Hunter or Helper? Private Equity Funds Shaking Up Korea Inc. [New Financial Power: Private Equity Funds ①]

Active Intervention in Management Disputes at Hanjin KAL and Korea Zinc
Rising Concerns Over Talent Outflow and Investment Delays
Enhancing Corporate Value Through Governance and Financial Improvements

Editor's NoteAt the end of last year, the total committed capital of domestic institutional private equity funds surpassed 153 trillion won. Since their legal introduction in 2005, private equity funds have played a positive role by acquiring distressed companies and successfully turning them around. However, there have also been numerous cases where insufficient management capabilities have caused harm to companies and shareholders. Additionally, as control has passed to the third and fourth generations, private equity funds have become involved in management disputes within chaebol families with weakened governance structures, leading to concerns that they are shaking up the capital markets. This article examines the current state of private equity funds, which wield significant influence over the financial markets, and explores what their desirable future should look like.

As major domestic conglomerates have passed down their businesses to third and fourth-generation owners, the activities of private equity funds (PEFs) are drawing renewed attention. Initially, PEFs played an important role in the market as facilitators of corporate restructuring. However, more recently, they have become the focus of controversy and criticism as corporate raiders, intervening in management disputes among siblings or business partners of large companies with weakened governance structures.

According to the Financial Supervisory Service on July 14, last year the total committed capital of institutional private equity funds was tallied at 153.6 trillion won. This represents an increase of nearly 60 trillion won compared to 96.7 trillion won in 2020. Compared to the 5 trillion won market size at the time of their introduction in 2005, the market has grown more than thirtyfold. With their expanded scale, private equity funds have invested in numerous companies with formidable capital. Their judgment was that companies with inefficient management structures could significantly increase their value through value-up initiatives. In fact, these funds actively participated in the restructuring of major conglomerates, producing win-win outcomes and raising their profile within the capital markets.

Succession and Management Power Struggles Disrupted by Private Equity Funds

Recently, however, some private equity funds have shifted their focus to new markets. Judging that the market for large corporate restructuring has become saturated, they have now targeted management rights of third-generation companies, where ownership stakes are diluted and conflicts are anticipated during succession. While the former approach was cooperative, the latter is clearly hostile.

A representative example of such hostile intervention is the involvement of private equity funds in the sibling rivalry within the Hanjin Group, the parent company of Korean Air, the country’s largest airline.

KCGI, an activist fund, first acquired about 9% of Hanjin KAL, the holding company of Hanjin Group, in November 2018. Initially, its goal was to participate in management to enhance shareholder value, citing improvement of Hanjin Group's governance and shareholder-friendly policies as its rationale.

KCGI targeted the sudden death of the group’s leader, the unresolved succession, the dilution of ownership as control passed to the third generation, and the similar size of the children’s respective stakes. Although it ultimately failed to secure management control, KCGI eventually sold its stake to Hoban Construction, achieving a return of more than two times its investment.

Since then, private equity fund interventions in chaebol family feuds have become more frequent. MBK Partners, the largest private equity fund in Northeast Asia, jumped into the conflict between the largest and second-largest shareholders of Korea Zinc last year. Siding with the largest shareholder, Young Poong, MBK Partners aggressively attacked various allegations against the current CEO, Choi Yunbum, and launched a competitive tender offer. MBK had previously rehearsed such tactics in the sibling dispute between Korea & Company’s Chairman Cho Hyunbum and Advisor Cho Hyunsik last year, and its attack was fierce.

Chairman Choi’s side scrambled to defend itself, even creating a potentially illegal circular shareholding structure on the eve of an extraordinary shareholders’ meeting. Observers noted that if the Homeplus scandal had not generated negative public opinion against MBK, it would have been difficult for Chairman Choi’s side to prevail.

In addition, private equity manager La Defense Partners joined forces with Hanmi Pharmaceutical Group’s Chairwoman Song Youngsook to intervene in a mother-son management dispute within the founding family. In the so-called “nephew’s revolt” at Kumho Petrochemical, private equity fund CHA Partners also intervened.

Dispersed Ownership and ESG Trends Give Private Equity Funds an Edge

Private equity funds have mostly intervened during succession or family disputes. They have exploited gaps created by governance vacuums and generational transitions. As control passes from the founding family to the second and third generations, and from the third to the fourth, ownership stakes inevitably become diluted.

The vulnerability is even greater when there are many children or when the founder dies suddenly and succession is incomplete. In structures where the controlling shareholder holds around 30%, acquiring just 5-10% of shares and filing various injunctions can be enough to gain the upper hand in shareholder votes. In fact, the major shareholders in Korea Zinc, Hanjin Group, and Korea & Company Group all held stakes of around 20-30%.

Social changes have also played a role. The rise of ESG (environmental, social, and governance) management and the growing emphasis on “enhancing shareholder value” have increased the number of minority shareholders supporting private equity funds in opposition to incumbent management. In the past, owners were reluctant to raise per-share value to reduce inheritance tax burdens, but this has now become a stumbling block for future generations.

Hunter or Helper? The Two Faces of PEFs

Whenever private equity funds enter management disputes, they are often labeled as “corporate raiders.” Targeted companies, in particular, actively use this rhetoric. Korea Zinc criticized MBK Partners as “corporate raiders who could transfer technology to China.” In an internal employee survey, 60% of respondents said the management dispute would negatively impact Korea Zinc’s business and operational competitiveness.

However, there are also cases where private equity funds are recognized as helpers. In 2022, Kakao and Align Partners joined forces to oppose SM Entertainment founder Lee Sooman and the HYBE alliance. After Align Partners secured an auditor position at the following year’s shareholders’ meeting, they resolved issues of unfair transactions with the controlling shareholder. Subsequently, their efforts to enhance shareholder value won investor support. The alliance between activist funds and strategic investors not only improved governance but also boosted performance.

An investment banking industry insider commented, “Private equity fund intervention does not necessarily mean damage to corporate value, but if the dispute over ownership lacks a management roadmap, side effects such as talent outflow and investment delays can occur. As the SM Entertainment case demonstrates, whether there is a blueprint for improving governance transparency and shareholder return strategies will be the key criteria distinguishing private equity funds as either helpers or hunters.”