South Korea Hedge Fund Inspired by Elliott Eyes Chaebol CashHeejin Kim and Tom Redmond
Lime Asset says country’s conglomerates will have to dip in
Free cash flow at Korea’s largest firms tripled since 2008
A homegrown hedge fund has taken up activism in South Korea, betting the country’s family-owned conglomerates will have to deploy their cash hoards.
The timing couldn’t be better after Elliott Management Corp.’s campaign pushed Samsung Electronics Co. to boost its dividend and amid the start of a stewardship code last December.
Lime Asset Management Co., which oversees $500 million, started its first activist fund in November. The Seoul-based money manager is seeking to press firms with high cash levels to return it to shareholders, according to Lime Chief Executive Officer Jongjun Won. The fund has made investments but Won declined to comment on specific companies.
“This year is the best time to start an activist fund,” he said. The fourfold increase in the number of South Korean hedge funds last year suggests to Won that other funds will also focus on companies’ cash holdings. South Korea has the lowest payout ratio in the world, and Lime is targeting companies with rising cash on their balance sheets and falling returns, he added.
Total net income of 766 Kospi-listed companies last year is estimated to be the highest on record, according to SK Securities Co. Ltd. But return on equity for firms in the benchmark Kospi index stood at 7.1 percent at the end of 2016, slightly more than half the level for the S&P 500 Index in the U.S. That’s partly because companies let large amounts of cash sit on their balance sheets. Samsung Electronics, for example, had 88.2 trillion won ($76.9 billion) of cash and equivalents as of the end of 2016, according to its financial statements.
The average free cash flow for companies in the Kospi index tripled over the nine years through 2016, but capital expenditure only increased by 50 percent, according to data compiled by Lime. South Korean firms have clung to cash in recent years as growth in Asia’s fourth-largest economy slowed and executives found fewer places to invest, Won said in an interview in Seoul.
Lime isn’t the first company to pursue the strategy in South Korea, but there aren’t any other hedge funds doing so today, according to Gilbert Choi, an analyst at NH Investment & Securities Co. Ltd. An activist fund run by Lazard Asset Management Ltd. closed its doors in 2012 after suffering outflows during the financial crisis.
Most investors in Lime’s activist fund are from overseas, Won said. He declined to give its size. Lime is the eighth-largest hedge fund firm in South Korea by assets under management, according to NH Investment. The total assets managed by Korean hedge funds surpassed 7 trillion won as of the end of February, NH said.
There are signs that people in South Korea are becoming more receptive to activist investors. While Elliott’s attempts to force change in the Samsung Group were met with suspicion initially, many investors now take a different view, according to Won.
The country’s National Pension Service, which manages $482.2 billion, is under investigation relating to its support of the controversial merger of Samsung C&T Corp. and Cheil Industries Inc. in July 2015 that Elliott opposed. South Korea also followed in Japan’s footsteps by starting a stewardship code last December, to encourage money managers to press executives to run companies more efficiently. Also like Japan, participation is voluntary.
“Some opposition lawmakers are preparing a bill on pressuring companies to support minority shareholders’ interests,” Won said. “In this kind of the atmosphere, NPS might put more pressure on companies about corporate governance, too.”
(An earlier version of this story corrected figure for Samsung’s cash and removed inaccurately-described data on conglomerate cash holdings.)