By Kim Jae-kyoung
Staff Reporter

Korea faces an exodus of foreign private equity funds operating here, as many have already cut back their operations or are taking steps to pull out of Korea due to growing competition in the local market coupled with anti-foreign capital sentiment.

The funds are looking for alternative investment destinations and are moving to invest either in China and India with their favorable tax systems, or in Australia and Singapore, which have more transparent regulatory systems.

According to informed sources, Lone Star Funds, the largest shareholder of Korea Exchange Bank (KEB), is likely to withdraw from Korea, as soon as the KEB sale is concluded.

``As far as I know, Lone Star sold off most of its assets, except for KEB, and it has had Hudson Advisor, an asset management subsidiary of the fund, monitor and manage its remaining assets,'' a local investment banker involved in the private equity market told The Korea Times, asking not to be named.

``Most people in charge of deal making have already left, and only those taking care of problem loans are here,'' he added.

A spokesperson at Insight Communication, a PR agency for the Texas-based buyout fund, denied this, saying that Lone Star has no plan to make any additional investments nor to pull back from the Korean market.

Carlyle Group, one of the largest private equity companies in the world, is also mulling leaving Korea, according to the sources. Carlyle, which enjoyed a huge amount of capital gains from the sale of KorAm Bank to Citigroup in 2004, has recently reduced its operation here by cutting its total workforce from seven to five.

``Several years ago, Carlyle allocated 40 percent of its Asia fund to Korea, but it has recently slashed its allocation. I heard that they are seriously considering closing business here,'' an executive of a local private equity firm said on condition of anonymity.

The sources said that CVC Capital Partners, a Britain-headquartered private equity firm, is also believed to be taking steps to withdraw from Korea. Of late, the head of the Korean office and other staff quit their jobs.

CVC has been one of the most active private equity firms in Korea over the past decade. It took over Haitai Confectionary & Foods, WiniaMando and MagnaChip, a non-memory business unit of Hynix Semiconductor.

CCMP Capital, a private equity fund spun off from JP Morgan Partners, recently lowered its Asian fund allocation to Korea from 30-40 percent to 20 percent, the sources said.

Affinity Equity Partners (AEF), which took over Hi-Mart, recently sent its two partners based in Korea to its Hong Kong office, allegedly due to problems associated with taxes.

Newbridge Capital, which acquired the Korea First Bank in early 1999 and handed it over to Standard Chartered Bank in 2005, pulled out of the Korean market a couple of years ago.

Additionally, several major global private equity firms investing aggressively in other Asian markets are not even looking at the Korean market.

According to sources, KKR (Kohlberg Kravis Roberts), a New York-based private equity firm, is managing $4 billion in funds in Asia, most of which are invested in China, India, Singapore and Australia.

Other major private equities, including Black Stone, Texas Pacific Group (TPG) Asia and Bain Capital, are also not coming to Korea. Black Stone is operating in Asia with funds of $3 billion; TPG Asia with $4 billion; and Bain Capital with $1 billion, the sources said.

``Given the size of these funds and their activities in other Asian countries, it is not understandable that they don't come to Korea,'' another source said.

Market experts said that there are a few key reasons why foreign private equity firms are either not coming to Korea or are pulling out ― unfriendly attitude toward foreign private equity and few M&A targets generating enough returns.

They added that growing anti-foreigner sentiment, ambiguous regulations and problems associated with taxation, and fiercer competition have combined to scare away foreign funds.

``All of the reasons point to what private equity firms see as an unfriendly or even hostile attitude in Korea toward private equity investment,'' Jeffrey Jones, an international lawyer specializing in M&A, told The Korea Times.

``The notion that profits can be considered excessive in Korea and that a company will be criticized by the public and in the press keeps many private equity firms away from Korea,'' he said. ``This is not a government policy matter but a matter of the social environment and it frightens investors.

``The Lone Star case has become symbolic of this environment and every foreign investor, strategic or private equity firm, expresses concerns about the treatment of Lone Star,'' he said.

Lim Byung-chul, director of Shinhan Bank Future Strategy Development Research Institute, said that Korea is losing its popularity as an M&A market.

``There are fewer business opportunities in Korea than before due to growing competition. Since there is ample liquidity in the local market, demand for foreign funds is shrinking,'' he said. `` In particular, the number of M&A deals generating returns foreign private equities are seeking is decreasing.

``Putting any label on foreign private equities is not desirable. If this trend continues persisting, it is highly probable that Korean firms will face similar problems when they invest abroad,'' he added.

kjk@koreatimes.co.kr