Korea Private Equity

Private Equity Investment Returns to South Korea

South Korea successfully recovered from the 1997-1998 Asian Financial Crises and was looking to foreign investors to stimulate growth. But after a criminal investigation into a United States private equity fund, private equity firms adopted a low profile in South Korea. Today, however, private equity investors are increasingly active in the country hoping to benefit from broke conglomerates selling off assets at bargain prices.

Private equity firms played a major role in South Korea's recovery from the Asian Financial Crisis by rescuing distressed companies from bankruptcy. Then a high-profile criminal investigation of Lone Star Funds, a Texas-based private equity firm, changed the private equity landscape in the country. Following the financial crisis, Lone Star was regarded as a savior because it poured large amounts of investment into the struggling economy. Eight years later, Lone Star Funds was investigated by South Korea for its planned sale of Korea Exchange Bank which would earn the American firm $4.4 in profits and possible evasion of South Korean taxes. Another investigation into bribery and embezzlement led to the arrest of three men with connections to the fund. The scandals led to public outcry and a general distrust of foreign investors in the country.

Today, foreign private equity investment is returning to the country in full force, as investors hope to purchase cheap assets from large South Korean companies. Major private equity firms, such as CVC Capital Partners and Affinity Equity, are eying the country and banking on a more welcoming attitude from South Korea's new government. The country's financial difficulties coupled with the declining value of the won, have made South Korea an attractive location for private equity investors specializing in buying and selling distressed assets.

The potential lies in the assets of large conglomerates based in South Korea, which are being sold off at bargain prices. Private equity firms have considerably increased activity in the country recently. Thomson Reuters reports that M&A deals involving private equity firms have more than doubled to $3.6 in value so far this year from the year before. In order to survive large to mid-size companies--many involved in mergers or acquisitions--are selling off non-essential and even core assets. Family-owned businesses, "chaebols," are suffering from massive amounts of debt and need to sell their assets to stay afloat and pay off their obligations. The debt accrued by South Korea's 30 largest conglomerates rose 59% to a combined $50 trillion won (almost $34 billion USD).

Most private equity firms that invested after the Asian Financial Crisis made huge returns, like the Carlyle Group and Newbridge Capital which both more than doubled their returns on South Korean investments. Despite such proven success, private equity investors had remained cautious following the Lone Star debacle, but a recent ruling suggests the drawn-out legal battle may be ending. That closure along with a more welcoming stance by South Korea's government has led private equity managers to reconsider the country with its new set of potential investments. Managers say that consumer goods makers are an attractive target for private equity because they are less vulnerable to the economic downturn. Financial services and pharmaceutical companies are also attractive during the economic downturn.

Although private equity investment seems to be returning to South Korea, managers expect the deals to be considerably smaller than before because of limited access to leverage in the credit crunch.


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Private Equity Change

Changes in Private Equity

The Wall Street Journal has a great article on the private equity's changes in light of the credit crunch and financial crisis. Also, private equity firms going private, like KKR's delayed move to be a publicly traded company, are evaluated in such a volatile market. Here is an exert, to read the full article please follow this link.

The heads of these mega-private-equity firms may also sense that there is a bigger prize at stake. With a number of investment banks fatally wounded, there is scope for other sources of capital to emerge. Alongside a number of hedge funds, the larger private-equity funds were until recently in the process of positioning themselves to provide this capital, taking the place of traditional investment banks. In a recent example, Royal Bank of Scotland sold $8 billion in bank debt to private-equity firms, including Blackstone and TPG. Entities which used to be the borrowers had become the lenders.

One of the rationales for the firms making this shift is that, for private-equity funds, redemption terms tend to be long. This gives them the edge in providing long-term capital. However, inherent in the partnership structure -- as opposed to the public structure that KKR and others seek -- is the understanding that payouts are variable and unpredictable because they are based primarily on volatile investment performance, the value of which is realized on an irregular basis. By converting to publicly owned companies, these entities place themselves at the mercy of shareholders who value regular fees over the variable and volatile ones that come from the traditional work of private-equity funds.

This presents the new providers of capital with a different form of the problem that the rest of the banking system faced recently: unpredictable assets and predictable liabilities. One way for the newly public funds to manage this mismatch is to focus on earning steady, pre-agreed management fees rather than focusing on volatile investment performance. This shifts the core work of these funds toward fee-earning work, such as corporate finance advisory services, and away from their entrepreneurial roots of buying private companies and turning them around. This may be what the private-equity behemoths have in mind, but investors need to understand that these companies will not be the private-equity funds of old -- and must adjust their expectations accordingly.

And what lies ahead for the rest of the private-equity industry? Once the behemoths move into other businesses, the asset class itself may be free from the mantra of "bigger equals better." The remaining funds will be able to focus on their original task of extracting buried value from unlisted companies. Those firms that stood their ground in the mid-deal market and ignored the ever-growing thirst for bigger funds could once again become the standard bearers for the private-equity industry. Sticking to their knitting -- that is, focusing on what investors want from them in the first place and maintaining the alignment of interests through a commitment to the underlying investment performance -- may well prove to be a shrewder move than branching out as the big boys are doing.

