After several years of sluggish growth, South Korea’s private equity market is gathering steam, buoyed by economic and political stability, a steady domestic stock market and a stream of buyout targets being churned out by foreign and local conglomerates. In 2013, 7.4 trillion won ($7.09 billion) of new capital was committed to PEFs, which was the second-largest amount of commitment in a year since the introduction of PEFs in Korea in 2004, says Young Jay Ro, a senior attorney at Kim & Chang. “As of August 2014, about 259 PEFs were registered in Korea under the Financial Investment Services and Capital Markets Act (FSCMA), accounting for over 46 trillion won in capital committed on a cumulative basis,” says Ro. 

Between 2007 and 2013, the number of PEFs in Korea grew by 439 percent, while the total commitment amount grew by 389 percent. “This upward trend is expected to continue as managers, or general partners, build up a track record, and more companies and individual investors in Korea are increasingly exposed and attracted to the private equity market in Korea,” notes Ro.

Return of the global funds

Private equity-backed M&A deals in South Korea rose 22 percent to a record $9.1 billion in 2013, according to data from the Asian Venture Capital Journal, bucking an overall decline in private equity volumes in Asia. Many of those deals were spearheaded by a new crop of small and medium-sized local PEFs like IMM, Vogo Fund and Hahn & Co, as well as more established buyout shops such as MBK Partners.

In the latest sign that the pace of private equity buyouts is moving steadily ahead, KKR & Co and Affinity Equity Partners’ mammoth $5.8 billion sale in January of Korea’s Oriental Brewery to Anheuser-Busch InBev SA (AB InBev), the world’s largest brewer, marked Asia’s biggest ever private equity M&A exit. KKR and Affinity bought Oriental Brewery for $1.8 billion from AB InBev in 2009, grew its market share to more than 60 percent from 41 percent when it was acquired, before selling it back to AB InBev five years later for more than three times the amount they had paid for it. Simpson Thacher & Bartlett advised KKR and Affinity and Sullivan & Cromwell represented AB InBev, while Kim & Chang advised both the buyers and sellers on the deal.

And in March, Tyco International, a maker of fire safety and security systems, sold its South Korean home security business, ADT Korea, to Carlyle Group for $1.93 billion. Tyco put ADT Korea up for sale in 2013, and attracted bids from Affinity Equity Partners, Bain Capital, KKR and Korea’s MBK Partners as well as Carlyle, Reuters reports. Simpson Thacher & Bartlett and Kim & Chang advised Tyco on the sale, while Clifford Chance and Lee & Ko represented Carlyle Group.

The completion of successful deals this year underscores the view that foreign buyout firms are feeling more comfortable with Korea after years of trepidation. The country fell out of favour in the mid-2000s following run-ins with unions, courts and regulators, highlighted by Lone Star Funds’ series of widely publicised problems selling a stake in Korea Exchange Bank. Despite the high valuations in Korea, global PEFs have completed some very successful transactions in recent years, says Myong-Hyon (Brandon) Ryu, a senior foreign attorney at Shin & Kim. “The Oriental Brewery-AB InBev deal, for example, was very successful. Seeing those profitable transactions, other global PEFs are also trying to come back to Korea to do more transactions involving Korean target companies,” says Ryu, who advised on Daewoo International Corp’s $1.1 billion sale in 2012 of its 24 percent stake in Korea’s Kyobo Life Insurance to Affinity, Baring Private Equity, Government of Singapore Investment Corp and local fund IMM Private Equity.

Fostering growth

The rapid growth of the Korean private equity market has prompted the government to amend the PEF regulatory regime under the FSCMA. “In an effort to reform the system regulating the asset management businesses and to better supervise the PEFs, amendments were made to the FSCMA in 2013 whereby any entity that wished to become a general partner of a PEF established after Aug. 29, 2014 is required to fulfill certain registration requirements. No such requirement had previously existed,” says Young Man Huh, a senior attorney at Kim & Chang.

Most recently, on Sep. 2, 2014, certain proposed amendments to the FSCMA were resolved by the cabinet council as subsequent measures to implement the Plan to Reform the PEF Policies and M&A Invigoration Plan, says Huh. “The amendments are, in general, focused on easing certain restrictions on the formation and investment activities of Korean PEFs, and therefore we expect a positive effect on M&A activity by Korean PEFs,” he adds.

