The South Korean Private Equity Market: Transitioning from Foreign to Domestic Funds

Posted on by Jonathan Lee

Overview and History

After the Asian Financial Crisis in 1997, South Korea’s private equity market attracted a multitude of global investors, particularly in the distressed and buyout market.1 In fact, foreign funds such as New Bridge Capital and Carlyle were major players in the corporate restructuring process after the financial crisis.2 It was only in 2004 that the Indirect Investment Asset Management Business Act permitted domestic private equity funds (PEF) in South Korea.3 Onshore financial institutions finally gained the privilege to form PEF vehicles.4 Public pension funds became the largest players in PEF (36% of capital invested), while sovereign wealth funds (19%), insurance funds (16%), and government agencies (14%) also played a significant role.5

However, it seems the landscape in the Land of the Morning Calm has shifted far from the Asian Financial Crisis days. The government has actively suppressed the activity of foreign private equity funds in the country. In particular, it has turned to altering regulations to combat hostile takeover by foreign capital in key industries. For example, the US PEF Lone Star Funds attempted for six years to sell its 51% stake in Korea Exchange Bank but faced regulatory delays enacted by the Korean government and a stock-manipulation litigation case.6 In 2005, the National Tax Service of Korea initiated tax audits of two foreign PEF, Lonestar and Carlyle.7 These audits were considered particularly invasive because the firms received no advanced notice and the Tax Service simply appeared to collect books and records for inspection.8 Many public officials in the country’s National Assembly called for such audits because they believed the funds were reaping large profits on which they paid no tax.9 Moreover, the government seemingly has promoted domestic funds by prohibiting foreign private equity funds from owning more than 10% in a domestic financial holding company.10 Instead, it has allowed foreign funds to partner with a local fund.11

In addition, offshore PEF face strict restrictions in their investment objects.12 The legal framework limited them to a form of “buyout funds”- the acquisition of equities with the intention of participating, directly or indirectly in the management of companies.13 In regards to offshore funds sold to Korean investors, the Korean government has required registration with the Financial Supervisory Service.14

Today’s Landscape

The trend today has foreign PE funds in Korea facing an uncertain future, especially as their core investment strategy, large scale buyout transactions, have become more difficult to execute under current market conditions.15 This difficulty could be a reflection of the relatively smaller scale of local funds operated by many onshore sponsors, many of which are focused on early-stage and growth capital investments that do not represent a large portion of total investment.16 In addition, offshore sponsors have had limited access to small and middle-market buyouts due to their Korean counterpart’s advantages in language and culture.17 In these types of buyouts, the Korean chaebols (conglomerates) seemingly outbid their financial competitors.18 Due to the chaebols deep pockets, it is difficult for offshore private equity funds to “Get things at a reasonable price.”19 Combined with these barriers to offshore funds, the talent pool of local PE professionals has increased because many of them lost their jobs at global PE firms after the 2008 financial crisis.20

On the other end of the spectrum, domestic PEF seem to be flourishing. As of September 2013, Korean PEF completed USD 3.5 billion in deals, up from USD 2.2 billion in 2012 even in spite of a decline in private equity investment overall in Asia.21 The domestic PEF MBK Partners’ also recently signed one of the country’s largest private equity deals (USD 1.6 billion to buy ING Group’s life insurance operations in South Korea).22 The firm has also purchased Woongjin Coway, South Korea’s top water purifier maker, and NEPA, a major outdoor sportswear company.23 Other domestic PEF’s operated by the Vogo Fund and Mirae Asset have also aggressively entered PE deals.24 Mirae Asset, one of the largest asset management companies in Asia, recently acquired Coffee Bean & Tealeaf while Vogo Fund purchased Burger King franchises in Korea.25

Today, domestic PEF’s operate funds totaling USD 39 billion which is 140 times more than in 2004 when the Indirect Investment Asset Management Business Act created domestic private equity funds.26 According to an official from the Financial Supervisory Service, PEF “could spend more next year because more firms are expected to be put up for sale due to an economic slump.”27 Moreover, it seems pension funds will continue to play a major role as investors in PEF because pension funds will face hurdles in dealing with pensioners’ demands and low interest rates.28 Private equity funds could serve as effective investment tools for pension funds because PEF “do well regardless of the economic situation because their strategies are independent of macroeconomic trend.”29 In line with this prediction, the Ministry of Health and Welfare, which controls the National Pension Service, proposed 76 trillion Won in financial market investments in 2014.30 It seems domestic PEF growth is on the horizon as “the portion of investments by PEF’s to the GDP is only 0.05%, which is much lower than…the US (1.05%) and the UK (1.02%).”31

Spurred by their recent success in the domestic market, it seems Korean PEFs have also started to explore foreign deals. As recently as January 2013, MBK Partners’ purchased a controlling stake in Komeda, a Japanese coffee chain which operates more than 480 shops.32 It seems foreign PEF’s will continue to struggle against the legal barriers erected by the Korean government as well as the coffers of Korean chaebols while domestic PEF’s will continue to grow both domestically and overseas.

  1. Chang Gyun Park & Seok Kyun Hur, Recent Trends and Regulations on Private Equity Funds in Korea (Aug. 2007), KOREA DEV. INST. 1, 10, https://www.kdi.re.kr/data/download/attach/8251_3-2[1].pdf. ↩

  2. Id. ↩

  3. Yun Goo Kwon ET AL., Private Equity in South Korea: Market and Regulatory Overview, PRACTICAL LAW (Nov. 1, 2011), http://us.practicallaw.com/8-521-4346. ↩

  4. Alex Yang ET AL., The Korean Private Equity Market- Structural Considerations for Investors (2011), EMPEA LEGAL & REG. BULL., http://kimchang.com/UserFiles/files/EMPEALRBulletin_KoreaPE_Autumn2011.pdf. ↩

  5. Aveline Tan, Private Equity Investors in South Korea, Preqin (May 25, 2012), https://www.preqin.com/blog/101/5217/pe-investors-in-south-korea. ↩

  6. Se Young Lee, Three Korean Private-Equity Funds Pursue Woori, WALL ST. J. (Jun. 28, 2011), http://online.wsj.com/news/articles/SB10001424052702304450604576414970777058418. ↩

  7. Don Yang, South Korea Goes After Private Equity Funds, 38 TAX NOTES INT’L 551, 552 (2005). ↩

  8. Id. ↩

  9. Id. ↩

  10. Lee, supra note 6. ↩

  11. Id. ↩

  12. Park & Hur, supra note 1 at 8. ↩

  13. Id. ↩

  14. Yang, supra note 4.) On top of the registration requirement, offshore PE funds must utilize a locally licensed distributor (i.e. domestic financial institution) to market to Korean investors. ((Id. ↩

  15. Id. ↩

  16. Id. ↩

  17. Id. ↩

  18. Id. ↩

  19. Isabella Steger, Korean Private-Equity Activity Picks Up, WALL ST. J. (Sept. 18, 2013), http://blogs.wsj.com/moneybeat/2013/09/18/korean-private-equity-activity-picks-up/. ↩

  20. Yang, supra note 4. ↩

  21. Steger, supra note 20. ↩

  22. Id. ↩

  23. Na Jeong-Ju, Indigenous Private Equity Funds Flourish, THE KOREA TIMES (Oct. 15, 2013), http://www.koreatimes.co.kr/www/news/biz/2013/10/488_144381.html. ↩

  24. Id. ↩

  25. Id. ↩

  26. Id. ↩

  27. Id. ↩

  28. Id. ↩

  29. Id. ↩

  30. Id. ↩

  31. Id. ↩

  32. Id. ↩

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