Chosun Ilbo

Myths and truths about global private equity funds

Regardless of the reason, foreign private equity funds are increasingly shying away from Korea.

Di Chul-Joon Park

First published on settembre 19, 2006
Tempo di lettura min.


Ever since the economic crisis, excessive light has been shed on the negative dimensions of global private equity funds (fund raised by a small number of investors to invest in high-yield, high-risk assets) as "vulture" funds focused only on making short term profits. The situation has been made worse by the recent Lone Star scandal, which is currently under investigation by the Korean authorities. Putting aside who has committed wrongdoings in the Lone Star and Korea Exchange Bank scandal, groundless jealousy and hostility toward global private equity funds is aggravating. Regardless of the reason, foreign private equity funds are increasingly shying away from Korea. At the same condition, they are turning their eyes toward Japan, China and India. This will inevitably lead to numerous missed opportunities and potential benefits. The influence that private equity funds exert on the global corporate investment market is too large for Korea to blatantly ignore. Total revenue of the portfolio companies of the top ranking global PE funds on average equals that of Global 50 companies such as GE and IBM. Many have earmarked 5~10 trillion won each for investment in Asia over the next 3~5 years. PE industry is no longer a cottage industry it was 10 years ago. It is now a battlefield for management gurus. Former GE CEO Jack Welch and IBM CEO Lou Gerstner are both active players in the industry. The question is not about whether the Koreans should care or not about global private equity funds. It is more about what Koreans can learn and how they can capitalize on the relationship with the global PE funds. Global PE funds can help Korean companies in at least four ways. First, PE funds represent a potential governance role model for the next-generation chaebol businesses. Many Korean chaebols are entering their third generation family ownerships and are soul-searching between their wealth management as investors and their role as the management of publicly listed companies. The global PE funds show a good example of a governance model that best links the interest of investors with the best professional management talent. Second, global PE funds can be a potent partner for the Korean companies seeking to expand overseas. Many Korean chaebols are fearful of acquiring foreign companies due to lack of experience and success cases. Global PE players have very deep experience in acquiring companies, putting in new 'world-class' management teams and turning around companies. The Korean chaebols have a need that the Global PE funds can help fill. The Chinese are ahead of the curve in this case. The Chinese PC company Lenovo received help from TPG of US in acquiring and securing new management team for Lenovo's acquisition of IBM's PC business. Third, global PE funds themselves offer attractive investment opportunities. If the Koreans feel that they have made so much return in so little time, it would make sense for Koreans to consider investing their money into these foreign PE funds that are notoriously known for making very high returns. Lastly, Korean companies can tap into the management know-how and experience of global PE funds. The top global PE funds are getting very smart at not only 'investing' but also 'managing' their investment portfolio. It is true that global PE funds have generated thick returns during the last few years. However, it is these funds that have taken the risks that no one was willing to take during the Asian financial crisis and "helped" save the country from going bankrupt. Viewing global PE funds as competitors or enemies and trying to maintain as far a distance as possible is a very narrow-minded thinking. Koreans need to incorporate a strategic mindset of building long-term partnership with theses funds to facilitate the development and globalization of the Korean economy and companies. Chul Joon Park, Partner at Bain Seoul Office and Head of Asia Pacific M&A practice

Ever since the economic crisis, excessive light has been shed on the negative dimensions of global private equity funds (fund raised by a small number of investors to invest in high-yield, high-risk assets) as "vulture" funds focused only on making short term profits. The situation has been made worse by the recent Lone Star scandal, which is currently under investigation by the Korean authorities. Putting aside who has committed wrongdoings in the Lone Star and Korea Exchange Bank scandal, groundless jealousy and hostility toward global private equity funds is aggravating.

Regardless of the reason, foreign private equity funds are increasingly shying away from Korea. At the same condition, they are turning their eyes toward Japan, China and India. This will inevitably lead to numerous missed opportunities and potential benefits.

The influence that private equity funds exert on the global corporate investment market is too large for Korea to blatantly ignore. Total revenue of the portfolio companies of the top ranking global PE funds on average equals that of Global 50 companies such as GE and IBM. Many have earmarked 5~10 trillion won each for investment in Asia over the next 3~5 years. PE industry is no longer a cottage industry it was 10 years ago. It is now a battlefield for management gurus. Former GE CEO Jack Welch and IBM CEO Lou Gerstner are both active players in the industry.

The question is not about whether the Koreans should care or not about global private equity funds. It is more about what Koreans can learn and how they can capitalize on the relationship with the global PE funds.

Global PE funds can help Korean companies in at least four ways.

First, PE funds represent a potential governance role model for the next-generation chaebol businesses. Many Korean chaebols are entering their third generation family ownerships and are soul-searching between their wealth management as investors and their role as the management of publicly listed companies. The global PE funds show a good example of a governance model that best links the interest of investors with the best professional management talent.

Second, global PE funds can be a potent partner for the Korean companies seeking to expand overseas. Many Korean chaebols are fearful of acquiring foreign companies due to lack of experience and success cases. Global PE players have very deep experience in acquiring companies, putting in new 'world-class' management teams and turning around companies. The Korean chaebols have a need that the Global PE funds can help fill. The Chinese are ahead of the curve in this case. The Chinese PC company Lenovo received help from TPG of US in acquiring and securing new management team for Lenovo's acquisition of IBM's PC business.

Third, global PE funds themselves offer attractive investment opportunities. If the Koreans feel that they have made so much return in so little time, it would make sense for Koreans to consider investing their money into these foreign PE funds that are notoriously known for making very high returns.

Lastly, Korean companies can tap into the management know-how and experience of global PE funds. The top global PE funds are getting very smart at not only 'investing' but also 'managing' their investment portfolio.

It is true that global PE funds have generated thick returns during the last few years. However, it is these funds that have taken the risks that no one was willing to take during the Asian financial crisis and "helped" save the country from going bankrupt. Viewing global PE funds as competitors or enemies and trying to maintain as far a distance as possible is a very narrow-minded thinking. Koreans need to incorporate a strategic mindset of building long-term partnership with theses funds to facilitate the development and globalization of the Korean economy and companies.

Chul Joon Park, Partner at Bain Seoul Office and Head of Asia Pacific M&A practice