Vogo: Flying the Flag
An ex-government bureaucrat and two senior investment bankers launched Korea's first domestic private equity fund earlier this summer. It surprised many when Dr Byeon Yangho resigned from the Ministry of Finance. The respected government bureaucrat had risen to near the very top of the bureaucracy and could look forward to a secure position running a state corporation and a good pension.
His decision to leave and set up a private equity fund was out of character for a senior Korean official. Apparently it took him a year to persuade his wife of the wisdom of the move.
But Byeon's connections go to the heart of Korea Inc, both at the government and corporate level. And after the government legislated new laws on domestic private equity funds - in part to prevent foreigners from reaping all the spoils of restructuring Korea - Byeon knew this was his big opportunity.
He recruited two heavyweight local investment bankers to join him as partners. Lee Jaewoo joined from Lehman Brothers, where he was country head, and Jason Shin arrived from Morgan Stanley, where he had run Korean investment banking.
Both men resigned at the end of May and officially started at Vogo on June 7.
The three of them have now raised funds from domestic financial institutions and are installed in tasteful new offices in the Hanwha Building. The offices - with a giant flat screen TV in the meeting room and a dark wood colour scheme - are among the most stylish of any that this writer has ever seen in Seoul.
Clearly they know about décor, but can they invest? We talked to them about their strategy and why the name Vogo was selected.
How much have you raised for the new fund?
Byeon Yangho: We got active on the fundraising side on June 1. Before that, I was doing it informally. We had targeted a little more than 15 anchor investors - primarily domestic banks and insurance companies. We wanted to approach blue chip institutions that would make sizeable investments. We now have commitments from 13 investors for about $500 million.
Jason Shin: The negotiation of the partnership agreement was a grueling process. This had to be negotiated with all 13 limited partner investors in one uniform document. A number of law firms in Korea got involved - this document went through over 70 drafts. That took a lot of time, and was completed only recently.
Lee Jaewoo: We have a subsequent fundraising that will occur for nine months after the first closing. And for foreign investors we are going to set up a mirror fund overseas. This will give them the same investment opportunities as the domestic investors. It will be structured on a proportionate basis. So if we end up having $700 million domestic and $300 million overseas, every deal will be invested 70/30.
Why bother with foreign money - there must be enough money here?
Byeon: We'd like get overseas money as well, but keep it at about 30% of the overall size. It is our current intention to give them pre-emptive co-investment rights. So we expect a number of them to become limited partners but then co-invest at every opportunity. We have been solicited by quite a few foreign private equity funds even though we didn't approach them.
What happened with the name change? Originally it was supposed to be Bogo?
Shin: We've been hearing some funny variations to the name "Bogo". Upon hearing these names, Dr Byeon's daughter suggested the English name should be written Vogo. He floated the idea and we liked it. The Korean name remains Bogo, because in Korea there is no 'V'. But in the English name, we went with Vogo.
Where does the name derive from?
Byeon: Bogo Jang was the most prominent and successful merchant in the Korea-Japan-China trade dating back to the 9th century. He was given the title of admiral by the government thanks to his success in international relations. We wanted the name to be something Korean and symbolic while easy to pronounce.
Lee: Our symbol is a double sail from Bogo's boat and the meaning of this is: East meets West. As to using the 'V' in Vogo - V stands for Victory, Vision and Vigour, and Vitality and Value.
The vision here is about Koreans investing in Korea, right?
Lee: We know Korea and we live in Korea. But we want to run the fund management company to global standards. That's why our slogan is 'Truly Korean, Truly Global'.
Isn't the mood here somewhat nationalistic now, and won't it be detrimental therefore to work with foreign private equity firms?
Shin: It's not being purely a Korean fund that is important, but that it's led by Korean money. As long as the majority is Korean money, this will be a Korean fund. But we want foreign co-investors that represent smart money, and means we can bring them in as co-investors. We won't be blindly nationalistic. We will lead a coalition with other foreign private equity firms. We'll be open-minded. But a basic criterion is that our own fund must be 70% Korean capital.
