Local buyouts burdened

Korean private equity firms are facing problems in expanding their takeover business because of Seoul’s restrictions on their ownership of manufacturing firms, according to Kim Han-seop, 49, the chief executive officer and vice president of KTB Network. He talked with the JoongAng Daily earlier this week.
Noting that the restrictions do not apply to foreign investment companies, Mr. Kim said he would like to see some legal changes to give such firms a freer hand.
KTB Network, a former state-run venture capital fund for technology start-ups, has focused on the buyout market since its privatization in 1999, looking for firms in which it can take a managerial stake and resell when the firm increases in value. Its most notable investment has been Pantech & Curitel, a cell phone handset maker, which has given the private equity company a 700-percent return. In November, 2001, KTB Network bought an 80-percent stake in Curitel from debt-ridden Hynix Semiconductor Inc. at 590 won (51 cents) per share. It formed a 50-50 joint investment with Pantech Co., another cell phone maker. Last year, Pantech & Curitel became the nation’s third largest producer of cell phones. It went public last month, and its shares were valued at 4,125 won on the Korea Stock Exchange yesterday.

Q: How did KTB Network come to focus on the buyout market?
A:Just after the 1997-98 financial crisis, foreign private equity funds made great profits through buying out debt-ridden domestic companies with potential. At that time, there was little recognition of the buyout business and few domestic financial service firms could afford to get into it. Foreign buyout funds bought the troubled companies at liquidation values and then sold them at going-concern values, taking the gap between those prices as profit. Seeing that, we recognized the importance of the buyout business and learned from the foreign funds.

What’s the main reason for your success in Pantech & Curitel?
We had connections with many small and medium cellular phone makers as a venture capitalist. So we had full information about the ability and experience of chief executive officers in the industry. We picked up the most suitable top manager for Curitel. And, after the merger of Pantech & Curitel, the economies of scale helped the firm.

What problems with the laws and institutions do you have in the buyout business?
Under the Financial Service Industry Reform Act, domestic financial service firms have to obtain permission from the Financial Supervisory Service in order to take more than a 20-percent stake in a manufacturer. In troubled companies, we can take a larger stake without permission under the special laws for corporate restructuring.
But as the market is developing, even some companies with normal operations need a buyout.
For example, Hyundai Autonet, in which we are now seeking an investment, is a company with normal operations but because its largest shareholders like Hynix have troubles, Autonet needs a buyer.
And the restriction does not apply to foreign investment funds. We have proposed a private equity fund law, but the government says it is too early.

How about private equity markets in other Asian countries?
China and Japan are buyout markets with much potential. When I visited China, I heard that the ratio of bad debts in China is much higher than in Korea. So as the current rapid growth of China slows down, the problem of bad debts will emerge. We are considering setting up a subsidiary in Hong Kong to enter the Chinese market.

by Moon So-young