Q&A: STIC Investments' Hans Jung

Q: PE investors have been talking about divestments by chaebols for years but there doesn’t appear to have been a marked increase in deal flow. Is it different this time?

A: Deal flow is expected to increase significantly. Prior to 2016, corporate restructuring was based on regulatory policies such as restrictions on cross-shareholding and intra-group deal trading. However, in the past year, a special law has been enacted to enhance corporate vitality and promote voluntary restructuring. Conglomerates tend to make restructuring decisions because of business needs rather than regulations or government support. M&A aimed at selling non-core businesses with a view to strengthening core businesses – such as those between Samsung Group and Hanwha Group in 2014 and between Samsung and Lotte Group in 2016 – continues. Since the beginning of 2017, LG has sold LG Siltron, a semiconductor manufacturer that was deemed non-core. Uncertain internal and external environments will also play a role that facilitates conglomerates restructuring. Economic nationalism is the US, China and Japan, for example, will encourage conglomerates to restructure their businesses to secure liquidity and focus on their core competencies.

Q: To what extent have the reforms already made by major conglomerates generated deal flow?

A: By becoming the first holding company among the major Korean conglomerates in 2003, LG has been at the forefront of chaebol corporate governance and business structure reform. Since then, many affiliates have been separated, merged, and sold to build the current holding company and business structure. LG Chemical’s acquisition of Dongbu Farm Hannong and merger with LG Life Sciences in 2016 – as well as the sale of LG Siltron – are examples of deal flow resulting from these efforts. In addition to LG, Hyundai Heavy Industries is undergoing a corporate restructuring, and it is anticipated that there will be a lot of investment opportunities for private equity firms from various conglomerates.

Q: Is there a ‘trickle-up’ effect, i.e. second and third tier chaebols become targets for restructuring first and then the larger conglomerates do it later?

A: We believe that the need for voluntary reform to survive the changing environment is stronger than reform driven by government pressures or guidelines. If the government’s pressure has an influence, it is mostly due to the economic democratization. This involves promoting balanced economic growth through a fair competition by adjusting the imbalanced power between conglomerates and small and medium-sized enterprises (SMEs). It seems the government believes that the initial target of reform should be the first tier, which comprises the 20 largest chaebols. Of course, the restructuring pressure on first-tier conglomerates that own globally competitive companies may be smaller than the pressure on second and third-tier conglomerates.

Q: How effective have been the measures intended to restrict circular investment, tunneling and cross-shareholding?

A: Regulations on mutual shareholding, cross shareholding and intra-group trading are clearly defined. STIC’s $100 million investment in Hyundai Group to solve the tunneling issue and improve corporate governance is a typical deal. Currently, attempts to mitigate these regulations are continually being made and some chaebols are avoiding these regulations while trying to strengthen the corporate governance. So far, we have only seen a partial impact, but improved regulations will help address these problems.

Q: Does the special situations fund pursue distress opportunities? What about situations in which a restructuring comes as a result of a government bail-out?

A: The special situations fund that STIC operates, finds deals from conglomerates' voluntary restructuring special situations. It is not part of the strategy to invest in insolvent companies; rather the strategy is to target large, high-growth conglomerates with special situations in their shareholder base. 

Q: What impact do political cycles have on investment opportunities tied to chaebol reform?

A: Normally, the demand for chaebol reform is strongest in the beginning of a new government’s term and weakens toward the end of the term. A new administration will be elected this spring or winter, and no matter which side wins, there are likely to tougher chaebol reform policies. However, since most chaebols are more stable now than in the past, we don’t expect radical change in every industry. We expect to see more of an impact in struggling industries such as shipbuilding and shipping.

Q: What particular qualities does a PE investor require to make the most of restructuring opportunities? How is it a good fit for STIC?

A: The team behind the special situations fund has managed three secondary funds at STIC. Those funds invested in old shares owned by major shareholders, institutional investors and funds. The most recent fund’s investments involved conglomerates such as Innocean and Dongbu Palm Hanon. They are similar to deals that aim for the upside profit after securing downside protection through investments in special situation opportunities that arise during conglomerates restructuring. STIC also accumulated special situations experience through investments in LIG Nex1, Hyundai Oilbank and Posco Energy. In order to source deals and invest effectively, we have established a close network of conglomerates, including Samsung, LG, Hyundai Motors, Hyundai Heavy Industries, Dongbu, SK, CJ Group, Kolon Industries and Hanwha. Additionally, we have the experience and knowhow to negotiate and complete deals quickly.

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• Topics
• North Asia
• Buyout
• Restructuring
• GPs
• South Korea
• STIC Investments