[Song Seungseop's Financial Light] Why Is There Intense Opposition to Private Equity Funds Acquiring Banks?

Private Equity Funds Maximizing Short-Term Profits
Potential Weakening of Financial Firms' Structure
Controversy Over 'Meoktwi' Exiting with Gains

Finance is difficult. It is tangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even if you know nothing about finance, you can immediately understand these ‘light’ stories that turn on the bright ‘light’ of finance for you.

Last January, officials from the National Private Equity Fund Fraud Victims Joint Countermeasures Committee held a rally urging dispute mediation for victim protection in front of the Financial Supervisory Service in Yeongdeungpo-gu, Seoul. Photo by Moon Honam

[Asia Economy Reporter Song Seungseop] Private equity funds are called ‘big players’ in the mergers and acquisitions (M&A) market. When ordinary companies hesitate to acquire at high prices, private equity funds often place bids. However, private equity fund acquisitions are uniquely criticized. Concerns are even greater when they acquire financial companies. With active M&A spreading like a trend, why do only private equity funds receive negative attention?

A private equity fund is a fund that privately gathers a small number of investors to invest in various assets. It can manage money more freely than public funds, which raise money from an unspecified large number of people. Depending on the private equity fund, they buy and sell stocks, bonds, and real estate. They can also buy and sell companies by acquiring equity stakes. They may invest in companies put up for sale in the M&A market.

The problem lies in the strategy private equity funds use to generate profits. Private equity funds often adopt a strategy of acquiring companies, increasing their value, and then reselling them. This strategy is not necessarily bad. There is a positive function in quickly restructuring large and insolvent companies.

However, because they try to increase corporate value in a short period, side effects follow. First, necessary long-term investments become difficult. They focus only on businesses that can easily generate profits in the short term. Large-scale layoffs also become frequent to reduce labor costs and improve performance.

However, industries like banks, capital companies, and savings banks, though private enterprises, are considered national infrastructure industries due to their immense importance and ripple effects. They affect everything from large corporations needing investment funds to financially vulnerable groups requiring living expenses. Moreover, if one financial company collapses, damage spreads to other financial companies. This could cause the domestic financial system to falter.

What if a private equity fund, aiming to maximize short-term profits, rapidly liquidates non-performing loans of an acquired financial company and raises loan interest rates? The financial company’s profits would increase, but borrowers would suffer. If the enormous profits gained this way are converted into cash through high dividend payouts, the private equity fund would pocket the gains. By increasing the financial company’s value through restructuring and short-term profit strategies and then reselling it, private equity funds can secure huge profits. This is why ‘eat-and-run’ controversies arise every time private equity funds acquire financial companies.

Short-term Gains and Exit After Acquiring Financial Companies... Negative Perception of Private Equity Funds Grows

In the past, private equity funds in Korea earned huge profits through short-term transactions with financial companies, which also fueled negative perceptions. In 1999, the foreign private equity fund Newbridge Capital acquired Jeil Bank for 500 billion won. During the foreign exchange crisis, the government injected about 10 trillion won of public funds into Jeil Bank, but Newbridge Capital earned a profit of 1.15 trillion won in five years and sold it. There were also criticisms that they did not pay taxes at the time.

The American private equity fund Carlyle Group formed a consortium with JP Morgan and acquired Hanmi Bank in 2000 for 450 billion won. Four years later, they resold it to Citigroup, earning a profit of 660 billion won, but again faced criticism for not paying taxes.

The U.S.-based private equity fund Lone Star acquired Korea Exchange Bank in 2003 and sold it to Hana Financial Group in 2012. They earned nearly 5 trillion won in profits, but there were controversies over acquisition qualifications and undervalued sales. The investor-state dispute settlement (ISD) lawsuit worth about 5 trillion won filed against the Korean government is still ongoing.

Those opposing the ongoing sale process of the Japanese financial group J Trust also worry because the buyer is a financial company established by a private equity fund. J Trust is in the process of selling 100% of the shares of domestic JT Capital and JT Savings Bank to VI Financial Investment. VI Financial Investment is a financial company established by Banker Street Private Equity (PE), a Hong Kong-based private equity fund (PEF) management firm.

Accordingly, the JT Savings Bank labor union held a press conference in front of the Financial Supervisory Service headquarters on the 11th, stating, "Businesses acquired by private equity funds are invariably followed by restructuring and high dividend payouts," and argued, "If savings banks realize profits based on ordinary citizens’ deposits, the bidding qualifications of private equity funds should be revoked."

This content was produced with the assistance of AI translation services.