JPMorgan Partners Asia manages the $1.1 billion Asia Opportunity Fund, of which it has committed $520 million in direct equity investment since the fund's inception in 1999. Its most recent investment was in Korea where it acquired a 27.4% stake, and joint management control, of  Ceratech, a designer and manufacturer of high-end passive electronic components. Elton Cane talks to JPMorgan Partners Asia managing director Eugene Suh.

 

FinanceAsia: Not long after you took joint control of Ceratech the company bought back 13% of its shares at a 19% premium. What was the thinking behind this?

Eugene Suh: The share buyback was for 1.8 million shares. It was a joint decision between us and the management. We thought it was an attractive price for the company and it also increased our stakeholding in the company. And the way we're going to finance that makes the capital structure of Ceratech more efficient. There was really no short-term incentive in terms of stock price because we're long-term investors.

The Asia Opportunity Fund was set up in May 1999. What other investments had you made in Korea prior to this one?

Our one major investment in Korea prior to Ceratech was Mando Machinery. We also have an affiliate fund that invests in smaller technology type deals. I believe that it has invested in two Internet/wireless related companies. They're more like a VC fund and we don't directly get involved in those activities. We're more of a large buyout or control-oriented fund. Almost all the deals we've done are either leveraged buyouts where we have got 100%, or are joint control deals where we share control with existing management or shareholders, as was the case with Ceratech.

What is it about Korea that makes it the main focus for your fund right now?

Our view is that Korea, relative to the rest of Asia, has probably made the most progress in terms of restructuring and reforming. 

Secondly there has been a fundamental shift in the attitude of Korean corporates in general compared to prior to the crisis when it was one of the most closed markets to foreign investment. Koreans now have a very pragmatic view. Right now, they're looking a lot to foreign investors, in particular private equity, to fill some of their capital requirements.

Though the restructuring on the banking side has been a bit slow in some respects, it has been quite impressive. There have been some instances where the government and also the banks themselves have pushed to sell off assets of distressed conglomerates. The stigma of the foreign investor has been much reduced.

How would you describe the ideal situation you are looking for in an investment?

The Mando deal is a prime example of the kind of deals we like to invest in. It was quite a distressed parent -- the Halla Group -- which was actually in trouble before the crisis. They underwent a significant restructuring of their whole group, selling off assets and the prime one in most people's opinion was the Mando Machinery business. It was and is a world-class company with a highly distressed and motivated seller. There was a lot of competition on that one from the investor side.

Because management had a large say in who the eventual buyer was, we were able to win them over. We have a lot of strategic interest in the auto sector, and one of our group MDs is ex-president of Lucas Verity Asia, which was one of the largest auto-parts manufacturer subsequently bought by TRW. So we know the business.

We saw an opportunity because this was a world-class company that was only selling domestically within Korea, and this applies with Ceratech too. With our expertise and having invested $1 billion in the sector globally we were mainly focused on working with the business to diversify out of Korea. As evidence of how this works, Mando recently won a $300 million contract from GM.

Would you consider the auto industry as a specialist focus globally?

In general we're fairly opportunistic, although we do have certain areas where we have more expertise. One area is the auto sector, from parts manufacturing through to distribution and the OEM side. Another sector where we have a lot of expertise is consumer products such as beverage, confectionary, household products. A third sector of focus is electronics manufacturing; this is where Ceratech fits in. Ceratech is our second investment in the semiconductor chain, the first one being ASAT, which was really the first big deal we did in Asia.

How would you compare opportunities in this sector in Korea and Taiwan?

I'd say in Taiwan it's harder to find opportunities. There are similarities in terms of well-developed infrastructure and world-class managers and companies. The extent of the downturn was less in Taiwan than Korea, though, but Taiwan is much more of a local venture capital market. Also, in general, the scale of Korea is larger than Taiwan. For those reasons, although we're interested in Taiwan, we see more opportunity in Korea.

What is your view of the impact of that the recent Hynix deal will have on the pace of restructuring in Korea?

The fact they got their GDR done even though it was at a significant discount is a positive. In terms of opening up opportunities for us, it's difficult to tell at this stage. But there seemed to be other related companies which were being prepared for sale and now that that deal has gone through they're moving along. I think they were holding off for a while.

Do you see any major distinction in Korea between chaebol companies and non-chaebol companies?

The opportunities for us with the stable chaebol are more on the partnership side where we take a 50% stake, or less than 50% with a stake in management. With this kind of structure we sell ourselves on our global value-added, on our professionals in-house, on our global network of portfolio companies. When the chaebol are being restructured by the banks, these are more the leveraged buy-out opportunities. But really we're just looking for world-class companies. While there are a lot of deals out there if you look at the auctions, it's still hard to find companies that meet that criteria.

How does the auction process work in Korea?

A lot of investment banks are focused on Korea so a lot of the larger size opportunities are held for auction by one of the larger investment banks. In general, it's a relatively transparent and competitive process.

What about opportunities elsewhere in Asia?

Korea, we expect to be an attractive market. Taiwan, as I've said, is interesting. But another area we're building up in is Japan. That market obviously has a lot of potential, and it always has. But if reform and restructuring really start to take off, there will be a lot of opportunities for our fund. We've had a presence there for a while with the team travelling a lot, but opened an office last year.

In Japan, I think there are a lot of competitive companies with strong technology that are kind of buried under the large conglomerates. We're just beginning to see a desire to spin off and restructure on a quiet basis. So we're taking the approach of going for the proprietary type deals that are being done. There's not really the auction market there -- at least not yet.