Korean fund houses in M&A frenzy

Two mid-sized Korean fund management houses are acquiring rivals in a bid to gain the size needed to finance the creation of alternative and overseas investment capability.

The $5.1 billion Mirae Asset is expected to acquire SK Investment Trust Management Company (SK ITMC) as early as next week, while the $3 billion, Morgan Stanley-owned Landmark Trust is in talks to buy at least two domestic ITMCs.

The deals take place against a background of falling assets under management for the ITMC industry, plummeting fees and heightened foreign competition, but also in advance of liberalizing legislation that starting January will broaden distribution channels and allow for new types of product. (For a deeper look at the state of the Korean fund management industry, see the upcoming December/January issue of AsianInvestor magazine.)

Chang Kil-hoon, director of international business development at Mirae Asset, says the intention of acquiring the $1.7 billion SK ITMC is to not only build size, but to transform the SK unit into an alternative investment specialist. He says SK ITMC will retain its name, similar to how GAM has kept its brand after becoming a unit of UBS.

"We're thinking of introducing a lot of edgy products like a property fund, a corporate-governance fund for pension funds, and hedge funds for absolute-return strategies," Chang says. He will be developing many of these products himself, relying on his experience as head of international outsourcing for the $88 billion National Pension Corporation. Chang joined Mirae just last month. But the firm will also be looking to hire people to develop products such as funds of funds and funds of hedge funds. The increased capital from the merged business will finance these measures.

Mirae will be looking to acquire additional domestic ITMCs once it has absorbed SK ITMC, but no targets have yet been identified, Chang adds.

Landmark was also in talks with two local ITMCs, although a rival bidder is trying to spoil the talks, says Choi Hong, CEO and president. Landmark was formerly the funds arm of Kookmin Bank, before its merger with Housing & Commercial Bank, and last year Choi partnered with a consortium led by Morgan Stanley (and including Singapore's GIC) to acquire 93% of it; Kyobo Life owns the rest.

Morgan Stanley bought a $2 billion business; a focus on risk management, retail customers and clever marketing has helped Landmark become the fastest-growing ITMC in Korea, with now $3 billion under management - no mean feat given that the industry as a whole has lost 6% of assets since early this year.

Choi says the firm's two big opportunities lie in providing overseas investment expertise, which domestic ITMCs lack, and in alternative investments. Although Landmark is already building a fixed-income team to handle a regional portfolio, it needs to hire more expertise to handle international equities or absolute-return strategies. Choi hopes Landmark can be the first domestic firm provide these to local institutions. "We will combine and restructure two or three companies and leverage off of that," Choi says. "Then we can invest in building an overseas team and an alternative investment team."

Local rivals identified Tongyang ITMC as Landmark's first target; Choi would not comment.

Although foreign firms have approached Landmark to suggest partnerships in the hedge fund space, Choi has refused. "That would mean regulatory issues, splitting fees, and we wouldn't be able to build our own expertise." But he is in discussions with a variety of individuals, including foreigners, to hire them for their expertise.

Negotiations with targets have bogged down, which could delay creating an overseas expertise, but Choi says absolute strategies can't wait. New regulations will allow ITMCs next year to engage in OTC derivatives, commodities, real estate and other asset classes, although onshore shorting of individual securities remains a grey area. "We won't be shorting or using leverage at first," Choi says. "We'll do that when it's allowed onshore."