ADVERTISEMENT

Hedge Fund Makes Huge Bet on Korean Governance Change

Hedge Fund Makes Huge Bet on Korean Governance Change

(Bloomberg) -- A Seoul hedge fund is making a massive bet that hinges on changes in the chronic issue of South Korea’s corporate governance.

It all started in August, when Must Asset Management, a 500 billion-won ($430 million) long-only hedge fund, said in a filing that it will become more actively engaged with a local builder it has a stake in: Taeyoung Engineering & Construction Co. Then in December, it proposed the company, which owns several valuable subsidiaries, should set up a body to improve governance.

Activists typically seek to add shareholder value. In this case, the holding structure is key: If things stay the way they are, the owner family could decide to spin off Taeyoung E&C’s subsidiaries into independent groups for its family members. That’s a common succession practice that has angered minority shareholders who generally don’t get consulted.

Corporate governance is a problem that’s deeply rooted in the nation’s $1.5 trillion stock market and is one of the reasons for the longtime “Korea discount.” Both local and foreign investors -- including billionaire Paul Singer -- have called for governance changes.

Hedge Fund Makes Huge Bet on Korean Governance Change

For Must Asset, it’s led to a wager worth about a third of its assets.

“We don’t think we are making an excessive bet,” Kim Doo-yong, the fund’s chief executive officer, said in an interview. Must Asset is the second-biggest shareholder in Taeyoung E&C with a 16% stake, after the builder’s chairman.

“If the company accepts our suggestion, we’ll feel appreciated. If they accept it conditionally, we’ll have a discussion and a rigorous negotiation. If they do not accept, we’ll proceed to the next step, which we’ve been preparing for a long time,” Kim said.

Kim’s proposal of setting up a corporate-governance body came after Taeyoung E&C’s chairman sold about 790,000 shares of his stake in Taeyoung Industry Co., a unit of the group, to his sister in December 2018 without disclosing a price, according to a filing.

Taeyoung E&C is reviewing Kim’s request, a spokesman said in a text message. The company’s shares have risen 22% since Must Asset’s December filing asking for a governance body.

Must Asset started to invest in Taeyoung E&C in 2014. It subsequently raised its holding to more than 5% in 2017, a filing showed. Since its inception in 2009, the hedge fund has posted annual returns of 25% on average, with no losses, according to Kim.

Hedge Fund Makes Huge Bet on Korean Governance Change

There are good reasons for Must Asset to target the company because Taeyoung E&C is “filled with hidden assets,” said Chae Sang-wook, an analyst at Hana Financial Investment. “The company has great earnings potential, including an IPO event in 2020.”

Must Asset’s bet, however, has raised some eyebrows.

“I’m not sure the fund really wants to change the firm,” said Park Ju-gun, the president of corporate research firm CEOScore. “I’ve seen many local hedge funds in Seoul just seeking a short-term profit in the name of activism. As far as I know, it seems to be difficult for the owner family to split the group under the current holdings.”

The hedge fund also faces potential backlash from the union of local broadcaster Seoul Broadcasting System, whose parent is mostly owned by Taeyoung E&C. In an August statement, the union said that “SBS is not something a hedge fund can sway in order to squeeze profits.” Must Asset’s Kim said the fund will “maintain a rational stance on the issue.”

Activism in South Korea has been on the rise recently, especially since the nation’s largest pension fund adopted a so-called stewardship code in 2018 to push family-run conglomerates to improve governance and increase shareholder payouts.

The issue has struck a chord abroad too: In December, California-based hedge fund Dalton Investment LLC sent a letter to Korean lawmakers asking them to urge the nation’s companies to treat minority shareholders fairly. Hedge fund manager Paul Singer has called for more accountability, while Michael Burry, who was featured in the movie “The Big Short” said certain management behaviors have damped sentiment among international investors.

Read more about activism in South Korea

While not all activist campaigns are successful, Must Asset may have a “pressure point” on Taeyoung E&C, said Namuh Rhee, a professor at Yonsei University in Seoul and former head of Merrill Lynch’s Seoul office.

“It is an interesting issue, and it might be a good move to resolve the ‘Korea discount’ phenomenon,” Rhee said.

--With assistance from Sohee Kim.

To contact the reporter on this story: Heejin Kim in Seoul at hkim579@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Cecile Vannucci

©2020 Bloomberg L.P.