As regulators keep up their pursuit of Lone Star officials, it's easy to form the impression that Korea is hostile to private equity. Think again.

And so the Lone Star saga rumbles on. With each passing month, it seems, a fresh batch of reluctant witnesses are hauled in front of Korean authorities to answer charges that government officials and executives of Lone Star and Korea Exchange Bank connived to drive down the price of KEB when it was acquired by the US investment group in 2003.

In late November came news that a Korean court had granted prosecutors warrants to arrest Ellis Short, a cofounder and vice chairman of Lone Star. and Michael Thomson, the firm's general counsel, on charges of manipulating the stock price of the bank's credit card unit around the time of the deal. In early December, it was announced that former Finance Minister Lee Hun-jai was being questioned about his role as an adviser at law firm Kim & Chang, which had provided legal advice to Lone Star on the transaction.

If the arrests and interrogations were coinciding with the first few days of the investigation, they would be startling developments. But coming, as they do, some nine months after prosecutors first began their probes, they have lost their power to shock. After all, we've already seen office raids at dawn and Lone Star's former head of Korea, Steven Lee, step down and then become the subject of a civil lawsuit brought by his own former employer (which resulted in him paying back a greater sum than he had been accused of misappropriating). No one familiar with this long-drawn-out tale is easily surprised any more.

All of which said, there was one recent announcement that may yet have succeeded in raising an eyebrow or two. It came in the form of Lone Star's decision to forego a profit of around $4 billion by abandoning the planned $7.3 billion sale of KEB to local rival Kookmin Bank. Lone Star chairman John Grayken said the firm would put its sale aspirations on hold until the investigations have been completed – which, according to those close to the situation, may very well not be imminent.

It's not known how high Grayken's blood pressure rose as he made the announcement, but he has certainly been vocal in his criticism of Korea's allegedly anti-foreign attitudes. His stance is a contentious one though, undermined somewhat by the equally stringent investigations being conducted into domestic icons such as car giant Hyundai. Lone Star may be feeling the heat, but it is certainly not alone.

Another suggestion that has been voiced, and which appears easier to dismiss, is that Korea is anti-private equity. In fact, since private equity funds were first officially recognised as investment entities by the introduction of regulatory changes in December 2004, the domestic industry has been blossoming. A November 2006 report by Korea's Financial Supervisory Service (FSS) revealed that there are now 20 Korean private equity funds, an increase of five sine the beginning of the year.

A handful of Korean funds are of the large variety, most notably the $1.56 billion debut vehicle raised earlier this year by Michael Kim's MBK Partners. But while most of the funds are far more modest in size, the message that comes across from the FSS report is of a nascent industry beginning to find its feet and impress onlookers. The report notes (one senses with some pride) the 54 percent IRR delivered by local fund FG10 from on October 2006 sale of shares in MK Electronics, following an investment made ten months prior.

Invitably, there are some teething problems. The report notes indications that soem general partners were “not adequately prepared for […] post-takeover management”. Among other concerns were “ambiguities in the investment contract over the extent of […] management participation” and “cases where strategic investment by private equity funds was perceived as hostile M&A”.

Nonetheless, the overall tone of the report is positive. It refers to “a number of large companies open to possible takeover activities and many strong, undervalued SMEs and others currently undergoing restructuring and seeking new investors”. All of which is being underpinned by government support: “On the regulatory front, the industry will likely benefit from further fine-tuning and easing of restrictions […] on the range of investment activities open to private equity funds, as well as improved regulatory transparency.

The increasingly hysterical response to the Lone Star investigation may suggest otherwise; but for the most part, Korea and private equity appear to be rubbing along just fine.