CCVC LP Report: A handful of hedge funds have been seeking opportunities on the unchallenged family control and complex structures of the country’s largest companies, chaebol

1. CCVC LP Report
Activist Hedge Fund:
Follow the trail to profit in Korea
A handful of hedge funds have been seeking opportunities on
the unchallenged family control and complex structures of the
country’s largest companies, chaebol
July, 2015
Jang, Hoyoung

2. 1
South Korean Market Feels Investors’ Love
Increase in Interest on Activist Hedge Fund
“Many ‘Activist (Behaviorism) Hedge Fund will throng while management
structure reformation of main companies of Korea regularizes.’ While
leading ‘Allianz Company Value Improvement’ Fund is the view of Zebra
Investment Management Lee Won Il, who is one of the Korea’s best
company management structure experts.
America’s Hedge Fund Elliott Management appeared as the rock in the
cooperation of Cheil Industries and Samsung C&T where the interest on
activist hedge fund is becoming the focus. In particular, it is engaged with
the period of succession 3rd
generation management rights of Korea’s
greatest upper class Samsung. Furthermore, various Korean companies
that have inheritance ahead are being focused.
After 2009 Global Financial Crisis, activist hedge funds that received high
investment income in the reorganization process of American companies
have been finding different high earnings. This is the reason of predicting
that the main field of activity will be reborn as Abenomics, pass through
Japan and move to Korea.
Exhibit 1
Historic Stock Price of Cheil Industries and Samsung C&T(Unit: KRW)
Source: KRX, Company annual report, Media search

3. 2
Reason for Increase in Interest about Activist Hedge Fund
As a result of analyzing the recent data based on May of global hedge
fund evaluation company ‘Hedge Fund Research (HFR), the 3 years of
accumulated income rate of activist hedge fund strategy 57.4% with the
highest income rate from the 31 main hedge fund strategies.
Exhibit 2
Performance of Activist Hedge Funds
Source: WSJ, HFR; Hedge Fund Research
Recent 1 year of income rate (9.7%) was also second place after IT •
Health Care Sector Hedge Fund (18.1%), and the income after the
beginning of this year (5.0%) recorded high standard income rate with
accompanied increase of global stock market. Along with this high
performance, capital inflow is going through the trend of rapidly increasing
with global activist hedge fund.
Worries of activist fund the power of increasing is at its limitation in the
U.S stock market that continuously drew an upward curve from 2009 to
this year.

4. 3
Because of the serious competition of around 100 activist hedge funds in
the U.S market and to match the eye level of investors that jumped in just
by looking at the high income rates of the past, the best way is to turn to
Asian markets.
Many activist funds came into Japanese companies during the last year,
and it is predicted that Korea will be the next stage of where company
management structure reformation will be normalized.
“Actions” by Activist Hedge Funds in Korea Market
Various income fulfillment cases of Activist Hedge Funds such as buying
out Samsung C&T shares of Elliott Management have existed.
The reason Korea attracted the interest of foreign speculation capital is
because income realization is possible any time because of no tax with no
relations to the period on the balance of transfer of stocks.
Let’s take a look at the representative 5 types of events.
Exhibit 3
Cases of Activist Hedge Funds in Korea
Source: Media search, Bloomberg, Mergermarket

