Financial Returnees as New Agents in East Asia: The Case of Korean Private Equity Funds

Abstract

Although the standing of Anglo-American capitalism has been badly damaged by the global economic crisis, the return of the state in emerging markets is by no means assured. Over the past decade, financial processes originating in Anglo-American markets, such as derivatives, hedge funds and mergers and acquisitions (M&A), have made quiet headway in emerging markets. One of the transmission channels is financial returnees, defined as elites returning to domestic finance from either global finance abroad or from foreign financial institutions in their home countries. Many financial returnees pursue business agendas that parallel the Anglo-American model, while portraying themselves as local for domestic constituencies. These actions are now especially visible in the rise of private equity funds in emerging markets. This article defines the concept of a financial returnee and charts the impact of these individuals in importing the Anglo-American private equity model to Asia with Korea as the primary case study. Once foreign-controlled, the private equity industry in Korea is now domestically-run and financial returnees have been integral in this sector's short but important history.

Keywords:

• financial returnees
• foreign training
• Anglo-American capitalism
• private equity funds
• domestic politics
• Korea

Notes

James Brassett, Paul Cammack, Mike Keating and Nicole Weder provided helpful comments on a draft of this article.

It is a stretch to call Korea an emerging market anymore, as Leonard (2010) does, but Korea has always served as a valuable emerging market case study.

Anglo-American capitalism and neoliberalism are terms used interchangeably in this article to denote a process wherein the restructuring of ownership, management, labour and financing practices at the firm level strengthens market-based capital further.

Chinese princelings are an intermediary drawing attention from the international press (Barboza and LaFraniere 2012). Princelings are the children of current and former senior party officials who enter the business world. In principle, princelings are consistent with the thrust of my argument: they enter business fields new to the country, they facilitate foreign capital's entry and some are even returnees. However, this is a better media story than it is an accurate representation of private equity flows in China. Princelings are still a secondary presence in Chinese private equity and the most high-profile princeling that is nearly always cited in media reports (for example, Carew 2010), the son of Wen Jiaobao, is no longer running a Chinese private equity firm.

Interviews were conducted in Seoul with 10 senior financial returnees, two local business executives and one government official from an economic ministry from 13–17 June 2011. All of these individuals spoke on the condition that their statements would be reported without attribution. Citations, then, are only provided in this article for other interviews where attribution is possible.

Calculated using the database of the Asian Venture Capital Journal (accessed 26 June 2012).

Legislation in 1998 established preferential immigrant status for Korean Americans with free mobility within the job market and an expedited path to a permanent resident visa. There are currently between 20,000–25,000 Korean Americans working in Korea (Seol and Skrentny 2009: 152).

Pointing to the success of Korean American returnees to Asia as a whole, Bae has gone on to run all of KKR's deal-making in Asia. Similarly, Michael Chae of Blackstone has been appointed to lead the whole Asia group. In investment banking, Samuel Kim was promoted to run Morgan Stanley's M&A group for Asia.

I am only looking at deals actually completed. Capital raised by Korean private equity funds would be an even larger number.

One of the leading labour union critics talks disparagingly of the financial engineering in private equity today and the risks associated with overleveraged private equity-held companies. Interview with Damon Silvers, AFL-CIO, Washington DC, 20 June 2007.

Calculated from annex tables of UNCTAD's World Investment Report.

Calculated using the database Thomson One Banker for announced M&A including the net debt of the target company.

Data drawn from McKinsey (2012: 16). Turnarounds refer to investments in a struggling company's turnaround plan.

The Global Alternative Investment Forum: Korea, hosted by PEI Asia in Seoul on 14 June 2012.

A recent study demonstrated that pension funds have quadrupled their allocations to hedge funds and private equity funds over the last 15 years (Thompson 2011).

Determining whether this pattern is unfolding requires difficult primary research that no academic or journalist has yet undertaken.

Interview with James Rooney, Vice Chairman, Seoul Financial Forum, Seoul, 17 June 2011.

While there are some female returnees, the reality is that the financial returnee movement is overwhelmingly male.

Kim's father in law is a former Prime Minister in Korea and Hahn is the son in law of the Chairman of Chosun Ilbo, one of the most powerful media groups in Korea.

Interview with senior partner of the Carlyle Group's Japan team on the sidelines of a 2009 private equity conference in Hong Kong.

As a whole, Chinese private equity funds raised US$32 billion in capital in 2011 alone (Cheung 2012).

The four firms are: BTG Pactual, Gavea Investimentos, Patria Investimentos and Vinci Partners.