Tags: Private equity change, private equity changes, changes in private equity, private equity wall street journal, private equity news, private equity story, private equity article, private equity industry

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Private Equity Pension

New Report on Private Equity and Pensions

A recent survey found that private equity firms still see pension funds as a major concern when investing.

A new survey shows that private equity deals are significantly hindered by consideration of pensions. Above all pension-related concerns for private equity firms is the probability of future life expectancies increasing, which would in turn increase the liability to the private equity firm. An increase in life expectancy would make a more costly private ownership for the firm and potentially cause the private equity firm to hesitate before investing. This is especially troubling when considering big manufacturers like in the auto-industry that have large pension liabilities.

The survey revealed that a major consideration for private equity firms was the pension liability. Of the sixteen firms surveyed, "More than 80 per cent of survey participants see making an agreement on a deal with a pension scheme’s trustees as a significant hindrance to completing a deal." This report shows that pensions are still a major obstacle for private equity firms when trying to make a deal, adding to the already difficult market for private equity deals.

Source


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Private Equity Turnaround

Discussion of the Private Equity Turnaround Market

Today's economic downturn may lead to an increase in the number of turnarounds performed by private equity firms. In this type of deal, a private equity firm would supply the necessary resources or capital for a distressed company to succeed, thus completing a "turnaround" of the company's performance.

I revisited a discussion published to AltAssets in 2003 with some private equity players that specialize in turnarounds. Although it is five years past, the situation for private equity firms has distinct similarities to today. Most importantly, in 2003 the market was flooded with companies failing presenting many opportunities for private equity-backed turnarounds. Today's economic downturn seems to be presenting similar turnaround targets, making this Q&A very relevant.

Where are the best opportunities?
Jon Moulton of Alchemy Partners explains the basic criteria he uses for a turnaround, "The deals that work for us as private equity players are those in which companies need liquidity to keep going, where there is a business worth saving and where we can get management control." But there are few companies that actually meet these requirements so the market for potential turnarounds becomes very small.

Another opportunity is in companies threatened by China (and India), especially the automotive industry. As the manufacturing process is outsourced to China by many U.S. and European automakers they fall into distress with excess workforce and resources. This could be a great position for a private equity firm to cut the company to the bone leaving a more efficient company with only what is necessary to survive.

What would you not consider for a turnaround?

Jon Moulton says, "We wouldn't do a large contracting turnaround. We have had no success in those and neither has anyone else. They are fundamentally feeble businesses, you never know the depth of the hole you are puttying money into and then the money at the end is usually pretty slight. I am also very suspicious these days of manufacturing. These businesses are swimming against the tide and they often have large pension and environmental liabilities. We are looking at some turnarounds in which the key issue is a dramatic restructuring to get rid of pension liabilities. It's brutal territory and a very unattractive activity for anyone to be involved with."

Again, the threat from Asia means that heavy industries are not great opportunities because countries like China can manufacture so much more cost-efficiently than Western countries. So companies focused in manufacturing industries are less attractive for a turnaround than say, the services industry, because that work cannot be outsourced abroad as easily.

Gary Klesh has several industries he is staying away from, " I wouldn't touch pharmaceuticals and other industries that are heavily reliant on research and development. I won't go into business that are reliant on the skills of particular people, services such as advertising agencies and consultancies. We are also staying away from the construction industry. But we are in negotiations with companies in all other areas that are quite sick."

What are your main obstacles?

The most obvious obstacle is labor laws and protections against downsizing companies. This is a key way in which to trim the budget and many distressed companies do have a lot of excess personnel. Moulton makes an especially relevant coorelation to today, "The not so obvious obstacle is trying to restructure when you have a sick banking system around you. It's very tough dealing with banks on a day-to-day basis - they are shell-shocked and can't make decisions." Banks that are reluctant to work with risky companies make it all the more difficult for a turnaround.

Turnarounds are not always attractive to managers so one challenge "is finding the right people. When we turn around a company, we set the strategy but we don't get involved in the day-to-day management of the business; we find other people to implement that strategy. It is very difficult to get these people. As you can imagine, turnarounds are a lot of work and there is a lot of pressure involved - it's not always an easy sell to managers."

	Jon Moulton, managing partner of Alchemy Partners, a specialist in turnarounds and public to privates in the UK
	Gary Klesch, chairman of Klesch & Co, which specialises in investing in European companies in need of restructuring
	Ollivier Lemal, directeur general of Plantagenet Capital, a US and European firm that makes early-stage venture, strategic buy-out and turnaround investments

The future of private equity turnarounds is not clear but there are more and more companies facing insolvency and private equity investment could be the best solution for filling that capital gap. Additionally, many firms need superior executives at the helm in such difficult times and private equity groups often provide management that is experienced and capable of making the changes necessary for survival.

