A Resurgent Market – Myong

KOREA
26
ASIAN LEGAL BUSINESS
OCTOBER 2014
A RESURGENT MARKET
TEN YEARS HAVE PASSED SINCE SOUTH KOREA’S FIRST PRIVATE EQUITY FUNDS WERE
ESTABLISHED, AND BUSINESS IS BOOMING. PRIVATE EQUITY ACTIVITY HAS RISEN SHARPLY
IN RECENT YEARS, SPEARHEADED BY FAST-GROWING DOMESTIC FUNDS. IN ORDER TO
FOSTER THIS GROWTH, THE GOVERNMENT HAS RECENTLY EASED RESTRICTIONS ON THE
FORMATION AND INVESTMENT ACTIVITIES OF PRIVATE EQUITY FUNDS. COUPLED WITH THE
RETURN OF GLOBAL FUNDS TO KOREA AND THE INFLUX OF INTERNATIONAL LAW FIRMS
INTO SEOUL, THE CONTEST BETWEEN DOMESTIC AND GLOBAL FUNDS AND LAW FIRMS TO
SECURE BIG-TICKET DEALS IS EXPECTED TO HEAT UP. KANISHK VERGHESE REPORTS
WITH ADDITIONAL REPORTING BY STEPHEN ALDRED
A
fter 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
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KOREA
“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. AS
A RESULT, A HIGHER LEVEL
OF COOPERATION IS LIKELY
TO TAKE PLACE BETWEEN
KOREAN LAW FIRMS AND
INTERNATIONAL LAW
FIRMS.” Sung Uk Park, Kim & Chang
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
ASIAN LEGAL BUSINESS
OCTOBER 2014
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,
the 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.
LOOSENING THE RULES
Senior foreign attorney Sung Uk 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 postformation reporting system. The postformation 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.
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KOREA
ASIAN LEGAL BUSINESS
OCTOBER 2014
Bottled beers produced by South Korea’s Oriental Brewery Co are displayed at a liquor section of a market in Seoul REUTERS/Kim Hong-Ji
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
continue to venture abroad, global funds
and international law firms have set their
sights 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,
“THE ORIENTAL BREWERYAB 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.”
Myong-Hyon (Brandon) Ryu, Shin & Kim
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 bigticket 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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