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CHARITY BEGINS ABROAD

Life is getting tougher for foreign GPs in South Korea, so Newbridge Capital has decided to make a donation.

Consider if you will two charitable donations made this month: one in England, the other in South Korea. The first saw the Queen engage in the ancient tradition of distributing Maundy Money, whereby a small amount of cash is handed out to deserving subjects. Given that the sum in question is a mere 79 pence per person (one pence for each of Her Majesty's 79 years), this is surely the easy option in comparison to the custom that pre-dated Maundy Money: that of washing said subjects' feet.

The second saw US-based private equity firm Newbridge Capital announce it was in discussions with South Korea's Finance Ministry and state-run Deposit Insurance Corp regarding a “donation” to small and medium-sized companies operating in the country's financial services industry. The size of this particular giveaway – reported to be around $20 million – makes it the financial equivalent of an all-over body scrub.

There again, some would say Newbridge – a joint venture between Texas Pacific Group and Blum Capital Partners – could easily afford such benevolence. When the firm sold a 48.6 percent stake in commercial lender Korea First Bank (KFB) to Standard Chartered Bank in January, it nearly doubled its original 1999 investment and reaped a reported $1.14 billion of profits.

Newbridge was one of the first international private equity groups to take advantage of rules introduced in the wake of the 1997 financial crisis in Korea that were designed to encourage much needed foreign investment into the domestic economy.

The initiatives have certainly been effective, evidenced for example by significant buying sprees undertaken periodically by foreign investors on the Seoul Stock Exchange. Around 45 percent of the market's total capitalisation is now held by these investors, compared with just 20 percent in 2000 and nine percent back in 1993.

The rules have also had a major effect on foreign buyers' appetite for assets in certain industries – notably banking, where Newbridge has not been the only US financial institution to start deploying capital. In 2003, for example, fellow Texas-based GP Lone Star bought a controlling stake in Korea Exchange Bank for $1.2 billion, while earlier this year Citigroup bought Koram Bank for $2.7 billion.

The only problem is that these pioneer investors from overseas have struggled to win over critics in their host country. It was anticipated that foreign – specifically Western – ownership would bring all sorts of healthy developments in their train such as the transfer of financial techniques and skills to Korean management teams, the introduction of new services for the domestic consumer and improving companies' global competitiveness. A view taken in certain quarters is that such things have been sidelined in the pursuit of short-term profits – and the Newbridge exit from KFB only served to focus this sense of disillusionment.

Consequently – as in neigh-bouring Japan – foreign buyout groups appear to be suffering a backlash. For example, according to a recent report in the Korea Times, the South Korean government is exploring whether or not it can levy taxes on Newbridge's proceeds from the KFB deal by investigating whether the vehicle used by Newbridge to acquire KFB – which was registered in the Malaysian offshore tax haven of Labuan – was in fact a “paper company” and hence subject to taxation.

Meanwhile, buyout heavyweight Warburg Pincus is under investigation by the Korean authorities over possible illegal trading during the piecemeal disposal (from late 2003 onwards) of its stake in LG Card Co, Korea's largest credit card business in which WP and other investors bought a 19 percent stake in 2000 for $380 million.

Concurrent to these developments, the Korean government has been systematically revising aspects of the country's securities law that since 1997 has discriminated against domestic investors (for example, by only allowing them to buy a maximum four percent stake in local banks). In what is now perceived to be a more favourable environment, domestic private equity funds have recently raised a total of $750 million of capital, with another ten funds currently seeking to raise a further $1.25 billion.

Of course, one should not criticise the Korean authorities for investigating possible rule breaches, nor from seeking to level the playing field for domestic GPs. Nonetheless, there is an implied message in such manoeuvres, which is that life has become tougher for those seeking to take large chunks of profit out of the country. Newbridge has clearly got that message and has decided to give a little back.