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The move represents an attempt by a Korean chaebol to break into asset management in the wake of the Capital Market Consolidation Act. This legislation, which came into effect last year, removes cross-selling barriers and ownership restrictions among different financial service providers. The Act not only tries to put Korean regulation on a UK or Australia-like basis, but also implicitly supports domestic chaebols to try to emerge as competitors with sufficient scale.
For Lotte, the acquisition of an investment manager could open opportunities for it to cross-sell or expand its existing businesses in casualty insurance and credit cards (there are about 10 million Lotte credit card holders). Having an asset management company would also allow Lotte Group to invest its own cash more effectively. Lastly, it is attracted to the growth prospects for managing Korean funds, particularly by catering to the new retirement pension fund market.
Lotte, founded in 1948 as a confectionary company, now has businesses spanning hotels, restaurants, construction and a professional baseball team in Japan.
Cosmo was founded in 1999 as a listed equities specialist in Korea, running both absolute return (long-only and long/short) and index-relative strategies. It has quickly grown to become a $3 billion boutique and was acquired in early 2005, with Sparx taking 67.9% and the managers owning the rest.
The following year Sparx bought 100% of Hong Kong-based hedge fund PMA Capital Management, making it the largest Asia-based manager of alternative strategies.
Under the current discussions, Lotte would acquire more than a 50% stake in Cosmo, although spokespeople at Sparx would not say whether this would come from just its stake or also from some of the managersÆ shares. The final ownership shares, transaction value and specific amount of investment by Lotte will be determined after the chaebol completes its due diligence.
Assuming the final agreement on the transaction has been reached, Lotte plans to shift CosmoÆs investment management operations to cover the investment trust management operations in an expedited manner. CosmoÆs pretax profit in 2007 totalled W46.7 billion, ranking it among South KoreaÆs most profitable asset managers.
Lotte has indicated it intends to keep CosmoÆs management team intact. It is buying human capital and has probably needed to offer sweeteners to ensure the present team stays put. Cosmo officials, led by CEO Kevin Choi, declined to comment.
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