Are foreign hedge, equity funds reliable?

Hana buy expected to carry same risks as with Lone Star

By Kim Jae-won

Hana Financial Group’s plan to buy out the Korea Exchange Bank (KEB) has received little criticism since last November when its Chairman Kim Seung-yu signed a preliminary deal with John Grayken, chairman of the Dallas-based Lone Star private equity fund, which owns a controlling stake of KEB.

The reason is that Kim’s surprise deal would transfer the KEB ownership back to Korean hands. Lone Star suffered a lightning rod of Korean public criticism because it used business tactics as a foreign private equity. It is derided for making fast profits and leaving, considered “meoktui.”

Last week, Hana disclosed its investors, most of which turned out to be lesser known private equity firms. This also causes worries in the financial industry that Hana’s KEB acquisition is not much different from Lone Star’s ownership.

Last Thursday the Hana board approved its plan to sell 34.1 million common shares to 36 domestic and foreign investors at 1.43 trillion won ($1.25 billion), or 42,000 won per share, about 30 percent of the money needed to buy KEB.

According to the list disclosed by Hana Financial, most of the investors turned out to be hedge funds and private equity funds in the U.S. and the U.K., which aim to earn large returns with short-term investments.

Among the investors, Perry Capital topped the list by agreeing to buy 5 million shares, followed by Och-Ziff Capital Management Group, and Korea Investment & Securities, which vowed to buy 2.1 million and 2.04 million shares, respectively.

Perry Capital is a New York-based hedge fund company, which invests in public equity, private equity, debt, real estate, and hedging markets. It was founded in 1988 by Richard Perry, who previously worked for Goldman Sachs. The 55-year-old businessman is known to follow an event-driven approach and invests in companies involved in mergers and acquisitions, bankruptcy, spinoffs or any other type of restructuring.

Och-Ziff Capital Management is also a New York-based global hedge fund company and alternative asset management firm. As of Feb. 1, the firm had approximately $28.4 billion of assets under management, according to the group’s official website.

The firm operates multiple investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed investments, private investments, and real estate.

It was founded in 1994 by Daniel Och, a former vice president of Goldman Sachs, with financial support from the Ziff family, founders of Ziff Davis Media.

However, the U.S.-based private equity firm Carlyle Group was excluded from the list as The Korea Times reported exclusively on Jan. 21. Goldman Sachs and AllianceBernstein, Hana Financial’s No. 1 and No. 3 shareholders, who have 8.66 percent and 7.31 percent stake, respectively, were not mentioned.

However, the National Pension Service, a local state-run pension fund and the second-largest shareholder of Hana Financial with 8.19 percent, is taking this opportunity to buy 1.5 million more shares of Hana Financial.

Analysts worry of a possible run away from the overseas hedge fund companies as there is no lock-up condition, which prevents them from selling their shares for some time. The investors can sell their stocks at anytime they want, which definitely will make Hana Financial to be vulnerable.

Activists say that the financial regulator should examine the investors thoroughly. “The government needs to check out who the investors are and their history of investments,” said Hong Seong-joon, secretary general of Spec Watch Korea, a local union activist group.

Hong said that the government needs to consider the case of Hyundai Group, after failing to acquire a controlling stake of Hyundai Engineering and Construction (E&C), though the group signed a memorandum of understanding (MOU) with Hyundai E&C creditors. The creditors later turned down the MOU saying Hyundai Group did not submit efficient documents for a reliable funding plan.

Hana Financial clinched a deal with U.S. buyout fund Lone Star in November to buy a 51.02 percent stake in KEB, the fifth-largest lender in South Korea, for 4.69 trillion won, or 14,250 won per share.

The group said it will raise about half of the takeover funds internally, mainly dividends from Hana Bank, the group's flagship banking unit. The remainder will be financed through sales of new shares and bonds.

To help fund the KEB acquisition, the group received a combined divided of 2.2 trillion won from its banking unit and unlisted brokerage affiliate. The group has also sold 1.5 trillion won in bonds.

The group's deal to buy KEB will enable Hana Financial to become the country's No. 3 industry player with combined assets worth 316 trillion won. The contract is subject to regulatory approval, which will be finalized in a few months.

Meanwhile, the board decided to put the age limit of members of the board of the group and its affiliates at 70. Starting this year, Hana Financial will allow its chief executives to extend their term only by one year after serving an initial three-year stint.

Under the guidelines, Hana Financial Chairman Kim Seung-yu, 68, could be allowed to extend his term by a maximum of three years if approved by the board each year. He has served as the group chief since 2005 and his current term ends in March.