South Korea: A Buyout Backlash; 'Speculative' funds are under fire for big profits.(Cover Story)

Byline: B. J. Lee

Intensely nationalistic South Korea has long been ambivalent about foreign investment. In the late 1990s, the country was forced to open its doors to private-equity funds and other international investors because, in the wake of the 1997-98 crash, the government badly needed help bailing out failing companies. Newbridge Capital, Lone Star, Carlyle and Goldman Sachs rushed in to buy faltering firms at fire-sale prices. But now that many of those foreign buyers are cashing out, suspicion and resentment are on the rise once again.

Koreans have been particularly irked by the size of the profits the foreigners are racking up. When Texas-based Newbridge sold a revitalized Korea First to Standard Chartered Bank earlier this year for $1.6 billion, there was a public uproar. Koreans objected not only to Newbridge's $1 billion profit, but also to the fact that the company would pay little in capital-gains tax to the state. More outrage was sparked by the revelation that Lone Star Fund, also from Texas, would realize more than $2 billion in profit on the planned sale of its stake in Korean Exchange Bank. A recent report by the Korean Chamber of Commerce and Industry says that "speculative" short-term foreign capitalists have "drained" at least $6 billion of national wealth since the financial crisis. "We were naive to think foreign funds came to Korea to save our economy," says Hong Key Tak, a business professor at Seoul's Chung Ang University. "Their purpose was to make quick bucks and run."

Buyout firms do like to make quick bucks, but right now South Korea could use more not fewer of them. The country's GDP growth, under President Roh Moo Hyun, has been modest for two years, and foreign direct investment has been dwindling--from $15 billion in 1999 to $6.5 billion in 2003. FDI rose last year, mainly because investors rushed to complete deals before the government phases out a tax incentive for them. To be sure, Korea, loaded with more than $200 billion of ...