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OPINION

Bankers welcome Korean president Yoon – but with a catch

Yoon Suk-yeol, South Korea’s new president, is seen as pro-business and pro-market reform. Bankers are delighted, but there’s also a nagging doubt that populist policies that favour retail investors over institutional have crept in to win votes.

Chris Wright on Asia 1920px.jpg

The mood is positive in South Korea’s banking sector following the election of Yoon Suk-yeol as president on March 9. Yoon, a conservative former prosecutor, is considered pro-business.

The IPO pipelines are full: clearly most deals will choose to wait for calmer geopolitical conditions, but if market turmoil recedes, banks expect to see record new volumes in 2022. That’s following a clear record year in 2021 with W20 trillion ($16.4 billion) of new issuance; Goldman Sachs reckons the 2022 figure could be W25 trillion, much of it in spin-offs from chaebol holding companies.

Several arms of the Kakao and Hyundai groups, as well as online shopping platform SSG.com, are among those in the queue. LG Energy Solution, a battery maker, raised $10.8 billion in a January IPO, which got out ahead of the Ukraine invasion, illustrating the sort of deal activity that can be expected if the war is contained.

Several large houses anecdotally report a fivefold increase in revenues from equity capital market fees last year and have high hopes of repeating or beating it this time.

Then there’s M&A. International private equity is in Seoul in abundance, and an increasingly capable and well-resourced domestic industry has taken root. Domestically, the chaebol continue to shift non-core assets, providing ample opportunity for those private equity houses to engage. Examples include the Doosan chaebol restructuring, aviation sector consolidation, and divestments and spin-offs from LG and SK.

International private equity is in Seoul in abundance, and an increasingly capable and well-resourced domestic industry has taken root

And at the same time, Korean acquirers are looking cross-border with increasing appetite, particularly to the US, where they are less likely than ever to be beaten to an acquisition by a Chinese buyer, given trade tension between China and the US.

There are many examples either recently completed or underway: SK Hynix buying Intel’s NAND and SSD business, CJ ENM buying Endeavor Content, Hyundai Motors taking a controlling interest in Boston Dynamics and Shinsegae purchasing 80% of eBay Korea.

The banks doing most of the advice on these deals – chiefly Credit Suisse, JPMorgan, Goldman Sachs and Morgan Stanley, who between them have come to dominate Korean investment banking mandates – have high hopes of more to come.

Underpinning these things are some useful swells of capital. Korea’s pension environment has long been important, but in recent years it has developed considerable momentum: the National Pension Service is on track to become the biggest individual pension fund in the world, growing assets 13.2% in 2020 to W833.7 trillion and W918.7 trillion by the end of October 2021. That huge domestic bid provides support for big deals.

And the participation of international capital is set to increase if Korea is reclassified as a developed market by MSCI.

That is not going to happen before 2024, and requires some changes to market accessibility for foreign investors, but it was an election issue and president Yoon is expected to embrace reform to allow it to happen.

If it does, it is estimated that over $40 billion of incremental foreign flows will enter Korea.

All good, then. But at the same time, some in Seoul voice concerns about the policies that were offered ahead of the election to encourage retail investors to vote in a particular way, and the unintended knock-on effects on institutional rigour.

Balance of power

Some bankers say they have been warned of a potential change regarding IPO structures.

Retail demand in domestic listings is considerable and became a key theme last year ahead of deals such as Krafton ($3.7 billion) and KakaoBank ($2.29 billion).

Retail investors must deposit cash with brokerage accounts ahead of orders in new listings, and may only subscribe up to the amount of those deposits; by the middle of last year, those retail brokerage deposits were estimated to stand at W70 trillion.

But domestic financial institutions are free from these requirements and have driven highly inflated subscriptions in many recent IPOs, including the LG battery deal.

Retail investors have pressured local politicians to amend the rules, and now banks say the regulator is considering measures against institutional investors, including putting caps on international demand. This is of considerable concern to that side of the market, particularly given that one third of it is still owned by global investors.

Some bankers are also alarmed by a trend they see for the exchange and regulators to find small ways to delay the process of applying for a new IPO unless the price range is reduced.

“They keep stalling,” says one banker. “They play these games until you lower the range, at which point they stamp it right away. But that’s the government choosing the IPO range. That’s not right. That’s what the market does.”

Then there was the curious case of DIAC, a small South Korean biotech company that has become a litmus test for institutional discipline in the market.

DIAC began attracting short sellers, many of them trading through Morgan Stanley, over a year ago when doubts emerged about the value of an anti-cancer drug it was developing. Trading in its shares on the Kosdaq exchange was suspended in March 2021 because of audit failures.

But the company merged with an auto parts company called Dual, which has an affiliation with DIAC, through a share swap, and the share price then flew up in value. Indeed, by late February, DIAC’s market cap was worth more than some of the biggest chaebol companies.

Institutions and the banks who serve them are becoming alarmed that the balance of power is shifting too heavily to retail

A movement like that, which will have an eye-watering effect on the short sellers, has some elements crying market manipulation and wondering where the regulator is.

In the pre-election market, they argue, no government or regulator was of a mind to step in to protect short sellers, when votes instead reside with retail. In fact, short selling was blocked completely until some Kospi and Kosdaq stocks were freed from those restrictions last May, but smaller names are still under restrictions following pushback from retail investors.

Consequently, institutions and the banks who serve them are becoming alarmed that the balance of power is shifting too heavily to retail.

“The whole problem can be described in one word: populism,” says a banker. “Part of the reason is that at the peak, 75% to 80% of turnover is retail. And retail means votes.

“But populism shouldn’t mean threatening the rigour of the institutional market. I am seriously concerned that Korea is losing credibility and competitiveness due to domestic-focused policy.

“Rules and regulations should be at least in line with a global standard. Hopefully newly elected president Yoon understands the problem and will do the right thing.”

That aside, bankers are buoyant about South Korea, a story they think has been missed by international investors.

“Korea’s e-commerce market is bigger than India’s and is likely to remain bigger for another five years,” says another banker.

At the time of writing, Seoul is gripped by Covid, and its per capita daily case rate is among the highest in the world. Mask-wearing is fastidious, indoors and out. But there is a sense, as in many Western nations, of the country allowing the illness to go endemic in order to move on and live with it, a situation that is not at all the case in China and not really in Japan either.

South Korea, under new leadership, senses an opportunity.

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