5. 4
1. Tiger Fund – SK Telecom
The Tiger Fund that divided the 1990s global hedge fund market into two
parts along with Soros Fund Management of George Soros attempted to
acquire management rights of SK Telecom by banding amity shares after
acquiring 6.6% of SK Telecom in 1999.
Tiger Fund attempted changing board of directors, Green Mail, on SK
Telecom. Furthermore, Tiger Fund succeeded in deploying enormous
funds to buyout shares of SK Telecom. Thus, Tiger Fund earned around
640 B KRW in 2000.
2. Hermes – Samsung C&T
UK Pension and Fund Hermes (Hermes Investment Management Limited)
bought out 5% of Samsung C&T shares. At the time, Hermes revealed
that the purpose was simply for investment but later went through dispute
by trying to interfere in the management Samsung C&T by making
Samsung Electronics sell the shares. Hermes obtained margin of around
38 B KRW by entirely selling the possessed shares after mentioning
hostile M&A possibility about Samsung C&T. Hermes cause big waves of
unfair trade and stock manipulation, but the company was innocent.
3. Carl Icahn – KT&G
Carl Icahn, also known as ‘Company Hunter’ bought out 6.59 of KT&G
shares with U.S. Hedge Fund Steel Partners in the beginning of 2006.
After applying promotion for 1 year, Icahn received profit of 150 B KRW.
February 3rd, 2006, Carl Icahn Alliance (Icahn Partners Master Fund LP,
Icahn Partners LP, High River Limited Partnership) obtained 6.59% of
KT&G shares and rose as the 2nd
generation stockholder.
Icahn requested selling real-estate of affiliated companies including Korea
Ginseng Corporation, selling treasury stock, supporting stock price, and
also interfered in management rights accomplishing 1 advancement of

6. 5
nonexecutive director at the general meeting of stockholders. Carl Icahn
received income of 148.2 B KRW by investing in KT&G for 10 months.
The income rate was sweet of 44.22%.
Exhibit 4
Historic Stock Price of KT&G (Unit: KRW)
Source: KRX, Company annual report, Media search
4. Sovereign – SK Holdings
Sovereign made the most of a change according to SK global fraudulent
situation during the beginning of 2003 and became the largest stockholder
by buying out 14.99% of SK Co., Ltd., shares. At that time, SK Group was
falling apart where the shares were dropping and the whole group was in
distress due to SK Global Fraudulent Accounting. Later, management
structure improvement such as changing board of directors was attempted
along with recommendation of nonexecutive director, selling asset, and
dividends to shareholders. There were also discussions on advocating the
necessity of large company reformation by bringing in friendly powers
such as minority shareholders, non-governmental groups, and labor union.
Sovereign failed to take over management rights at the general meeting of

7. 6
shareholders at the beginning of 2005. However, after selling shares in
July of 2005, Sovereign left Korea after receiving margin of more than 900
B KRW in just two years. Around 430% of income was raised during 26
months.
Exhibit 5
Historic Stock Price of SK Holdings (Unit: KRW)
Source: KRX, Company annual report, Media search
5. Lone Star Funds – Korea Exchange Bank
U.S private equity Lone Star Fund obtained the shares of Korea
Exchange Bank. The bank was going through difficulties of poor corporate
financing due to Korea’s economic crisis. Lone Star Fund made
purchases from existing shareholder in August 2003, and then obtained
51% of Korea Exchange Bank shares by taking over new shares. The
total investment amount was 1,383 B KRW, the buy-out was around 20%
higher than the average market price of Korea Exchange Bank In 2003,
but most opinions of the market state undervalue of shares due to Korea’s
economic crisis.

8. 7
Lone Star Fund was not able to make settlements for negotiation despite
the effort of trying to sell to DBS, Kookmin Bank(KB), and HSBC from
2005. Due to the improvement of Korea Exchange Bank’s performance
from 2006, income was made through dividend. Along with this income,
Korea Exchange Bank was finally sold to Hana Financial Group in 2012,
and Lone Star Fund’s investment in Korea Exchange Bank was concluded.
Through 8 times of allotment and sales profit, the company raised net
profit of 4,660 B KRW, and it was a success raising high income rate of
Multiple 2.8X, IRR 18%.
Opportunity Factors of Korea Company
Governance Fund Investment
Lagging Company Governance of Korean Companies
While facing foreign exchange crisis in 1997, lagging management
structure of Korean companies have been pointed out as one of the main
causes of economic crisis. Thus, the government carried out financial
reform and made an attempt on company management structure through
system reformation. However, despite this system reformation, company
management structure of Korea conglomerates, lagging was unavoidable.
The main issue of company management structure is as follows;
 Management of Governance: Perform taking over through pyramid
investment and cross-shareholding between subsidiary companies;
wealth transfer mobilizing subsidiary company; and executing
evasion management heredity.
 Inadequate Internal Management Surveillance Function: Lack of
manager containment function and independence of board of
directors; incomplete internal surveillance function on unfair
support of subsidiary company and internal transaction
 Vulnerability of Market Order: Dividend accounting, stock
manipulation and false disclosure
 Inadequate minority shareholder protection system

