Q&A: Morgan Stanley PE Asia's Michael Chung

Q: You recently acquired Hanwha Group's construction materials business. How strong an investment theme are corporate divestments?

A: We have seen a long-term trend going back to 1997-1998. During the Asian financial crisis a number of chaebols were forced to restructure and divest while some filed for bankruptcy. That led to a 10-year streak of deal flow for both PE and strategic investors. For example, MSPEA has held controlling stakes in three Ssangyong companies - the trading arm, a steel business and now Ssangyong C&B, which is a tissue paper business. As for the more recent divestitures, it is not as intense as during the Asian financial crisis. Chaebols are a lot more mature and transparent in how they govern their businesses. They realize they need to focus on their core businesses where they are competitive. MSPEA's recent acquisition of Hanwha L&C is another example. Hanwha's construction materials unit produced good margins but the group decided to sell it and use the proceeds to pay down debt and fund new capital expenditure in their core areas.

Q: How significant is government pressure in these situations?

A: There is no new regulation or law anyone can point to that can explain why the chaebols have not been acquisitive in recent times. I suppose one could say that it's more like guidance from the regulatory bodies. For instance, the government may decide to increase scrutiny of certain business groups' overall governance and interdependencies. That may cause companies to be cautious about further business diversification and incentivize them to pause and make sure they are on track in terms of their core businesses. We don't know of any chaebol that is particularly acquisitive right now, which is one of the reasons why this year may turn out to be a good vintage for PE investing. We at MSPEA are not really competing against the chaebols in the mid-cap space today.

Q: You completed two Ssangyong deals before buying the paper business. Did those first two help you get the third?

A: It is helpful because you know the former business group's culture, but in terms of actually getting the deal done it's not so helpful because the sellers are different. Ssangyong Corporation, the trading business, was a distress deal so the sellers were the creditors; Ssangyong C&B was owned by an individual. On the other hand, a similar scenario can be very helpful in minority situations. We invested in Hyundai Rotem, the largest rolling stock manufacturer in Korea, in 2006 and still hold a position in it. The company is majority-owned by Hyundai Motor Group and we recently closed a deal for Innocean Worldwide, an advertising agency and another Hyundai Motor affiliate. They can look at a multiple-deal track record of how you have behaved as a minority investor, and we have seen that long term relationships can be valuable.

Q: How is buying from an individual owner different to buying from a chaebol?

A: If you are negotiating with an individual owner over a business or an asset that comprises most of his wealth, then he or she cares about everything - who they're selling to, timing, indemnities, and so on. When you are dealing with experienced M&A professionals within any group the discussion is significantly more seamless. They usually know what the M&A practices are. On the other hand, post-investment we find that businesses previously owned by chaebols have been better run in terms of governance, internal controls, enterprise resource planning, and human resources programs. But the flip side is there might be less low-hanging fruit among the formerly chaebol companies. With businesses like Ssangyong C&B, there were things we could do immediately to enhance the company's value.

Q: Hyundai Rotem was Korea's biggest IPO in several years. Are we going to see more public market exits?

A: A number of minority investments have taken place in Korea however we haven't seen many private equity exits via IPOs in the recent past. Hyundai Rotem was quite possibly the only PE-backed company to list last year. This year the equity capital markets are better, the KOSPI 200 Index is up on last year's average, and there are companies going on road shows. The IPO market is opening up but it still remains to be seen whether companies with PE shareholders will get through the window. We think the IPO market will sustain or improve and that's one of the reasons we invested in Innocean. As a minority investor in a chaebol business, you are primarily dependent on an IPO for exit.

Q: As for trade sale exits, if chaebols are not in acquisitive mode, will it be harder?

A: There are pockets of capital out there willing to deploy that can get aggressive when they see something attractive. But it doesn't feel like chaebols are putting a net out to see if they can catch 2-3 targets in one year. If there is an available target out there and if they miss the opportunity they know they will regret it, they will still go after it. Our focus is not so much on timing exits as making sure our portfolio companies sustain their value at any given time. If a company has high strategic value, timing has less to do with your ability to exit. If it is not strategically valuable you may face challenges, especially in times when strategics are not acquisitive.

Q: To what extent does helping companies go overseas come into your investment strategy?

A: If company A in Korea wanted to buy company B in the US we would be the perfect partner. We could help them conduct the due diligence and negotiate the transaction, and we would have the alternative to invest in company B, or in company A in order to fund the equity check for company B. If you want to buy a business and help it go global that's a very different dynamic and global private equity firms are today probably best positioned to assist in that area. Entering a completely new country and using your networks to start or expand businesses is indeed difficult, although not impossible. Since acquiring restaurant chain Nolboo we have opened a new restaurant network in the Shanghai area. Without us, I don't think that would have happened - we found the right joint venture partner and structured and negotiated the business arrangement. In cases like these, we believe a combination of experienced private equity managers and the organization's deep local business network in the target country would comprise the key factors.

 

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• Topics
• North Asia
• Exits
• Buyouts
• South Korea
• Morgan Stanley Private Equity Asia
• Exit
• IPO
• Trade sale
• buyout