Are Private Equity Funds Pursuing Short-Term Gains Instead of Acting as 'Catalysts in a Stagnant Pond'?: Korea Zinc

Korea Financial Supervisory Service (FSS) to Investigate MBK Partners

SEOUL, South Korea--(BUSINESS WIRE)--Korea Zinc Co., Ltd. (KRX:010130) announced that Korean tax and financial regulatory authorities are gearing up to investigate MBK Partners for possible punitive measures, while Korean media have been raising strong criticism over the adverse effects of private equity funds, including MBK Partners which has operated Homeplus, one of the nation’s largest supermarket chains, since 2015.

MBK barred from hostile takeover in fund operations: NPS

Korea’s National Pension Service (NPS) clarified that its recent fund management agreement with private equity powerhouse MBK Partners was made under the condition that the firm would not engage in hostile takeovers, the Korea Herald reported.

The statement, released Monday evening, comes amid mounting concerns over MBK’s investment practices.

“In July 2024, NPS selected four out of 15 firms through its domestic private equity fund management selection process, with MBK Partners among them,” the NPS said. “In February, we finalized our agreement with MBK, explicitly including a condition prohibiting participation in hostile takeovers.”

According to the statement, the final signing with MBK took longer than usual, as such agreements typically conclude within two to three months of the final selection.

“With MBK, however, concerns persisted that some of its investment strategies, including the controversial attempt at a hostile takeover of Korea Zinc, did not align with NPS’ management principles. In response, we conducted a case review and sought legal counsel on hostile merger and acquisition investments,” NPS said.

The pension fund added that it is considering applying similar conditions to future private equity fund agreements.

Earlier, the Korea JoongAng Daily reported that criticism is mounting over the role of PEFs in the crisis surrounding Homeplus, Korea’s second-largest retail chain with 126 stores nationwide, because PEFs are prioritizing short-term gains rather than focusing on sustainable management.

Against this backdrop, the National Assembly’s Political Affairs Committee summoned executives from MBK Partners for questioning on March 18. However, MBK Chairman Michael Byungju Kim (MBK), a 61-year old Korean-American billionaire, was absent, citing an overseas business trip. Lawmakers from ruling and opposition parties strongly criticized MBK Partners for evading responsibility while it has branded itself as a ‘domestic’ private equity fund. Some even accused Kim, founder of MBK Partners, of being ‘arrogant and irresponsible.’

According to the Korea JoongAng Daily, the controversy escalated on March 4 when Homeplus officially filed for court receivership. MBK Partners alleged that it had no choice but to resort to ‘rehabilitation procedures’ in accordance with related laws and regulations after Homeplus’s credit rating was downgraded on February 28. However, suspicions are growing that MBK anticipated the downgrade yet proceeded with bond issuance before initiating court proceedings.

Before filing for rehabilitation, Homeplus raised billions of won by issuing corporate bonds and asset-backed commercial paper (ABCP) secured against credit card sales receivables. Of these, 188 billion won (approximately $129.7 million) worth of bonds was primarily purchased by individual and corporate investors through underwriting securities firms, raising concerns about potential losses for ordinary investors.

Financial Supervisory Service to Investigate MBK Partners

Meanwhile, the Financial Supervisory Service (FSS) of Korea announced during a press briefing on March 19 that it will investigate MBK Partners in connection with Homeplus’s recent court-led rehabilitation filing.

During a press briefing on Wednesday, the FSS stated that it plans to investigate MBK Partners following Homeplus’s rehabilitation filing and is set to begin a full-scale investigation later that afternoon.

In a related development, the National Tax Service has launched a tax investigation into MBK Partners, while the Financial Supervisory Service is examining the underwriting securities firms and credit rating agencies to determine the truth behind the bond issuance and downgrade.

As the controversy deepened, Kim pledged to use his personal assets to cover outstanding payments owed to small business owners operating within Homeplus stores. However, Kim and other executives of MBK partners did not go into the details. In the meantime, revelations of excessive borrowing practices have further fueled criticism of PEF investment strategies.

When private equity funds were first introduced in Korea in 2004, they were seen as an alternative to foreign PEFs, expected to play a role in rehabilitating struggling companies and improving efficiency in the aftermath of the IMF financial crisis, according to the Korea JoongAng Daily editorial. In that respect, PEFs were dubbed ‘catfish in a stagnant pond’ (a catalyst for revitalization).

At the time, Korean financial authorities imposed minimal regulations on PEFs, assuming that their investors were primarily large institutions. Consequently, Korea’s PEF market has expanded dramatically, growing from 400 billion won in 2004 to 136.4 trillion won in 2023, an astonishing 341-fold increase.

MBK’s acquisition of Homeplus exemplifies the risks associated with PEF-driven leveraged buyouts (LBOs). At the time of acquisition in 2015, MBK financed 2.7 trillion won, 45% of the 6 trillion won acquisition cost, through loans.

This approach, which often involves selling off core assets to repay excessive debt, can significantly undermine the management of acquired companies. In fact, Homeplus sold prime store outlets to pay off its debt, while similar concerns have emerged regarding Hansem and Lock & Lock after their acquisitions by domestic PEFs.

The Korea JoongAng Daily editorial emphasized that “entrusting the cat with the fish” is not a viable solution. Financial authorities must ensure that PEFs properly fulfill their intended role as ‘catalysts in a stagnant pond’, while implementing institutional safeguards to prevent threats to corporate stability and economic sustainability.

Press Reference Material Provided by Korea Zinc Co., Ltd.

The above is a press reference material provided by Korea Zinc Co., Ltd. Currently, Korea Zinc has declared that it will "do everything in its power to block" the hostile M&A attempt by MBK and Youngpoong. Please refer to this information.