Lee: We don't mind working with foreign private equity because we can borrow their technology as well. They have experiences from other parts of the world. So we don't mind picking their brains.
What do each of the three principals bring to the fund in terms of skills?
Lee: Dr Byeon spent 27 years in government after he topped the civil service exam, and he was one of the most successful bureaucrats in Korea. Just as importantly he was known as someone who understood the commercial sector. He spearheaded a lot of the restructuring of the Korean financial industry. He was responsible for negotiating with foreign creditor banks during the crisis and successfully rescheduling the foreign debt. He also played a critical role in dealing with the rating agencies to get Korea back to investment grade.
He pulled all these things together by mediating. He built a strong track record and network while earning a great reputation. He is a very sincere person and in Korea he brings a lot of credibility. That's important because in this country, private equity is still a new concept and it is not easy to get money from institutions. His credibility is also critical in sourcing attractive deal opportunities, especially on a proprietary basis.
Shin: Jaewoo has spent 23 years in financial services. At Citibank he was in charge of foreign exchange derivatives sales, and later did corporate finance and strategic turnaround. He also gained experience as a principal investor when he was a co-founding partner of H&Q Korea just after the crisis. He sourced and led the takeover of Ssangyong Securities at H&Q. H&Q turned it around, it became Good Morning Securities and was eventually sold to Shinhan. It became a flagship deal and had an IRR of 70%.
These successful experiences led to Lehman Brothers hiring him to upgrade from a rep office to a full office and build a franchise in Korea. At Lehman he created a joint venture with Woori Financial to buy distressed debt - which was very successful in terms of financial returns.
Byeon: Jason has dominated M&A banking in Korea and was involved in all the major deals in the past few years. Jason has a long and successful M&A track record with Korean corporates and multinationals. He will be heavily involved in a lot of the execution work, which is obviously critical.
Shin: My primary job is not only originating deals but executing them. We have a pretty good team - three professionals under me, hired from investment banks, private equity and management consultants. We are going to hire one or two more. We will have eight professionals.
All three of us bring very important qualities including a special one that all private equity firms require: we can all source deals via our own networks. Dr Byeon has deep and wide relationships, and not just through the government. Jaewoo has a wide network of relationships in the corporate sector in Korea. Dr Byeon likes to say that Jaewoo has a great smell for money. Over the years he has proven his ablity to package deals and successfully managing them.
Lee: Dr Byeon is the most experienced dealmaker in a way - especially in the Korean context. He knows how to make deals happen, and move certain key decision-makers to see why a deal should be structured in a certain way. He is very persuasive.
Shin: The proof is he could persuade us.
Is it very rare for a senior civil servant to make the switch to the private sector?
Lee: It never really happened before. Normally they would become the president or CEO of some government agency.
Some cynics might suggest that a lot of Korea's low hanging fruit has already been disposed of in the private equity world, and also that there is now more private equity money out there than ever before. What will be your competitive advantage over all the other private equity money chasing Korean deals?
Byeon: After the financial crisis, Korea was in a very distressed situation. Almost everyone was distressed from individuals to corporations to financial institutions. If you had money, there were deals. But much has changed and Korea has recovered. Having money does not mean that deals will come to you anymore. You have to spot and create deal opportunities and in order to do that you have to be a trustworthy person, so that people will be open with you. We are already getting a lot of referrals from our network of contacts, including even the chaebol owners.
Lee: Dr Byeon was trustworthy in government and was not your average bureaucrat. He was able to resolve issues. Now he has money backing that - and with his skills and good credibility, he can resolve a lot of issues with creditors, government and corporates. We can deal with management and shareholders. We can create deal opportunities.
Will you benefit from the current nationalist tone which has seen a backlash against foreign private equity funds?
Lee: I don't want to say there is a backlash, or anti-foreign feelings, but whether you like it or not there is a certain sentiment today that if there is a deal and there is both Korean money and foreign money, the Korean money will be preferred.
Shin: There is definitely a preference now for domestic capital.
Byeon: Domestic capital, however, should be run by internationally-trained people. That's what we are trying to build.
From Korea's perspective, is it very important the first domestic private equity firm doesn't blow up?