Stiff competition

Korean PEFs, which have historically concentrated on domestic companies, are now setting their sights on investment targets abroad. In the early stages of outbound activity by PEFs in Korea, foreign investments were mainly limited to targets based in developed countries like the United States, says Sung Uk Park, a senior foreign attorney at Kim & Chang. “Since 2008, however, investments in emerging markets or other Asian countries have started to increase, leading to more geographical diversity in Korean PEFs’ investment portfolios,” says Park.

But while Korean PEFs are increasingly willing to venture abroad, their lack of global experience could cause some problems, lawyers say. “Korean PEFs still don’t have enough experience in many respects as they haven’t done many large outbound investments before. But they have accumulated a lot of experience in the last few years, and are fast catching up with global PEFs,” says Ryu.

While Korea’s corporations and PEFs are starting to venture abroad, global funds, as well as international law firms, have their sights set on Korea. Since the signing of U.S. and EU Free-Trade Agreements with Korea in 2011 which allow American and European law firms to open offices in Korea, more than 20 international law firms have set up shop in Seoul. Restrictions remain in force until Korea’s legal market is fully opened in 2016, which limits international firms to largely international dispute resolution and outbound work. For his part, Ryu predicts that the rise in international law firm activity in Korea is unlikely to impede on the private equity work that domestic law firms handle in Korea. “Local law firms alone often represent the foreign PEFs on their acquisitions of Korean targets. In a few transactions, however, like Tyco’s sale of ADT, foreign firms actually represented the sell side and buy side together with Korean law firms. But I would say that is an exception,” asserts Ryu. 

But with more global law firms considering opening in Seoul, more PEF transactions are expected to be governed by terms and conditions generally used by such firms and their clients in their home jurisdictions, particularly the United States and England, says Kim & Chang’s Park. “As a result, a higher level of cooperation is likely to take place between Korean law firms and international law firms,” he adds.

Nonetheless, as more private equity and law firm players continue to flow into the Korean market, the contest to secure big-ticket deals is expected to heat up. “Global PEFs coming back to Korea will face stiff competition from domestic funds and other Korean strategic investors. There is a lot of competition for big transactions in Korea, and it’s going to be much more difficult for global PEFs to find good target companies,” says Ryu. “Meanwhile, as Korean PEFs significantly ramp up their outbound activity, that could fuel more competition among the 20 foreign firms that have entered Korea, as well as between international and local firms that handle outbound transactional matters.”

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Loosening the rules

Senior foreign attorney SungUk Park and senior attorneys Young Jay Ro and Young Man Huh of Kim & Chang summarise some of the recent amendments to the Financial Investment Services and Capital Markets Act (FSCMA).

Amendments were made to the FSCMA in 2013 whereby any entity that wished to become a general partner of a private equity fund (PEF) established after Aug. 29, 2014 is required to fulfill certain registration requirements. No such requirement had previously existed.

Most recently, on Sep. 2, 2014, certain proposed amendments to the FSCMA were resolved by the cabinet council as subsequent measures to implement the Plan to Reform the PEF Policies and M&A Invigoration Plan (which was announced by the Korean government on March 6, 2014 to promote the Korean M&A market, increase tax support for M&A transactions and relax restrictions on M&A transaction structures). The amendments are, in general, focused on easing certain restrictions on the formation and investment activities of Korean PEFs.

Some of the key amendments to the FSCMA are:

• The current post-registration system, which required a PEF to register with the Financial Supervisory Service (FSS) within two weeks of its formation and does not allow a PEF to engage in any business until the completion of registration, will be changed to a post-formation reporting system. The post-formation reporting system requires a PEF to file a report with the FSS within two weeks of its formation, but allows a PEF to commence its business right after completion of its formation without waiting for completion of review on the report by the FSS.
• PEFs are permitted to allocate up to 30 percent of their net assets in securities without any management participation purposes, thereby providing flexibility to PEFs’ interim management of uninvested funds.
• The proposed amendments permit PEFs to manage their currency exchange risk with respect to their general assets by investing in currency exchange-related derivative products.
• Currently, PEFs are allowed to use only a single layer of SPC in their investment into a target company. However, the proposed amendments permit PEFs to use multiple layers of SPCs in their investments.