AVCJ at 25: Michael B. Kim of MBK Partners

With an agreement to sell Taiwan's China Network Systems (CNS) pending final regulatory approval, MBK Partners remains, for now, the largest private owner of cable television assets in Asia.

CNS has 1.2 million subscribers; South Korea's C&M, another portfolio company, has more than 2 million. MBK is therefore indirectly responsible for sating viewer appetites for everything from CTV News Global Report and X-Factor equivalent One Million Star in Taiwan to reality show MBC Infinite Challenge and a dizzying array of TV dramas in Korea, not to mention the likes of CNN, ESPN and AXN. The companies also provide a range of telecom, broadband internet and related services.

What makes these businesses attractive is that viewer appetite is almost insatiable. "We love cable TV because you have a very stable customer which leads to strong recurring cash flow. Whether there is a recession or not, people pay their monthly subscriber fees," says Michael B. Kim, founding partner of MBK. "The story of North Asia is the story of domestic consumption. And it goes hand in glove with our concentration on telecom and media and financial services."

The private equity firm announced the acquisition of CNS for $1.5 billion - including $840 million in debt and equity participation from co-investors - from Koo's Group and Star TV in October 2006, three months after reaching a final close of $1.5 billion on its debut fund. The asset, Taiwan's second-largest cable TV operator, will be sold to Want Want China for $2.4 billion once the buyer agrees to certain conditions imposed by regulators.

C&M, Korea's third-largest but most profitable cable TV player, followed about one year later as MBK and Macquarie, with selected co-investors, acquired the asset in a $2.4 billion buyout, the largest in Korea to date. Korean lender HK Mutual Savings Bank was another early transaction that fell in the PE firm's consumption play sweet spot.

Leaving the comfort zone

Cable television and financial services in these markets were well known to the MBK team from its time with The Carlyle Group, which bought Taiwan Broadband Communications in 1999 and led the turnaround acquisition of KorAm Bank the following year. That they were willing and able to spin out in 2005 and pursue such deals independently speaks volumes for how far private equity had progressed over the preceding five years.

"I remember one of the slides from our marketing presentation for Fund I declared, ‘The center of gravity of the global private equity market is shifting to Asia,'" recalls Kim, who had joined Carlyle in 1998 and eventually rose to the position of Asia president. "We certainly felt the center of gravity of the global economy was moving to Asia with the emergence of China and India."

The first vibrations came with the Asian financial crisis, which opened up a regional market previously defined by growth capital to distressed buyouts. Newbridge Capital took control of Korea First Bank and then Carlyle followed suit with KorAam, and suddenly the prospects for private equity in Asia were changing as others investors sought out restructuring and carve-out opportunities.

Kim, who led KorAm deal, describes the transactions as "a watershed for the industry." Global buyout firms started deploying more resources in Asia and, more importantly for the likes of MBK, international investors began to take the region more seriously. MBK Partners I, which remains Asia's largest first-time fund, is said to have received substantial support from Ontario Teachers' Pension Plan and Temasek Holdings.

It wasn't the only spin-out. Three years earlier, UBS Capital Asia Pacific broke away to form Affinity Equity Partners and launched its first fund raised from third-party sources in 2003, reaching a final close of $700 million. By the end of 2006 Affinity was already well on the way to a third fund worth $2.8 billion, its LP roster populated by North American pension funds.

The J.P. Morgan private equity team that set up in Asia in 1999 spun out the same year as MBK, forming CCMP Capital Partners, which was subsequently renamed Unitas Capital. The GP raised a $1.57 billion fund in 2005 and followed up with a $1.2 billion vehicle that closed in 2008. On both occasions the nature of the LP base was similar to Affinity.

However, the availability of capital alone wasn't enough; MBK and its counterparts had to convince prospective investors that their interests would be best served by backing a smaller, indigenous Asian GP.

