Korea’s Michael Kim Leads Buyout Surge as Foreign Firms Return

From

Michael Kim

One sultry evening in July 2013, Michael Kim, Seoul-based founder of private-equity firm MBK Partners Ltd., was walking into his house for dinner when he received a text message on his mobile phone.

“Are you available for a call now?” read the message from Frank Koster, then ING Groep NV’s chief executive officer of insurance in the Asia-Pacific region, Bloomberg Markets magazine will report in its March issue.

Kim, known for his ability to write a big check as chairman of South Korea’s largest buyout firm, sensed it could be the news he’d been eagerly anticipating for three weeks. During that period, ING, which was seeking to sell its Korean unit, ING Life Korea, had been locked in exclusive talks with the highest bidder, a local rival of MBK’s.

But Kim knew that many local PE firms, struggling to attract big investors, had limited capital. Foreign firms with deep pockets, meanwhile, were barred from buying a financial institution under Korean law. That left MBK, Kim figured, as the only realistic suitor of Korea’s No. 5 life insurer.

He paused for a moment. Then instead of jumping and saying yes, he replied to Koster: “At a dinner. Call tomorrow a.m.?”

The ING executive wrote back almost instantly: “Can you step out for a minute or 2?”

Kim asked Koster to call in five minutes or so. Koster did, wanting to know one last time whether Kim would consider raising his offer from the original $1.7 billion, Kim recalls.

“No,” Kim said.

‘Trustworthy Counterparty’

Kim, a 51-year-old Korean-American who oozes the languid confidence of a man fully aware of his own worth, ended up getting the deal at his original bidding price after a month of negotiations.

Koster, now CEO of AXA Belgium SA, says he found Kim to be a “tough, reliable and trustworthy counterparty who knows what he wants.”

The ING deal turned out to be one of his smartest investments. It showed how his negotiating skills and his dominant position -- as head of a Korea–registered firm backed by sovereign wealth and pension funds -- propelled MBK’s remarkable rise during the past decade from a startup to the largest independent PE firm in North Asia, with more than $8 billion under management.

Leading the Pack

Today, MBK -- which stands for Michael ByungJu Kim, his full name -- is the only major buyout fund in the world that exclusively focuses on Greater China, South Korea and Japan. Kim has presided over a surge of PE in Korea, which tops Bloomberg Markets’ fourth annual ranking of the most-promising emerging economies.

Growth in gross domestic product, aided by central bank interest-rate cuts and a 46 trillion won ($42 billion) stimulus package, is forecast by the Ministry of Strategy and Finance to hit 3.8 percent in 2015, up from an estimated 3.4 percent in 2014.

MBK has led the PE pack since the Korean regulator loosened requirements in December 2004, effectively eliminating capital gains taxes for such firms.

Since then, the number of private-equity firms registered with the Financial Supervisory Service has soared to 271 from 15. They had a record 49 trillion won of capital under management at the end of 2014, up from 4.7 trillion won at the end of 2005.

Under Pressure

After an uninterrupted winning streak, Kim has hit a snag. After seven years of investment, MBK is under pressure to sell C&M Co., a Seoul-based cable TV service provider that the fund and its partner acquired for $2.35 billion in 2008 and subsequently expanded by buying another firm.

Adding to Kim’s troubles, more than 100 former C&M subcontract workers were on strike for five months until Dec. 31, when their labor union accepted C&M’s proposal to have them re-employed by other subcontractors.

Two of the strikers garnered Kim unwanted publicity, dramatizing their grievances by stationing themselves atop a 20-meter-high (66-foot-high) billboard for seven weeks outside the Seoul Financial Center, in which MBK’s office is located.

“All eyes are on MBK’s exit of C&M now,” says Lee Jae Woo, chairman of the Korea Private Equity Association and a co-founder of Vogo Investment, a Seoul-based PE firm. “But people need to look at the fund’s overall performance holistically, not one single investment.”

Growing Competition

MBK started the process of selling C&M in mid-January, hiring Goldman Sachs Group Inc. to attract prospective buyers.

But several forces are aligned against MBK. Like other Korean cable TV operators, C&M has been facing growing competition since 2008, when the government allowed telecommunication companies to broadcast programs in real time over their broadband networks, according to Moon Jee Hyun, an analyst at KDB Daewoo Securities Co. in Seoul.

