Picture it: South Korea, 2000. Asian markets are aching in the aftermath of the financial crisis three years prior. Automaker giant Daewoo collapses; industrial groups and other businesses are wilting and defaulting on debt; banks are panicking. What better time for The Carlyle Group to enter the fray? In November 2000, the firm completed its largest investment ever up to then by leading a consortium of investors, including JP Morgan, in a $443 million equity investment in KorAm Bank of South Korea.
Carlyle's Korean banking journey did not start off smoothly. The firm initially had expressed interest in investing in KorAm but was rebuffed by the South Korean government, which at the time prohibited foreign non-banking entities from taking more than a 4 percent stake in national banks. Previously the stipulation had been waived only once when Newbridge Capital, another US private equity firm, paid $600 million in 1999 for a 51 percent stake in Korea First Bank. That bank, however, had been classified as a failed bank and nationalised by the government, while KorAm was one of five banks classified as “healthy.”
So Carlyle regrouped, brought aboard JP Morgan Corsair and a host of other co-investors, and after several months finally convinced South Korea's Financial Supervisory Commission to allow the transaction in November 2000. The inclusion of JP Morgan Corsair meant an entity deemed to be a foreign bank, was part of the group, which helped get around the 4 percent rule.
According to Carlyle Asia managing director John Il Kwun, who works in the group's Seoul-based buyout division, KorAm's turnaround happened relatively quickly, partly due to experienced management brought in by Carlyle from big banking players such as Citigroup Asia, and partly due to the bank's strong credit culture, which was a product of having been founded by Bank of America. The restructuring coincided with a rise in affluence of Korean consumers, who took more interest in private banking and wealth management products.
Last month, after almost four years, the consortium announced the sale of its 36.6 percent stake in KorAm to Citigroup for $2.73 billion in cash. With this sale, not only does Carlyle Group Asia boast a 2.2 times return on its original investment, but the firm also showed that it is indeed possible to generate healthy, if not extraordinary, returns in the Asian private equity market. Says Kwun: “It's a milestone for private equity in Asia, in that it clearly demonstrates that private equity investors like Carlyle can create value in the region.” Expect more to come.