All about Korea

Korea has yet to reclaim top spot and its chances of doing so appear slim, given the size and evolution of neighboring economies. First Japan rose to prominence in the early 2000s and by the middle of the decade China had begun its rise before the Japan-Australia pre-financial crisis leveraged buyout spike.

The last two years, however, have seen a mini resurgence. Korea was one of only two major Asian jurisdictions to see an increase in deal flow in 2012 compared to 2011. This could be repeated in 2013, with Korea PE deal investment standing at $6.9 billion in October, about $500 million short of the previous year's total.

South Korea accounted for 16% of region-wide deal value in the first three quarters - and 21% in the third quarter alone - compared to 11% for 2012 as a whole. The country's share of Asia buyouts is even more pronounced: 42% for the first three quarters, up from 13.5 % in 2012. For the first year since those heady days in 2000, Korea is a bigger buyout market than Japan, leading its neighbor by $500 million.

It is in this context that we should consider the last week's three big pieces of Korea private equity news. First, Anchor Equity Partners, a spin-out from Goldman Sachs, closed its debut fund at $500 million, adding impetus to the notion that foreign LPs have an appetite for local managers able to tap into this deal flow.

Second, Morgan Stanley Private Equity Asia (MSPEA) secured a partial exit from train manufacturer Hyundai Rotem when the company raised KRW622.4 billion ($585 million) in its IPO, the largest offering the Korea Exchange has seen in more than three years. MSPEA paid KRW161.6 billion for a 42.4% stake in Rotem in 2006, AVCJ data show; it has recouped more than 80% of the principal through the IPO and still owns nearly 25% of the company.

Third, several private equity are said to have placed bids for pieces of Woori Finance Holdings in stage two of a three-stage project aimed at jettisoning the government's majority interest in the business.

Woori is arguably the most interesting development, even though there are no guarantees that a private equity buyer will emerge triumphant, because of what it says about Korea deal flow. Although two of the three largest deals so far this year - MBK Partners' acquisitions of clothing retailer NEPA and ING Life Insurance Korea - were not driven by local conglomerates needing to divest assets, a number of the big transactions typically are.

STIC Investments led a consortium into aerospace company LIG Nex1 in February because the parent had debts that required servicing; IMM Private Equity and Mirae Asset Private Equity secured a minority stake in POSCO Specialty Steel a few months later for much the same reason. Last year, MBK Partners agreed to buy a large minority interest in water purifier manufacturer WoongjinCoway a matter of weeks before its parent filed for bankruptcy.

There will always be a place for succession planning opportunities, but one of the questions for Korean private equity is whether so far intermittent divestments become more frequent.

Affinity Equity Partners' acquisition of a majority stake in Loen Entertainment - owner of the Korean version of iTunes - from SK Telecom in July was said to be an example of a government-mandated restructuring of local conglomerates. The pressure faced by the likes of SK is not financial but political, driven by accusations that their incessant expansion is suffocating small businesses.

Will this, however, generate a flood of deal flow or a trickle, as companies are squeezed into submission by banks and regulators? And of the transactions that emerge, how many will go to genuine private equity funds rather than quasi-fund vehicles launched by state-linked institutions?

A repetition of the early 2000s isn't going to happen in the absence of severe financial distress. It will be interesting to see, though, where the deals might come from to sustain the relatively strong showing of recent years.

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• Topics
• Buyouts
• North Asia
• South Korea
• buyout