What’s more, large family-owned businesses, or chaebols -- known for their appetite for expansion -- may be refraining from buying major assets under the government of President Park Geun Hye, who took office in 2013 pledging to counter their vast power.

To discourage cash hoarding by corporations, the government last year announced plans to levy a 10 percent punitive tax on excessive cash piles.

Then there are new rivals with formidable career and family backgrounds who are closing in on Kim. Scott Hahn, a former chief investment officer for Asia at Morgan Stanley Private Equity who founded Seoul-based Hahn & Co. in 2010, is one of them.

Brightest Spot

Like Kim, Hahn, a 43-year-old Korean native with a degree from Harvard Business School and experience on Wall Street, has shown he’s able to raise money from international investors.

In 2014, Hahn & Co. and its partner Hankook Tire Co. acquired Daejeon, South Korea–based Halla Visteon Climate Control Corp., the world’s second-largest supplier of automotive climate control parts, for $3.6 billion.

Global PE firms are also returning to Korea, the region’s brightest spot in terms of sustained deal flow, according to Bain & Co.’s Asia-Pacific Private Equity Report 2014.

In 2009, KKR & Co. beat MBK and acquired Korea’s Oriental Brewery Co. for $1.8 billion, selling it back to Anheuser-Busch InBev NV for $5.8 billion in 2014.

Overseas buyout firms had reduced their investments in Korea in the mid-2000s -- spooked by a mounting public backlash against billions of dollars of gains foreigners had reaped from Korean assets following the 1997–1998 Asian financial crisis.

‘Everyone’s Coming Back’

“Unlike Japan, where private equity developed over years in an evolutionary way, private equity hit Korea like a revolution,” Kim says.

Global firms -- including KKR, Carlyle Group LP, TPG Capital and CVC Capital Partners Ltd. -- have together raised $16.7 billion dedicated to Asia-Pacific investments in the 18 months since July 2013.

“Everyone’s coming back,” Kim says, adding that homegrown companies with local networks have an advantage over global firms in sourcing local deals.

Derek Murphy, senior vice president of private equity at Ottawa-based Public Sector Pension Investment Board, one of the founding investors of MBK, says that to remain pre-eminent in PE, Kim needs to continue to take advantage of his solid investor base.

“Michael needs to ‘own’ the large deal market in Korea and ensure that all large deals come to MBK first and foremost,” Murphy says.

‘Korea Is Google’

Since its inception a decade ago, MBK has fully or partially sold 11 companies in its first two funds, including China Network Systems Co. in Taiwan, whose sale is pending regulatory approval. Those exits have returned an estimated $3.84 billion to investors, generating a return of 2.6 times on equity invested.

Kim says South Korea will continue to be the most dynamic market for buyouts in Asia. Part of the reason is because of Korea’s corporate landscape, which is dominated by large family-owned businesses. That means deals tend to be “chunky,” and the third generation of owners taking over some of the businesses can make deal flow more dynamic, Kim says.

“Korea is Google to Japan’s IBM,” he says.

MBK allocates up to 50 percent of its funds toward Korea and the rest in China and Japan. Kim says that as a buyout market, China is just emerging and will become the most important market one day.

Club of Seven

For a country to be a sustainable buyout market, he says, it needs to have a population greater than 50 million and a per capita gross domestic product of more than $30,000.

Only seven countries are in that club, and Korea is one of them. The others: the U.S., the U.K., Germany, France, Italy and Japan.

South Korea’s population is 50.4 million, and its GDP per capita on a purchasing-power-parity basis is $35,485, according to 2014 data from the International Monetary Fund.

Though Korea is the world’s 13th-largest economy, it’s still considered an emerging market under MSCI Inc. criteria.

Even before he set out on his own with MBK, Kim had been one of the most prominent financiers in the country. After graduating from Harvard Business School in 1990, he rejoined Goldman Sachs and gained experience as an M&A banker. In 1995, he joined Salomon Smith Barney, which three years later became part of Citigroup Inc. There, he led the issuance of sovereign bonds worth $4 billion in 1998.

