Korea’s outbound mandate

Discount conglomerates rearranging their overseas assets or accumulating energy and commodities interests and South Korean outbound investment is inextricably tied to Fila.

The Italian sportswear company overextended itself in the early 2000s and ended up in the hands of Cerberus Capital Management, before Fila's South Korean franchisee snapped up the global business in 2007. Four years later, Fila Korea teamed up with Mirae Asset Private Equity, the National Pension Service of Korea (NPS) and Korea Development Bank to buy US-based Acushnet for $1.23 billion, thereby gaining control of Titleist, the world's most profitable golf equipment brand.

The two deals stand out because they were seen to represent two innovative M&A trends: a Korean franchisee buying its franchisor and a private-equity backed outbound acquisition of a Western brand by a Korean corporate.

Yet nearly 18 months after the second of these transactions - and at a time when numerous European and American brands are either putting themselves up for sale or seeking partners to strengthen their foothold in Asia - they are still held up as high watermarks in the outbound space. The government is certainly trying to promote overseas M&A, and it is encouraging private equity to participate, but not everyone is convinced.

"No major business groups in Korea have made moves for big overseas brands," says Scott Hahn, CEO of domestic GP Hahn & Co. "Most have success in growing overseas through organic expansion. Samsung Mobile is the number one phone brand in the world, so why would Samsung want to buy a Motorola or other foreign brands it has already overtaken?"

Resources are a slightly different matter. Korea, like several of its Asian neighbors, is reliant on external reserves to keep the lights on and the cars moving. Four of the 10 largest outbound deals completed during the first eight months of 2012 involve natural resources. A $3.3 billion investment by Posco and STX Corporation in conjunction with Japan's Marubeni Corporation in Australian iron ore mining company Roy Hill Holdings accounted for more than half the total spent on overseas assets.

Overall, industry participants say that M&A is slowing. According to Thomson Reuters, M&A activity involving Korean companies came to $34.4 billion for January-August 2012, with 671 deals transacted. There is little optimism about matching the previous year's total of $56.3 billion, the highest seen since 2007.

Outbound deals reached $6.3 billion for the first eight months of the year so it is possible that the 2011 total of $8.7 billion might be passed, but the Roy Hill deal distorts the overall picture. There were 88 deals during the period compared to 148 in 2011 as a whole.

Exception to the rule

The exception to the rule is Standard Chartered Private Equity, which has made four investments in the past 18 months with a view to helping the target companies expand overseas. These deals fall under a partnership with NPS that was agreed two years ago and launched in March 2011.

"Korea is not a big market - 50 million people - and the economy is growing at 3-4% a year. With organic growth you can get double digit returns but it's difficult to find," Charles Huh, head of SCPE in Korea, tells AVCJ. "But if there is a business that is proven in Korea, it will work elsewhere in the world."

The most recent investment follows in the footsteps of the original Fila deal: Using $46 million from NPS and SCPE, Smoothies Korea acquired its franchisor, US-based Smoothie King. This was the first cross-border acquisition by a Korean company of a global brand in the food and beverage sector.

Nearly 90% of the capital NPS committed to the partnership has been deployed. Two of the three other investments are Korean companies. It bought 49% of Doosan Industrial Vehicle, South Korea's largest forklift manufacturer, which wants to expand into Southeast Asia, India, the Middle East and South America. This was followed by a $61 million commitment to motorcycle and auto parts maker Daelim Motor, another company seen as having the brand and network to establish itself internationally.

"You could consider what we have with NPS as ordinary growth capital fundraising, but because we aren't a traditional GP, we don't have an existing investor base," says Huh. "We have two funds that invest together - in terms of the nature of the agreement it's one of a kind."

The NPS runs a number of other initiatives intended to support corporations in outbound investments, including the Corporate Partnership Program, a reported KRW8 trillion ($7 billion) scheme involving 12 large Korean conglomerates. The NPS puts up half the capital and the conglomerates - GS Group, SK Group, KT Corp, Posco and Hanwha Group, among others - contribute the rest.

The Corporate Partnership Program also has PE participants, with industry sources saying that MBK Partners, H&Q Asia Pacific, IMM Private Equity and Mirae Asset Private Equity have signed up with the NPS. Given that the initiative is still in its early stages, it is unclear exactly what function private equity will serve.

"The partnership is still being decided, but they have largely earmarked the GPs that will work with the chaebols and it appears the role will be managing the NPS' capital," says Hahn. "It's a very creative concept although I am not very familiar with it in terms of this as a general practice in private equity. It's certainly different from a PE firm making an overseas acquisition on its own as a GP."

Mutual benefits?

Other GPs have similar concerns. SCPE could be seen as a good fit for the NPS because it invests from its own balance sheet and so is free to manage money on behalf of a partner without risk of upsetting LPs. Conventional private equity firms have no such luxury - they raise third-party capital and are obliged to deploy it over a given time period. Working simultaneously with another entity could distract from this primary objective.

The counterargument is that operating in partnership with the NPS and Korean corporations could generate dealflow. However, one private equity fund manager expresses mixed feelings about this approach: the NPS enables transactions through its willingness to supply financing, but it is also creating a climate in which GPs assume support will be forthcoming should they identify deals.

As evidenced by several failed domestic transactions, assumptions are sometimes misguided and this gives false hope to sellers.

"The NPS has something like $350 billion in assets and 5-7 years ago it had zero allocation to private equity so it has been ramping up rapidly," the PE manager says. "We are all learning but the NPS has a much larger impact on the market than any single GP, so they are not just learning but they are also changing the market - sometimes for the best, sometimes for the worst."

The positive contribution private equity can make is in finding targets that are aligned with corporations' strategic interests and risk appetite. NPS, though supportive, doesn't necessarily have the skill sets or manpower to perform such a role, and SCPE's Huh says it is the area where most companies are found wanting. The barriers may be language, culture or just not having a clear idea of what they are looking for.

"The biggest challenge for them is target identification," says Huh. "They don't have a significant presence overseas and, although they are interested, once they sign a non-disclosure agreement they become more conservative than Chinese and Indian corporations."

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• Topics
• North Asia
• GPs
• LPs
• Outbound investment
• South Korea
• Standard Chartered Private Equity
• National Pension Service (Korea)