Exiting Seoul

Global private equity firm TPG has closed down its Seoul office as the backlash over foreign ?predators? continues to mount in South Korea. Central to the hostility is a view that Western investors are making excessive, tax-free profits.

The timing of TPG's decision to move the management of its South Korean investment program to its Hong Kong office comes on the tails of recent troubles experienced by several other US private equity firms in the country. At the same time, local Korean private equity firms are gaining ground in the market.

A source close to TPG said the firm's leaving Korea had ?nothing to do with? recent private equity troubles in the country. Among these, the former head of Warburg Pincus' Seoul office was recently sentenced to a four-year jail term on charges of insider trading of shares of Korean credit card company LG Card. Warburg Pincus denies any wrongdoing.

TPG has had notable successes in Korea. It realized a profit of $1.2 billion ? a 400 percent return ? on the sale of Korea Exchange Bank to Standard Chartered Bank in 2004; the investment was made through its Asian arm Newbridge Capital. The deal, part of a program by Korean regulators to sell poorly performing banks to foreign investors in the aftermath of the Asian financial crisis, was structured using legitimate, tax-treaty structures that enabled TPG to not pay taxes on its profits.

Another private equity firm has yet to enjoy the rich rewards of a similar windfall. In the course of trying to sell Korea Exchange Bank (KEB), Texas private investment firm Lone Star Group now finds itself in a very different political environment. Media attention over the impending tax-free sale of yet another Korean asset ? a deal was struck in early 2006 to sell KEB to Kookmin Bank for $7.3 billion ? was too much for regulators and the public to bear.

Lone Star has been subjected to raids of its Seoul office and accusations of conspiring with KEB's management to illegally acquire the bank's stake at an artificially low price. The firm's image has not been helped by the fact that its former country head, Steven Lee, was discovered to have embezzled $12 million from the firm. Lone Star's current Korean head, Paul Yoo, recently went on trial on charges of artificially depressing the stock price of KEB's credit card unit before it was acquired by the bank in 2004.

With the troubles the firm has had, speculation is growing that Lone Star is planning to exit the country altogether. Last November, it was forced to scrap the planned sale of KEB to Kookmin Bank. Recently, the firm recently announced the sale of two of its portfolio companies: StarLease, a car rental group it bought in 2002, and Kukdong Engineering & Construction, a building firm it bought in 2003.

The official stance towards foreign investors is mixed. South Korea's finance and economy minister Han Duck-soo has spoken out in favor of foreign investors, reportedly saying, ?We can't criticize foreign speculative funds for taking legal steps to make profits and see it as an outflow of the national economy.?

But tighter regulations have been imposed, making the climate for foreign investors much less favorable than they once were. Conflicts between various regulatory bodies are believed to be contributing to some the troubles foreign private equity firms are having in the country, such as the Financial Supervisory Commission's proposals to limit the number of foreign directors allowed on corporate boards or requiring Korean nationals to sit on a bank's board of directors.

Since 2006, South Korean law has required any foreign shareholder acquiring more than five percent of a local company to disclose whether it intends to influence the company's management, to declare the names of its largest backers and to reveal how it raised the money for the investment.

Anti-foreign sentiment has also permeated the public. Where banks were once sold to foreign financial institutions like Citigroup and StanChart with little opposition, public sentiment all but mandated that KEB could only be sold to a local Korean bank, to create a local Korean champion. KEB, however, reportedly attracted the interest from various foreign institutions including Deutsche Bank and Singapore's DBS Bank. Similarly, the bailed-out and cleaned-up LG Card went to local player Shinhan Bank, despite interest from Barclays Bank and StanChart, among others.

As foreign private equity firms run up against increasing numbers of stumbling blocks in South Korea, the path is being cleared for local homegrown private equity teams. Two of the most promising start ups are MBK Partners, founded by Michael Kim, the former head of Carlyle Group in Asia Pacific; and Vogo Fund, founded by Jason Shin, a former M&A banker for Morgan Stanley in Korea and Lee Jae-woo, the former Korea country head for Lehman Brothers.