Opening Doors

At Carlyle Group, where he served as Asia president for six years, until 2005, he led the firm’s $450 million investment in KorAm Bank, which was later sold to Citigroup for $2.7 billion.

Seated in a 20th-floor MBK conference room, dressed in a gray blazer with a colorful handkerchief peeking out of the breast pocket, Kim acknowledges that he hasn’t gotten to where he is entirely on his own.

He says his marriage to Park Kyung–Ah, a daughter of late Korean Prime Minister Park Tae-Joon, opened many doors for him.

Kim’s father-in-law built Posco into one of the world’s biggest steelmakers from scratch. He also was one of the most trusted lieutenants of former President Park Chung Hee, under whom Korea became an industrial powerhouse.

Park Chung Hee, whose daughter Park Geun Hye is now president, governed Korea from 1961 until his assassination in 1979 by the head of his own security services.

On his first visit to Asia, in 1998, then–Citigroup Co-Chairman Sanford “Sandy” Weill chatted with Kim over dinner.

‘Mr. Chairman’

He was so impressed by Kim’s knowledge of Korean and Japanese banks that he asked the young Salomon banker to hop on his corporate jet and fly with him to Tokyo.

During the flight, Kim sat next to his boss and fielded his intense questions. Their relationship blossomed.

“I always thought Michael was the kind of young man who really deserves success,” says Weill, now 81. “He worked hard. He had good ethics. And he was very respectful.” Weill says Kim has always addressed him as “Mr. Chairman.”

Kim set up MBK in 2005 with five senior Asian executives from Carlyle. Kim says one of MBK’s earliest and most ardent supporters was someone who “thought it was high time that we have Asians running an Asian firm.”

He’s referring to Ho Ching, CEO of Temasek Holdings Pte, Singapore’s state investment company, which has S$223 billion ($165 billion) of assets. Ho put up several hundred million dollars in 2005 to get MBK started.

Affluent Family

“She basically put us in business,” Kim says.

“We do invest in funds where they give us new exposure to new sectors and geographies,” says Stephen Forshaw, a Temasek spokesman. “We often keep long-standing relationships with many funds, global and regional.”

MBK invests in leading consumer businesses, among others. They include Nepa Co., one of Korea’s biggest outdoor apparel companies, which MBK acquired for $869.6 million, and Coway Co., Korea’s biggest health appliance maker, which it purchased for $1.1 billion. It also acquired Komeda Co., one of Japan’s largest coffee chain operators, for $470.5 million.

Kim credits his success to being in the right place at the right time. He grew up in an affluent family in Seoul. It was his father, Kim Ki Yong, a businessman who later owned an insurance company, who set his son’s future course by sending him to the U.S. at the age of 12.

Mastering English

Michael attended private schools in Cherry Hill, New Jersey, before enrolling at Haverford College in Pennsylvania. He majored in English literature, leading to his lifelong love of the language.

“Don’t come back until you have mastered English,” he recalls his father saying to him.

During the summer before his 50th birthday in October 2013, he reread all of Shakespeare’s major works. So driven was Kim when chasing the KorAm deal that his Carlyle colleagues nicknamed him “Captain Ahab,” after the whale hunter in Melville’s Moby-Dick.

Kim says KorAm became an obsession: “It was my Moby-Dick, and I was obsessed with it.”

Kim -- 5 foot 10, with thick black hair -- prefers a 45-minute squash game over five hours on the golf course. “I have this bad habit of looking at everything in terms of opportunity cost, especially when it comes to my time,” he says.

‘Big Fat Ahjussi’

He plays squash with Eric Hoffman, an American who’s been chief commercial officer at Aon Risk Solutions Korea since 1998.

For nine years, they’ve played a couple of times a week when not traveling. At the end of each year, the one who’s won the most games gets to keep a trophy proclaiming him “Big Fat Ahjussi.” (Ahjussi means middle-aged man in Korean.)

“Michael really wants to win” Hoffman says.

Last year, Kim did. He won 30 games to Hoffman’s 29.

Kim can only hope he’ll be equally successful in finally selling off MBK’s cable TV companies in Taiwan and Korea.

He says he’s learned not to panic in his line of work. Recalling the days when he waited for the fateful call from Frank Koster of ING, he says:

“Every deal has twists and turns. That’s where patience and discipline are required.”

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