"The private equity market in Asia was past its infancy stage, which I characterize as 2004-2005, and entering the adolescent stage," says Kim. "That's the period where you have a growth spurt but you also have some growing pains. The clear trend was you had to be local. We wanted to form an Asian firm operating in Asia owned and operated by Asians. We thought it was time for a local alternative to the global players."

The global players didn't take long to catch on to the benefits of localization, aggressively recruiting investment professionals native to the region, but building out local teams across Asia remains a challenge. As such, they tended to be much stronger in some geographies than in others. Kim cites Carlyle as an example. The firm hired a large team of Japanese and launched its debut country fund in 2001; progress in other parts of Asia was slower.

Strategic considerations

Two other, more strategic, issues also featured in MBK's pitch to LPs. First, there was a desire to find a middle ground between pan-regional platforms that might be too broad and shallow in coverage to identify certain deals and country funds where there is a concentration risk. MBK opted to focus on North Asia - China, Taiwan, Japan and Korea - and in this sense remains distinct from the likes of Affinity and Unitas, as well as from the global buyout firms' Asian entities.

"As a block they represent a larger GDP than the euro zone or the US and we thought that North Asia was really where all the buyouts were happening," says Kim. "We wanted to concentrate on this very fertile set of markets rather than do pan-Asia. You can't spread yourself too thin. We don't do venture, we don't do growth, we don't do distress. We do buyouts and we do them in North Asia."

Second, regulatory barriers make it difficult for private equity to operate in certain countries, which pushes firms towards geographic and even sector specialization. Korean PE legislation promulgated in 2005 required GPs to register with the Financial Supervisory Commission. MBK and about 50 other firms now file disclosures with the regulator on a quarterly basis but in return they are classified as domestic entities and qualify for capital gains tax exemption.

The system also offers a competitive advantage in deal sourcing: once categorized as local, MBK was able to enter strategic sectors to which foreign investors are denied access. This made it easier to win regulatory approval for the C&M and HK Mutual Savings Bank transactions, both in highly regulated industries.

"Korea is an important market for us - it punches above its weight as a private equity market relative to its GDP - so it is important to be able to do business there," Kim says. "And it fits squarely into our investment thesis: to do local deals, where our localness would be an advantage, and focus on our two key sectors, telecom and media and financial services."

Too much money?

Seven years on from the spin-out, MBK is investing its second fund, which has a corpus of $1.6 billion, and is in the process of raising a third vehicle, with a target of $2.25 billion. The firm continues to target market leaders with strong cash flow, almost always seeking majority control because it's easier to implement operational value-add. TMT and financial services remain front and center of a portfolio that is 90% domestic consumption-oriented; export plays have never really come into it.

Kim argues that North Asia retains considerable investment potential, particularly Japan, which has been overlooked in recent years but still boasts a reliable legal system, a strong private equity infrastructure, including leveraged finance, and a lot of companies with compelling fundamentals. Comparing Japan with Korea, he notes that the government could do more to engage with the asset class and encourage cultural acceptance of private equity as an alternative form of capital.

On the flip side, too much money has entered the likes of China and India, leading to increased competition for deals and higher prices. "There was a huge flood of capital from the mid-2000s and it's turned into a high-class problem because there is just too much of it in Asia," Kim says.

As part of this trend, there has also been a proliferation of independent private equity players as investment teams follow the MBK route and break off from existing firms or emerge from other parts of the financial services and consulting industries. While the global buyout firms continue to operate across the whole region, spin-outs tend to have a more concentrated, country-focused agenda. As the fundraising environment deteriorates, it is becoming more difficult for these newly independent players to win over LPs and therefore imperative that they communicate a clear investment thesis.

However, Kim believes the value placed on the combination of local knowledge and international experience means seasoned executives will continue to generate a following in Asia.

"They offer technology transfer - how to do a buyout, negotiate it, execute it - and create value post-investment," he says. "These people bring technology back to their home markets where they can marry Western knowhow with local norms, standards of business and customs. This is going to be a critical success factor in the next stage of private equity in Asia."

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• Topics
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• Michael ByungJu Kim
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• The Carlyle Group
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