Here is the full discussion from AltAssets


Tags: Private equity turnaround, private equity distressed, distressed private equity company, private equity turnarounds, private equity investment turnaround, private equity distressed debt company, Private Equity Turn Around, private equity investment turnarounds

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Private Equity Layoffs

Private Equity Firms Hint at Possible Layoffs

So far, private equity employees have been more or less exempt from the mass layoffs on Wall Street. Dan Primack of peHUB reports the latest rumors that suggest this may not be the case soon:

I’ve begun asking senior industry sources about the prospect of private equity firm layoffs, and most of the replies have been in the range of probably to definitely. I’ve even heard that a few brand-name firms have begun holding internal discussions about across-the-board personnel cuts, but the talks are too formative (and perhaps speculative) for me to feel comfortable naming names.

A big reason for the potential layoffs is the lack of deals being made right now at the big private equity firms. With the massive amount of hiring during the peak of private equity, there are now a large number of unnecessary personnel. Primack notes especially the high number of analysts that have little to do with the lull in private equity deals.

Other targets for layoffs in the private equity firms are senior executives that have impressive salaries for unimpressive deal-making records. A trademark of private equity is the ability to trim the unnecessary fat from a firm's budget and it seems that this process may be used on private equity firms themselves. With less and less deal activity this may be a necessary--even saving--manuever for some private equity firms to stay afloat in rough times.


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Yahoo Private Equity Deal

Yahoo's Kelkoo Sold in Private Equity Deal (YHOO)

After announcing that it would be cutting at least 1,500 jobs, Yahoo Inc. (YHOO) made another big decision to sell Kelkoo to a private equity firm. The sale of the France-based shopping price comparison company to U.K. based-private equity firm, Jamplant Ltd., was confirmed on Nov. 21 by a Yahoo spokesperson.

In 2004, Kelkoo was purchased by Yahoo for $576 million in hopes of boosting its global service capacity. The sale of one of its major assets adds to the shaky environment at Yahoo Inc.
Earlier this year Yahoo rejected a takeover bid from Microsoft for $47.5 billion. Then, last week Yahoo announced that Chief Executive Jerry Yang would step down for a new CEO to step in. All while it is in the process of reducing at least 1,500 jobs at the company.

Microsoft's CEO, Steve Ballmer, confirmed that Microsoft will not be resuming takeover talks with Yahoo, sending Yahoo's shares even lower. The terms of the Kelkoo deal with Jamplant have yet to be publicly disclosed. Former Kelkoo CEO disclosed the news on his blog here is the link (it may have to be translated from French though).

Source


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Private Equity CFO

Private Equity CFO | Chief Financial Officers

Over the last few years private equity firms have succeeding in attracting many chief financial officers from jobs at large public companies. These CFOs opt out of cushy, high-ranking positions to work for private equity firms and their portfolio companies.

Private equity firms are willing to compensate chief financial officers very competitively because there is a high demand for executives with experience managing a company's finances with a wide range of responsibilities including financial planning, record keeping and protecting against risk. Chief financial officers also make the move for the possibility of sharing in the immense profits from a successful private equity deal when the portfolio investment is sold to another buyer or taken public. One negative aspect for entering the private equity industry is that many private equity CFOs must move from company to company as their services are required. Chief financial officers often give up a safe and consistent job with great pay for the career in private equity but find that not all private equity firms are successful. CFOs are then faced with the decision between taking a potentially higher paying, exciting position in private equity with a risk of losing money in the new job or remaining in a stable, well-paying job with one company.

The idea of moving to a private company may be attractive to an experienced CFO because private equity-backed companies are often in a transitional period that allows for the chief financial officer to use his talents to improve the company. The challenge of taking an underperforming company and having a vital role in its success can be appealing to CFOs unsatisfied in their current work.

More Valuable as a Private Equity CFO

Despite the tech burst, which showcased the risk to those working at private equity-backed firms, many CFOs welcome the risk because the huge monetary incentive if they are able to produce positive results and make the company attractive to the public or another buyer. Additionally, chief financial officers may feel undervalued or unappreciated at a standard post within a firm. In many large public companies, the CEO often dominates the lower-level executives like the CFO but many cheif financial officers working in smaller private equity-backed companies are regarded as vital to the success of the company and treated with more attention. In private equity, CFOs are a "hot commodity" and the private equity model allows them to showcase their talents in an important way. Although CFOs are in high demand, when making the decision to transition to private equity they may have to prepare for a period of unemployment.

CFOs working in private equity have taken on a different role than they did a few years ago, according to Chad Brownstein a managing partner at ITU Ventures in Los Angeles, he says "Before, venture capital firms hired smart numbers guys from accounting firms (as CFOs) that the CEO could manage." Now it seems that private equity firms are willing to pay a CFO higher and offer a more prominent within the company. Rather than focusing mainly on accounting, today's private equity CFO also takes on a major interest in the company's capital structure and finances. Mr. Brownstein illustrates the point, “Every CFO we have is part of our network. We are working equally as hard to get the right CFO as the (right) CEO. It’s a critical role.”

As chief financial officers anticipate a greater role and higher compensation in private companies the transition from large public companies to smaller private equity firms may become more and more attractive, even with the inherent risks.

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