TPG secures pact with Korea’s Vogo

The tie-up between TPG Capital and South Korean GP Vogo Investment was buried at the bottom of the story, sacrificing top billing to a reshuffling of the US private equity firm's senior management in Asia. Already responsible for Australia and Southeast Asia, Managing Partner Ben Gray has now added Japan and South Korea to his remit, with counterpart Stephen Peel focusing on China and India.

However, the Vogo partnership may turn out to be just as significant as the personnel changes. Not only does it have the potential to improve the Korean GP's prospects, but it also represents a novel approach to a market that is attractive to investors yet notoriously difficult to operate in. Success hinges on just how deep the relationship goes.

"If you look at the last five or so years, there have only been about two decent-sized buyouts by foreign firms each year - and there is a perception that Korea favors local firms and local private equity players," says Bob Partridge, managing partner for Greater China transaction advisory services at Ernst & Young. "There are a lot of local firms that tend to see more dealflow, so establishing an affiliate relationship seems logical."

Tried and tested

TPG is no stranger to this approach in Asia. Much of its early activity in the region was channeled through Newbridge Capital, a joint venture with Blum Capital that was absorbed into TPG in the early 2000s. In 2007, the private equity firm established a relationship with Indonesia's Northstar Pacific Partners, backing its first two funds and co-investing in certain deals. Last year the two firms formalized ties, with TPG taking 10-20% of Northstar, which received less than 0.5% of TPG in return.

"Northstar started as an informal alliance and then TPG seeded the fund and got co-investment rights," says one pan Asian GP. "It worked out well so maybe Vogo thinks it could be the next Northstar."

But comparisons between Vogo and Northstar are as deceiving as those between Northstar and Newbridge. While it could be argued that Northstar wouldn't be where it is today without TPG's support, the firm - unlike Newbridge - has always been independent and is expected to remain that way. And then Vogo is no Northstar. It can claim to be an established player however, having raised a debut fund of KRW607 billion ($514 million) in 2005 and a KRW537 billion follow-on vehicle last year. Vogo is one of few Korean GPs to attract capital from overseas investors.

Furthermore - and as sources close to TPG are keen to point out - there is no economic relationship between the US private equity firm and its Korean counterpart. They have one thing in common: Byungmoo Park, who joined Vogo last year as a managing director, formerly held the same role with Newbridge.

According to one source familiar with Vogo's investor base, the GP has promised LPs that they will get precedence over TPG when it comes to allocating co-investment opportunities. A local fund manager, citing conversations with his own investors, adds that Vogo has been using the TPG alliance to pitch its global connections to domestic LPs.

What purpose?

Given that there appears to be no formal agreement for deal-sharing on either side, it begs the question of what this alliance is supposed to achieve. Several observers are somewhat cynical about the arrangement, suggesting it amounts to little more than a marketing ploy for two firms on the fundraising trail.

TPG is said to be approaching a first close of $1.5 billion on a pan-Asian vehicle that is seeking $4 billion, while Vogo has been marketing its third fund, which has a target of $650 million, for about a year. About 20% of the firm's first fund came from overseas investors, and Jason Shin, Vogo's managing partner, told AVCJ earlier this year that a larger portion of foreign capital is being targeted for the latest vehicle.

An LP familiar with Vogo describes the performance of the firm's first fund as "okay, but not great." He sees the ties to TPG, however loose, as a positive factor in the fundraising efforts. "If I were Vogo, I would have tried to get a deeper, more formal relationship," the LP adds.

For TPG, the arrangement appears to provide access to Korean dealflow that it otherwise might not have, with relatively little offered in return. The firm no longer maintains an office in Korea and hasn't made an investment there since 2003, when Newbridge participated in the $1.1 billion buyout of Hanaro Telecom, which was exited in 2007.

Newbridge's landmark investment came in 1998, with the restructuring of Korea First Bank. The consortium led by the private equity firm bought the bank for KRW500 billion and sold it seven years later for KRW3.4 trillion. The size of the returns prompted a public backlash against foreign investors, who were accused of exploiting Korean enterprises while they were weak in the wake of the Asian financial crisis.

"Lone Star has overpowered everyone following the problems with Korea Exchange Bank, but TPG still doesn't have a great reputation here," says the local GP. "In that context, maybe having a local partner makes sense."

Back in vogue

The tensions that followed the Korea First exit saw foreign private equity firms steer clear of buyouts in the country. A quick scan of the largest foreign-backed Korean control deals since 2000 shows little activity after 2005. Morgan Stanley broke the deadlock with its $835 million acquisition of Jeonju Paper Corp. in 2008, although it did have a local partner. A year later Affinity Equity Partners and KKR secured the $1.8 billion buyout of Oriental Brewery.

Ernst & Young's Partridge believes that the investment environment is becoming easier, and it could be argued that TPG's willingness to reengage through Vogo is evidence of this.

"In the last year there has been a clear increase in interest in Korea - you just have to catch the Cathay Pacific flight to Seoul on Monday afternoons to see that," says Partridge. "There are a lot of assets for sale, including secondary deals from international PE firms. Although the data doesn't show any change, the sense on the ground is that the hostility towards foreign private equity has dropped."

He sees foreign private equity firms targeting two kinds of deals: succession opportunities where one generation of family owners wants to retire and their children don't want to retain the business; and joint ventures between foreign and Korean entities, where the foreign party is unhappy and wants out.

Others are more circumspect. The size and skill of the economy and the opportunities - relatively rare in Asia - to put large amounts of capital to work in a single deal are seen as the principal highlights. These are tempered by latent concerns about the risks of regulatory nationalism and draconian tax policies, and competition for deals from domestic strategic investors.

Then there is the fact that private equity works in cycles, and when valuations or exits become a problem in one country, fund managers must seek to deploy their capital elsewhere. "Five years ago people didn't worry about Korea; it was all China and India," says the pan Asian GP. "Now there are concerns about Chinese growth slowing, combined with rising competition, and India is unpopular, so suddenly Korea makes a lot of sense again."

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• Topics
• North Asia
• Fundraising
• Northstar Group
• TPG Capital
• Vogo Investment
• South Korea
• Fundraising