Carlyle Sees Big Buyouts After Largest Since 2008: Korea Markets

Carlyle Group LP, which completed South Korea’s biggest private-equity buyout in five years, sees more large transactions as the nation sustains its economic growth amid emerging-market turbulence.

The buyout firm, whose Asian investments span budget hotels to injectable drugs, agreed to buy Tyco International Ltd.’s security business in Korea for $1.93 billion earlier this month. Preqin Ltd. data show buyouts backed by private equity rose 65 percent to $4.3 billion in 2013, the most since at least 2008, including forays by MBK Partners Ltd. into hiking gear and H&Q Asia Pacific Inc. into online recruiting.

Asia’s fourth-largest economy offers buyout opportunities as President Park Geun Hye accelerates state-asset sales and the nation’s biggest business groups, known as Chaebol, offload underperforming businesses. Gross domestic product is forecast by the Bank of Korea to grow 3.8 percent in 2014, the fastest pace since 2010, even as expansion in India and China slows.

“Korea is an attractive market because it has stable economic growth with a consistent deal flow of large buyout transactions,” said Sanghyun Lee, the Seoul-based managing director of Carlyle’s Asia buyout team. “We see great investment opportunities in the country.”

Insurance, Clothing

Fundraising for private equity activities globally totaled $428.7 billion in 2013 compared with about $315 billion in 2012, according to data compiled by Bloomberg. Of that, almost half, $205.5 billion, was for buyouts.

South Korea’s biggest private equity deals last year included the purchase by MBK and local funds of ING Life Insurance Korea Ltd. from Dutch lender ING Groep NV for $1.75 billion in August, and MBK’s 550 billion won ($517 million) acquisition of a stake in NEPA, which has the largest retail network in Korea’s outdoor apparel market.

“There are still more deals in Korea to pursue,” said Brandon Ryu, a Seoul-based mergers and acquisitions lawyer at Shin & Kim, the nation’s second-biggest law firm. “There’s fierce competition considering the local private equity and hedge funds which have sprouted up.”

Carlyle’s purchase of Tyco Fire & Security Services Korea Co. and other assets which formed a business known as ADT Korea is the largest private-equity buyout in Korea since MBK and Macquarie Group Ltd. paid $2.3 billion for cable-television operator C&M Co. in 2008.

Acquisition Financing

It’s also the Washington-based firm’s biggest investment in South Korea. Its interests in the nation have included Hyundai Hy Communications & Network Co., EO Technics Co., Tapex Inc. and Yakjin Trading Corp. Early successes included a co-investment of $423 million for a 40 percent stake in KorAm Bank in 2000. Carlyle exited when Citigroup Inc. offered $2.73 billion for 100 percent of the lender in 2004.

Carlyle has lined up some 1.3 trillion won in acquisition financing for the Tyco purchase including a 940 billion won five-year term loan from Korea Exchange Bank, Kookmin Bank, Industrial Bank of Korea, Korea Investment & Securities Co. and a 360 billion won-equivalent facility in U.S. dollars from UBS AG, two people familiar with the matter said yesterday.

Loan volumes in South Korea’s acquisition and leveraged buyout market fell to their lowest level since 2009 last year as higher-than-average spreads failed to attract banks, according to data compiled by Bloomberg. Carlyle’s Tyco financing, when complete, will account for more than half of last year’s $2.32 billion total.

Economic Acceleration

The firm, founded by William Conway, Daniel D’Aniello and David Rubenstein, reported a 79 percent increase in profit last year as its portfolios gained in value and it seized on rising stock markets to sell holdings.

A recovery in global demand for goods from South Korea such as mobile phones and automobiles will help exports increase 6.4 percent, the most since 2011, the Ministry of Trade, Industry & Energy said Jan. 1. Economic growth will accelerate from 2.8 percent in 2013, the BOK said in a Jan. 9 statement.

Confidence in corporate debt is improving. The extra yield on AA rated five-year won bonds over similar-maturity government debt narrowed to 37.3 basis points on March 10, the least since Sept. 10, Bloomberg-compiled data show.

KKR, TPG Capital

Even so, the benchmark stock gauge has slipped 2.9 percent this year compared with a 2.3 percent slide for the MSCI Asia Pacific Index. Market forecasters who predicted two months ago the Kospi may surge to a record in 2014 have trimmed forecasts as a rising currency erodes some companies’ profits.

South Korea’s won has gained 2.9 percent against the dollar over the past 12 months, making it Asia’s best-performing major currency. It fell 0.5 percent yesterday to 1,066.50 per dollar as data from the U.S. supported bets the Federal Reserve will continue to trim stimulus and was trading up 0.2 percent at 1,064.29 as of 11:18 a.m. in Seoul today.

Other private equity firms active in Asia include New York-based KKR & Co. and TPG Capital. KKR’s first Asia fund, a $4 billion pool from 2007, was producing a net internal rate of return last year of about 14 percent. The company run by Henry Kravis and George Roberts achieved the $6 billion target for its second Asia fund last June.

Fort Worth, Texas-based TPG has about $59 billion of capital under management including investments in 63 companies in Asia, according to its website. It previously held a stake in Standard Chartered Korea First Bank Ltd. while its China investments include China Vogue Casualwear Ltd. and car dealership network owner China Grand Automotive Group.

Frontier Markets

“Even with the slowdown in China, it’s still difficult to see past it as the premier place for private-equity fund raising and investment within Asia,” said Mitul Patel, Preqin’s Singapore-based research manager. “China’s requirement to provide products and services for its middle class represents a new opportunity.”

Because Korea is a more developed and mature market than some of its regional peers, the focus in coming years may shift from countries including it, China and Japan to Southeast Asia and other frontier markets, Patel said.

In Korea, privatization of state assets and unit sales by Chaebols, multinationals run by a single family group, are a good source of deal flow, MBK Partners co-founder Michael Byungju Kim said in an interview with Asian Venture Capital Journal in December. Kim told the newsletter there was a “flight to quality” after the thesis that you can make money investing in private equity in Asia had been proved. Kim didn’t reply to an e-mail from Bloomberg News seeking comment.

“There are some deals from the shipping industry up for grabs and more could come should Korea’s economic recovery be challenged,” said Choi Joung Wook, the Seoul-based head of Hyundai Securities Co.’s private equity team. “There’s also big pressure from the government for both state-run enterprises and Chaebols to deleverage to contain any ripple effect on the economy in case things go wrong.”

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Kyoungwha Kim in Singapore at kkim19@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net; Sandy Hendry at shendry@bloomberg.net

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