Just over three years after a consortium of private investors led by Carlyle Group and J.P. Morgan Corsair II (JPM) bought South Korea's troubled KorAm Bank and revived it, Citigroup (C) is offering to acquire KorAm for $2.7 billion. The Citigroup purchase, set to take place in April, adds up to the largest foreign investment ever in South Korea. To some observers, it's a vote of confidence in the Korean banking system, which was driven to its knees, and largely nationalized, in the wake of the 1997-98 Asian financial crisis. Citigroup "is sending a strong thumbs-up signal for the Korean economy," says Lee Chang Hee, a banking analyst at Daiwa Securities Co.
But to hear some members of the Korean press and political Establishment tell it, this foreign interest in Korean assets is a danger. They accuse the foreign investors, particularly private equity groups like Carlyle, of exploiting Korea to skim off big profits. And what does Korea get in return? ask these critics. Precious little. "Foreign equity funds seeking short-term profits could lead to the drain of national wealth," warns Kang Jae Sup, lawmaker of the main opposition Grand National Party.
They couldn't be more wrong. True, some private equity deals in Korea have been highly profitable. The Carlyle-J.P. Morgan consortium will take away a 130% return once Citigroup's takeover is completed. Since Lone Star Funds of Dallas paid $1.2 billion to buy 51% of Korea Exchange Bank last year, the shares have jumped more than 50%. And last year, Goldman, Sachs & Co.'s (GS) private equity arm cashed out most of its $500 million in Kookmin Bank (KB), Korea's largest lender, tripling the value of its four-year investment.
But these profits hardly amount to exploitation and profiteering. On the contrary, the foreign investors took big risks by investing in what at the time was a crippled banking sector, and they are now reaping their just rewards. "The equity funds served as a bridge over troubled waters for Korean banks," says Jun Sung In, an economics professor at Hongik University.
Moreover, the private equity investors have done a world of good for the management of Korean banks. They have largely ceased being the financiers of Korea's huge conglomerates, opened their doors to ordinary consumers seeking retail loans and mortgages, and stopped taking orders from bureaucrats eager to help corporate patrons get cheap credit. For all this, the banks' new managers have been raked over the coals. After taking over Korea First Bank (KFB), San Francisco's Newbridge Capital Group was labeled "selfish" by the press and politicians for refusing to take part in a government-led bailout of distressed corporations. The truth, of course, is that KFB was only doing what was in shareholders' best interests.
The success of the Carlyle-J.P. Morgan gamble and other deals is likely to bring in more investors. Citigroup rivals HSBC Holdings PLC (HBC) and Standard Chartered PLC of Britain have both expressed interest. And the chance to make gobs of money is prompting Koreans to set up their own private equity funds. And not just to invest at home, where legal restrictions make deals difficult. "Hard-earned experience will enable us to tap opportunities in Northeast Asia," says Kim Hyoung Tae, vice-president of Korea Securities Research Institute, a private think tank. That means China -- an economy ripe for the kind of financial reform that could be greatly aided by those selfish foreigners. By Moon Ihlwan