Korean private equity steps in to help heirless tycoons

For private companies owned by families, the absence of a male offspring to inherit the dynasty is a problem. However, this is an area where private equity can enter and take a stake in a company where the succession lineage has no obvious candidate to step into daddy’s shoes.

“It’s no longer taboo for business founders to sell out to private equity in these situations and there have been a number of mergers and acquisitions,” says Peter Ko, Seoul-based senior managing director of H&Q Asia, speaking at the Superfund conference in Hong Kong.

“As a recent example, a cable television operator wanted to sell up as he didn’t have a son to pass the business on to. And the same situation applied for a steel structure engineering businessman who also didn’t have a son.”

Korea is not a very fashionable market for private equity, and that is partially a legacy of the issues experienced there with US private equity firm Lone Star three years ago.

However, efforts are being made to make Korea a more inviting place for private equity, such as tax incentives eliminating capital gains tax on investments.

“Lone Star has created a wrong perception,” said Ko, whose firm manages domestic won-currency funds focusing on mid-cap deals. “Korea does have a rule of law and our tax laws are no different from the USA.”

It's not just family succession issues that are driving Korean private equity. It's also the direction of the chaebols, the conglomerates that dominate Korean industry. The top four chaebols represent 50% of Korea’s GDP, namely Samsung Group, LG Group, Hyundai Kia Automotive Group and SK Group; the top 10 chaebols account for 50% of the Korean stock market index.

A key phase of their reinvention has seen the deleveraging of those conglomerates and tackling of their overcapacity issues. Korean private equity was virtually born overnight.

“Chaebols are selling assets not to deleverage but to try to make themselves globally competitive,” says Jong Ha James Yoon, a partner at MBK Partners in Seoul a firm which has 50% of its assets in Korea.

“For example, Samsung has 300 local subsidiaries, and yet the firm wants to go abroad, so it means that their resources at home are more constrained.

“Privatisation is one of the highest priorities for the current president [Lee Myung-bak]. For political reasons [the task of privatisation] has been somewhat set aside, but he has 15 months left in his term of office and may try to get something done. The privatisation of Woori Financial Holdings was being looked into, but on that occasion MBK’s bid didn’t see the light.”