A spate of bumper deals has seen South Korea emerge as a success story for private equity this year and a destination of choice for investors in Asia. And there a large number of projects in the pipeline, sources told AsianInvestor.

Obtaining funding for PE deals has become tougher due to higher bank lending costs, but on the plus side government policies have been pushing Korean conglomerates, or chaebol, to sell domestic assets.

The PE industry started the year strongly, notching up Asia’s largest-ever trade sale with the concusion of beer maker Anheuser-Busch InBev’s $5.8 billion purchase of Korea’s Oriental Brewery from PE firms KKR and Affinity Equity Partners.

And this year’s largest PE buyout by Asian investors could be another Korean deal. On December 16, it was reported that Hankook Tire is considering joining a W4 trillion ($3.69 billion) bid by local PE firm Hahn & Co’s for a 70% stake in auto parts firm Halla Visteon Climate Control from Visteon of the US.

“There now seems to be better opportunities for private equity firms in Korea,” said Eugene So, senior vice-president at alternative investment firm Auda.

The government is encouraging small and medium-sized enterprises (SMEs) to expand domestically while pushing chaebol to expand internationally and shed assets at home, he said. This means PE funds face less competition from cash-rich conglomerates for local assets.

However, the cost of getting loans from banks in Korea is higher these days, which makes PE funding more competitive, said David Shen, Asia head of mid-market PE firm Olympus Capital. The situation is similar in China and India.

Financing has been harder to come by for smaller companies despite lower borrowing costs. Korea’s central bank cut its benchmark rate in August and October this year (from 2.5% to 2.25% then 2%) in a bid to prop up the economy. The average rate on new loans fell from 4.39% in July to 4% in October. Many expect further rate cuts next year, given relatively slow GDP growth and low inflation.

Despite this, SMEs struggle to access bank financing in the country. “Large financial institutions [in Korea] are only lending aggressively to large clients” said Michel Lowy, chief executive of fixed income specialist firm SC Lowy. His clients include PE firms, which are borrowing to leverage up deals.

“It’s only in developed Asian markets like Korea, Australia and Japan that you see leveraged buyout deals available,” said a managing director at another PE firm.

Korea accounted for two of Asia’s 10 largest PE-backed buyout deals so far this year, and three of the 15 largest, according to data provider Preqin. This put the country second only to China, which accounted for three of the top 10 and seven of the top 15 deals. Singapore also claimed two of the top 10 deals.

The largest Korean deal so far this year – and Asia’s fifth largest – is PE firm Carlyle Group’s $1.93 billion acquisition of ADT Korea from US firm Tyco International.

Hyundai Merchant Marine’s $1 billion sale of its liquefied natural gas business to IMM Investment and IMM PE is Asia’s eighth biggest deal so far this year. Hyundai Merchant Marine was also involved in the region’s 13th largest deal, partnering Japan’s Orix to acquire Hyundai Logistics for W600 billion.

Auda's So said Korea’s chaebol were “now thinking more strategically about what are the core assets of their portfolio companies and trying to sell non-core assets”. Such firms are unwilling to sell assets to another chaebol group, he added, creating an opportunity for PE firms.

It is common in Korean PE deals for the seller to have a first-look option to buy the asset back when the PE firm is looking to exit in the future, noted So. Hankook Tire is reported to be considering joining the Halla Visteon Climate Control Corp bid on condition that it gains an option to be the preferred buyer when Hahn & Co decides to sell its stake.

Some second- and third-tier chaebol groups are in bad financial shape, he said, and need to sell non-core assets because borrowing money from banks is becoming more difficult for them.

Korea's financial sector itself has also proved fertile ground for PE deals this year. SC Lowy partnered with PE firm Yuli to acquire an 89% stake in Korea’s Shinmin Mutual Savings Bank from construction company Samhwan Corporation. The deal was finalised in January.

“When we saw the fact that the saving bank sector was undergoing significant changes – in many ways similar to the savings and loan bank crisis in the US in the early 1990s – we decided we wanted to be one of the players going after a licence to operate one of those banks,” said Lowy.