity in particular – that derives from a combination of cultural and lingual differences and occasionally conflicting expectation in terms of management and governance. This might lead them to choose a domestic player over a foreign one, all other considerations being equal.

“Public auctions tend to be pretty colorblind, but if it’s private control deal for whatever reason – it could be a union issue, you don’t want to be seen as being in financial distress by selling this asset, you don’t want to open it up to a competitor – they tend to reach out to the people they are most comfortable with. The people they can talk to, that they can trust and rely on, that are predictable from their perspective,” says Jason Shin, managing partner

at domestic GP Vogo Investment.

Is Lone Star responsible for this state of affairs? Probably not, is the consensus view. “It’s always been tough, even before the problems with Lone Star,” says one pan-regional buyout fund manager. “The country has never been that friendly to foreign investors – it is quite a nationalistic market.”

Linklaters’ Ahn argues that the

evidence doesn’t support such an extreme assessment. The Korean government didn’t set out to create regulatory obstacles for foreign investors and this hasn’t stopped overseas private equity funds operating in the country if they choose to. It is more about timing, pricing and, if there is a desire to target financial services, partnership. “The ones that do may find it easier and more practical to team up with local partners,” FLAG Squadron’s So adds.

Global buyout �rms’ investment activity in South Korea

Source: AVCJ Research

5

4

3

2

1

0

2,000

1,500

1,000

500

0

Dea

ls

US$

mill

ion

Value (US$m)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013YTD

2012

Deals

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