Asia PE investment: Korea makes a splash

In the space of two months, South Korea has seen four of the 12 largest private equity deals executed in Asia so far this year.

Last week, MBK Partners agreed to pay KRW1.1 trillion ($1.1 billion) for a 31% stake in WoongjinCoway This is just shy of the KRW1.2 trillion Affinity Equity Partners, Government of Singapore Investment Corp. (GIC), Baring Private Equity Asia and IMM Private Equity paid for 24% of Kyobo Life earlier in the month. Ontario Teachers' Pension Plan (OTPP) snapped a 10% stake in the same company for KRW470 billion in June, while IBK Capital and Kstone Partners concluded a KRW415.5 billion investment in Daewoo Engineering & Construction.

Does this signal an opening of the floodgates as Korea's conglomerates, or chaebols, offload assets to willing private equity buyers?

"It's consistent with what I've been saying for the last year-and-a-half," Jason Shin, managing partner at Vogo Investment. "The buyout environment in Korea has improved greatly compared to five years ago. Although Korea wasn't as affected by the global financial crisis as elsewhere, banks started to become more disciplined on credit risk and this has hit the tier-two and tier-three chaebols."

Trend or no trend?

The recent transactions have helped send private equity transaction value past $4.5 billion, a three-year high and it's still only August. Not everyone is prepared to endorse a trend, however. It is generally agreed that the country is more open to private equity than recent history of the fallout from Lone Star's investment in Korea Exchange Bank suggest. But there is uncertainty as to whether the chaebol deals will be forthcoming.

"The deals that have been announced have been in the market for some time, so I don't think it signals a step change," says Bob Partridge, a transaction advisory services partner with Ernst & Young. "The chaebol scenario is something we've heard every year for the past decade."

There are three possible explanations for this difference of opinion: the pipeline of recent transactions is certainly mixed; the top-tier chaebols are in rude health, which might influence perceptions of these companies as a whole; and there have been no major blowups among the second-tier chaebols in the style of Kumho Industrial, so they aren't necessarily under extreme pressure to divest.

The Kyobo Life deals were widely anticipated as both sellers always wanted to exit. OTPP bought its stake from Korea Asset Management Corp. (KAMCO), the agency assigned to manage parent company Daewoo when it slid into bankruptcy in 1999. The 24% interest in Kyobo held by the Affinity group came from steelmaker Posco, which obtained it as part of the purchase of Daewoo International from KAMCO in 2010.

In the other transactions, though, there is evidence of sales driven by creditors applying the squeeze to conglomerates. Daewoo Engineering & Construction was the source of many of Kumho Industrial's problems, having been acquired in a highly leveraged KRW6.4 trillion deal shortly before the global financial crisis. Kumho ended up in a debt restructuring program and its assets are still being offloaded. The company said last year that it would divest assets worth KRW1 trillion to about 10 PE funds.

WoongjinCoway is a more recent phenomenon. Parent company Woongjin Holdings has ramped up its exposure to solar energy and construction in recent years and requires capital to service these businesses. Woongjin initially agreed to fold the asset into a joint venture with KTB Private Equity but this fell apart late in the process and MBK moved in.

Hi-Mart, an electronics retailer acquired by Lotte Shopping for KRW1.25 trillion in July despite competition from MBK, is cited as another example of the credit squeeze as majority-owner Eugene Corp. was under pressure from lenders to deleverage.

It's worth noting that Hi-Mart is the only transaction that involved a transfer of control and the only one to go to a strategic investor. "What's interesting about these recent transactions is that most are for minority stakes and geared towards IPOs," says Scott Hahn, president of Hahn & Co. "You are seeing a concentration of larger-size transactions that are geared to private equity investors because control isn't involved."

Money matters

The other factor contributing to the strong deal flow in Korea is the availability of financing at a time when the leading leveraged markets in the region - Australia and Japan - have become quieter. MBK has reportedly secured financing from Hana Financial Group and Shinhan Financial Group for the Coway deal, reflecting a wider trend of domestic lender dominance.

"Korea is even more extreme than Japan - the cost of funding from local financial institutions versus global ones is incomparable," says Hahn.

The country's banks were far less exposed to the global financial crisis than their Western counterparts and they don't have to worry about foreign exchange volatility if they are lending in local currency. At the same time, the amount of leverage on offer is said to be relatively low by global standards.

"When the banks see one of the larger PE firms making a 100% acquisition of a business with solid cash flow and only 40% in the transaction, it's a no-brainer," says Vogo's Shin.

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• Topics
• North Asia
• Buyouts
• Investments
• South Korea
• MBK Partners
• Affinity Equity Partners
• Baring Private Equity Asia
• IMM Investment
• GIC Private
• OTPP
• Vogo Investment
• Scott Sang-won Hahn
• buyout