Foreign private equity firms appear to have become public enemy number one in South Korea – but they're not alone in feeling the heat from regulators.

Historians will tell you that if you want to understand the present, it often pays to examine the past. In South Korea, the attitude of the authorities toward foreign private equity firms today seems so antagonistic as to be devoid of any logic – as a result of which, the country (along with other nations such as Germany and Japan) has been accused of protectionism. But a brief look back over recent history reveals an interesting context for current developments.

South Korea has traditionally been dominated by a small clutch of large, family-owned businesses known as the chaebol. Once lauded by the country's rulers due to their ability to create jobs and stimulate growth through their exporting power, they were, over the years, given preferential access to cheap funding and allowed to expand unimpeded into any industry they liked – an invitation hungrily accepted.

Then in 1997/98 came the Asian financial crisis and – whether justified or not – whispers grew louder that the chaebol were the source of all South Korea's woes. As whispers about “crony capitalism” grew louder, so the government became sensitive to the shifting mood. Rather than being propped up by the state – as they would once have been – a number of chaebol were left to collapse under the weight of their debts, while those that survived were often forcibly broken up.

A healthy purge of bad business habits ensued. Corruption had long been endemic – now it was challenged. Public expectations with regard to company ethics were rising, and demand grew for improprieties that would once have gone unpunished to be stamped on.

The perceived saviour of South Korea in this post-crisis era was the Western private equity firm. It would import desperately needed cash and operational expertise to a flagging economy. It would also bring in its wake, it was no doubt hoped, higher standards of corporate governance. The welcome mat was rolled out, and South Korea became a pioneer of private equity in the region. In the banking sector, in particular, private equity dollars piled in.

As private equity has gone about building its presence, so the war has continued to be waged against South Korea's industrial giants. Last autumn, Samsung patriarch Lee Kunhee fled the country (citing health reasons) after being threatened with indictment over political donations made in 1997. The authorities are currently looking into intra-family share dealings at Samsung that were allegedly made through tax-avoiding convertible bonds. Meanwhile, in March this year, prosecutors raided Hyundai's offices regarding the alleged use of slush funds to bribe government officials.

This provides the backdrop for action taken against Dallas-based Lone Star Funds – which is accused of owing taxes on its lucrative investment in Korea Exchange Bank and also of deliberately understating the bank's financial health to acquire it on favourable terms – as well as charges of insider trading being launched against Hwang Sung-Jin, the head of global investor Warburg Pincus' Korean operations, in relation to that firm's investment in credit card firm LG Card. Hermes Investment Management, Carlyle Group and Newbridge Capital are among other Western investment groups to have also been the subject of recent regulatory investigations in the country.

Some observers have been tempted to view these actions as proof that private equity is being singled out, though the evidence of prior action against other businesses suggests otherwise. What can be said – given their original exalted status – is that foreign buyout groups were bound to suffer a heavy backlash should they, like others, find themselves surrounded by the whiff of scandal. And that is precisely the scenario facing investors now, and which will continue to plague them for a while yet, even should many of the allegations ultimately prove to be without foundation.

In some ways, protectionism against foreign influence is now kicking in. Yoon Jeung-hyun, governor of South Korea's Financial Supervisory Service, recently revealed the government was considering extending the number of industries currently protected from foreign takeovers. In addition, tax incentives are being used to help build the strength of the domestic private equity industry: an about-turn from pro-foreigner policies in the wake of the crisis that discriminated against resident firms.

Such developments are of course worrying for those foreign buyout groups still active in South Korea as well as those who would like to move in at some point in future. But they may also be understood a little better when history is taken into account.