Align Partners ending 'Korea discount' for fun and profit

Align Partners Capital Management CEO Lee Chang-hwan speaks in an interview with the JoongAng Ilbo on Feb. 2. [JOONGANG ILBO]

Align Partners set off a storm in K-pop by asking all the right questions about the interference of a large shareholder in the management of SM Entertainment.

With 1.1 percent of the stock, it questioned connected-party transactions between the talent agency and a company owned by its founder and major shareholder.

“The National Assembly works for the people, not the president. The board should also exist for all shareholders, not just the large ones,” said Align Partners Capital Management CEO Lee Chang-hwan in an interview with JoongAng Sunday in Yeouido, western Seoul, on Feb. 9.

Align Partners questioned payments made by SM Entertainment to Like Planning, owned by Lee Soo-man, the founder. In the shareholder meeting in March 2022, Align Partners succeeded in appointing an auditor through a shareholder recommendation, which in turn led to more support for the cutting of ties between Like Planning and SM Entertainment.

This in turn made the company more attractive, which may have been a reason Kakao sought to buy 9.05 percent of the company.

Lee founded Align Partners in March 2021 after leaving KKR. SM Entertainment was its first target. This year, he is pushing for higher shareholder returns from financial holding companies, including KB Financial Group.

The CEO dismissed the idea of shareholder activism being about “justice and fairness,” arguing it is more about addressing undervaluation in stocks.

Q What is shareholder activism?

Nothing more or less than a creative investment strategy. Looking into the case of SM Entertainment, many thought it was owned by the largest shareholder, Lee Soo-man, even though the company had gone public. That’s why the rights of the largest shareholder with around 18 percent shares were protected over the rights of the other 80 percent. Of course, the stock price is cheap. If we correct the problems of companies like SM Entertainment, stocks rise along with profit. It’s a good investment strategy because there are many factors for a rise.

Q How are target companies chosen?

First, a company must be good, or fit for long-period investment. Second, the stock price needs to be cheap. However, the reasons for its cheap price should be ones that we can fix. For SM Entertainment, it was governance, and for financial holding companies, it was shareholder returns. We thought we could fix these and decided to invest.

Q Stocks of the companies you targeted rose significantly.

We saw the possibility of doubling revenue and tripling operating profit if SM Entertainment adopted a multi-producing system. I believe if financial holding companies act on shareholder proposals, such as stock repurchases and shareholder return policies, their stocks can jump twofold in three years.

Q What is your advice for improving corporate value?

American or Japanese companies treat their large shareholders differently. In these countries, decisions for large shareholders are rarely made unless they are for all shareholders. The problem of clashing interests between large and small shareholders is the biggest issue. The opaque governance is one of the main reasons for “Korea discount,” or a tendency for Korean companies to have lower valuations than global peers.

Korea made a choice to achieve rapid growth. In the period of accelerating growth, massing decision-making powers to a few shareholders may be more efficient because earning money fast and reinvesting it is important. But now, we live in a different time. In a period where achieving growth is difficult, companies should talk about how the earned money should be redistributed.

There are some who raise concerns over shareholder activism as being too much of an interference, and I would like to debate with them. We have pursued promoting the interest of shareholders in reasonable ways. Shareholder activism is not a subject to be banned. By encouraging shareholder activism, Japanese companies saw positive results like steering the corporate structure towards transparency.

BY BAE HYUN-JUNG, SOHN DONG-JOO [sohn.dongjoo@joongang.co.kr]