For anyone who lived through the early history of the Asia Pacific buyout business, the recent ruling by a World Bank tribunal against the South Korean government in its long-running contest of damage claims by Lone Star Funds was a real trip down memory lane.
Alas for Lone Star, the victory was moral rather than financial. The International Centre for Settlement of Investment Disputes (ICSID) only awarded the firm some US$216.5 million plus interest in damages, which is roughly 4.6% of its original $4.68 billion in claims. Even so, Korea’s Justice Ministry says it will contest the ruling, seeking an annulment or other abrogation. Lone Star has publicly expressed disappointment but hasn’t yet shown any wish to renew litigation.
Lone Star’s original purchase of Korea Exchange Bank (KEB), then a distressed asset, in 2003 was regarded at the time as one of the marquee deals that put Asian private equity on the map. But it was never an easy deal and Lone Star initiated action in 2012, claiming that the Korean financial regulator had taken discriminatory steps to delay the sale of its stake in KEB, inflicting losses in the process, and adopted contradictory tax measures.
The ICSID ruled in late August that the financial regulator exceeded its mandate in delaying Lone Star’s attempt to exit KEB to HSBC in 2008, violating its duty of fair and equitable treatment.
Lone Star certainly recouped a profit with the bank’s final sale to Hana Financial Group in 2012, after benefiting handsomely from dividends and share sales. But there was enough ill will generated in the fight with the Korean government to lead both to seek validation of their respective claims about the investment.
The news evokes a time when Asia’s companies and policymakers resented and repelled large private equity investments – before they got the message and started building private equity powerhouses of their own.
It’s also a trip back in time to a period when the Asia Pacific market for corporate control was locked up tighter than Japan’s Iron Triangle, and governments, company owners and employees alike all leaned heavily into the economic nationalism angle of the post-war tiger economies.
Fast forward to today, and South Korea is now one of Asia’s most attractive markets for control investment, with top-class domestic general partners and limited partners batting in the same league as their Western peers. Lone Star may still object to its treatment in the country, but its example is probably one of the catalysts in the development of an international-standard private equity ecosystem.
The South Korean authorities might reflect on that point too and take ample comfort in the strength of the domestic private equity sector instead of continuing to begrudge the loss of face from the tribunal’s ruling.