9. 8
Weak company management structure means that there is doubt of
improvement. Also, this can be connected to investment opportunity of
high investment like the cases in the past. As much as investment
strategy of company management structure fund is in the company
management structure of investment target company, the lagging
company management structure environment of Korean company can be
applied as the investment factors of these funds.
Korea Discount
The “Korea Discount” is defined by Forbes magazine as ‘the amount by
which investors undervalue Korean stocks.’ This discount rate can be
seen in how Korean stocks have consistently maintained low price-
earnings ratios, and are predicted to maintain this low ratio in the future as
well.
 One predominant cause for potential capital flight remains South
Korea's geographic proximity to and political rivalry with the
unstable North Korean regime.
 Another cause of concern for investors is Korea's significant debt
load. Household debt in South Korea surpassed 700 trillion won in
September for the first time ever, which may have a snowball
effect when interest rates rise
 Another reason for the Korean discount is an overbearing labor
union force. Lim Ji-won, an economist at JPMorgan Chase, said,
“Labor union issues are a persistent discount factor for South
Korea.''
 But the prime cause of the discount is more likely to be poor
corporate governance at the family-run chaebol conglomerates
that dominate the economy. Nefarious schemes to pass on control
to sons, avoid taxes and exploit company assets for the benefit of
family members are widely discussed in private. They are also
lambasted abroad: a 2010 survey by CLSA, a broker, placed the

10. 9
country third-from-bottom in Asia on governance, ahead of only
Indonesia and the Philippines.
According to ‘Does Corporate Governance matter? Evidence from Korea’
which analyzed the corporate value interrelations with company
management structure of local companies, when company management
structure index increases by 10, (When company management structure
improves by 10), the market cost of company increases 7% of net asset
value and/or 2% of asset by average. Also, When the company
management structure index increases by 10, the annual excess earning
rate increases by 4~6%. This resolves corporate governance issue, which
is the main cause of Korea Discount, and means that there is high
possibility in achieving excess earning.
Exhibit 6
Average Price-to-earnings ratio in the past five years1
Source: Wall Street Journal, Economist, Bloomberg
1
http://www.economist.com/node/21547255

11. 10
Inheritance Succession Regularization
Management rights of many Korean companies have been regularized as
the period of moving on to the 2nd ~ 3rd generations. Heredity of wealth
and management rights has started through succession of family business
from founding companies or 2nd generations.
Stock asset succession rate about direct children of the 30s group leader
is around 36.3%, and more than half of the whole needs succession.
Also, junior mid-to-small sized companies are going through difficulty of
founding company absence or due to no inheritor to receive the business
where these companies are passed over to Private Equity Fund (PEF).
In particular, securing financial resource through high inheritance gift tax
rate have been counted as core for Korean companies. Unlisted company,
which was the method of acquiring finances of conglomerate also is held
by ‘Giving All Work’ regulation between subsidiary companies of the
government. Also, obtaining cash is very important because inheritance
tax cannot be paid by stock since 2013.
After opening of capital market and strengthening authority of minority
stockholders, hostile M&A and management dispute have been increasing.
Through these temporal and situational factors, many opportunities exist
for financial investors for the development of company management
structure.

12. 11
Exhibit 7
Succession Trend of Korea Top 30 Conglomerates in 2015
Source: CEO Score 2015.05.07, Media Search, CCVC Analysis

13. 12
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