Byeon: For everyone in Korea who cares about the domestic private equity industry, they all feel that this fund - which is loaded with symbolism - has to do well. It becomes a litmus test for the entire industry.
We have been telling everyone that the low hanging fruit days are over. But that's not the normal private equity situation anyway. They were distressed assets. But traditionally private equity firms have not made money from a crisis, but taking advantage of the routine, continual restructurings that will always happen in an economy of this size. This revolves around independent equity capital being used for consolidation and generational change, or even temporary liquidity crises. The companies and people who are in that situation are going to call those people they feel comfortable working with. We think we can identify those opportunities earlier than others because of our network and reputation and because those people are more likely to give us a call and ask us to take a look.
Shin: Of course, we are not saying that if there is a very attractive asset such as Jinro, they are going to say let's do a private deal between you and me. That type of deal will lead to a public auction and we are not going to beat everyone on a public auction because we will be price disciplined. But when you look at proprietary deals where we are the capital provider and they are the management provider, I think we will get the call.
So some of this will be related to chaebol spinning off non-core operations?
Lee: Korea is the 11th largest economy in the world, but there is really no equity provider. Either you go to the industrialists or you go to the banks. Our vision is to become a truly independent equity provider to either those entities looking for expansion, in a credit crunch or looking for a consolidation, or a generational transfer.
Is generational transfer a big issue?
Shin: We believe it will be, and those will be the situations where they prefer a domestic solution and domestic capital. It is an honourable exit for them and we bring honour to the process. We're prestigious domestic capital with blue chip financial institutions backing us. Generational changes already are and will continue to be a source of opportunity we believe.
Do you have a typical deal size in mind?
Byeon: Yes, we'd like to do deals of $100-500 million deals - including debt. A deal size, however, could be larger than this. Theoretically, it could be as large as $600 million to $1 billion, depending on what our final fund size is going to be.
And how many deals do you think you can do each year?
Shin: We hope to do two to three deals per year.
Lee: Our commitment period is four years, so we have to spend the money within four years. We are able to invest up to 25% of the total capital into each deal.
But you are not interested in participating in the big public auctions for companies such as LG Card?
Shin: One exception would be if we could align ourselves with a smart domestic strategic partner where we believe we could buy such an asset at a reasonable price, and our domestic partner possesses the requisite management expertise on the business. We want to be smart about entering into auctions.
What are the other big government disposals?
Shin: Korea Express is under court receivership and that is slated for next year. That's the largest Korean logistics company, and is a good business. Obviously there is Woori Financial.
Lee: There aren't many assets left that the government can sell complete with control. However, there are minor stakes, such as in Korea Life. The government also has a stake in Shinhan Financial. Other deals include Hyundai Construction, Daewoo International, Daewoo Electronics, Daewoo Construction, and Daewoo Shipbuilding. These are just the known deals - so there are quite a lot of deals in the market.
You mentioned an insurer. Didn't KKR's experience with Samsung Life show that it was difficult for private equity to invest in insurers unless they were aligned with another insurer?
Shin: If you are a strategic player, whether foreign or domestic, you can own 100% of a Korean insurance company. But if you are a foreign financial buyer you are limited to 10%. But if you are a domestic financial buyer, and you are not affiliated with an industrial conglomerate - ie someone like us - you could buy 100%. So we could buy a bank or an insurance company. In that respect, we are quite unique.
Lee: This is one of the reasons why it is important to be an independent and neutral equity provider. We are not affiliated to any chaebol and are not classified as industrial capital.
Will your strategy be to focus on certain industries?
Byeon: No. The fact that we are a single country fund is already a limitation in itself. So we will look at all sectors - although we have natural strengths and advantages in the financial services sector thanks to our background.
Lee: The three of us have 65 years of business experience in Korea. And any one of the three of us could have headed up a foreign private equity firm in Korea. But there are three of us, not just one. So there is three times the firepower; three times the relationships.
This October, FinanceAsia magazine has run a cover story asking whether Asian private equity is a bubble in the making. For more information please contact Naveet Singh at [email protected].