MBK Partners faces headwinds and uncertainties in fundraising amid prolonged regulatory probes: Korea Zinc

Korea Zinc Co., Ltd. (KRX: 010130) announced that MBK Partners could face challenges in fundraising while embroiled in controversies surrounding discount supermarket chain Homeplus, while public funds and investors have been taking careful note of the growing headwinds against the private equity fund (PEF).

In particular, public funds turn wary due to compliance risks facing MBK Partners, according to the Korea Herald.

“Public funds are usually very concerned about compliance. Any type of noise that questions the general partner’s lack of compliance can be a hurdle for the limited partners in making new investments. From such a perspective, the compliance risks place more pressure on MBK Partners than the losses from investment failure,” an official from a local private equity firm said.

Following Homeplus’ application for a court-led rehabilitation support process early last month, MBK Partners has been pressured by multiple governmental bodies. The National Tax Service launched a tax investigation into MBK Partners. The Korea Fair Trade Commission, for its part, is looking into suspicions of alleged internal trading between MBK Partners, Homeplus, and local card issuer Lotte Card.

The Financial Supervisory Service (FSS) has been conducting an investigation into MBK Partners to determine whether it was involved in the issuance of short-term bonds for Homeplus while simultaneously planning the court-led rehabilitation behind the scenes.

On Thursday, FSS chief Lee Bok-hyun, a 52-year-old former prosecutor, who has CPA certificate, said that his agency has uncovered "meaningful facts" in its probe, the Korea Herald reported. Investors also warned they plan to sue the top executives of MBK Partners if the private equity firm does not come up with follow-up measures soon.

Industry sources believe the legal uncertainties will pile greater pressure on MBK Partners, as the firm relies heavily on public funds for limited partners.

MBK Partners has come under fire as Homeplus seeks court-led rehabilitation support in a Blitzkrieg action following its credit ratings downgrade from A3 to A3- in late February. The credit agency, Korea Investors Service, attributed the rating cut to weakened profitability, high financial burdens, and uncertainty surrounding mid-to-long-term business competitiveness.

Since taking control of Homeplus in 2015, MBK Partners has sold 20 stores of the retail chain to repay approximately 4 trillion won in debt and has been in the process of searching for a new buyer for the supermarket division.

Some critics have raised concerns over MBK’s management approach, arguing that the firm is seeking the court-led rehabilitation support for Homeplus without taking sufficient self-restructuring measures. MBK Partners and its top executives appeared unapologetic for its management track record, focusing solely on short-term profits with little regard for long-term corporate value.

MBK Partners has also been in the spotlight for its multi-trillion-won attempt to acquire Korea Zinc, the world's largest zinc smelter, in alliance with the zinc producer’s largest shareholder, Young Poong.

MBK Partners was founded in 2005 and named after Michael Byungju Kim, a 61-year-old Korean-American. Kim is a son-in-law of former South Korean Prime Minister Park Tae-joon, the key architect of Pohang Iron and Steel Co. MBK Partners wholly owns the discount supermarket franchise as a portfolio company.

Similar to other big-name private equity firms in Korea, MBK Partners largely relies on public pension funds. The firm has been pooling money from funds in and out of Korea, such as the National Pension Service (NPS), Korean Teachers' Credit Union, Canada Pension Plan Investment Board, and California Public Employees Retirement System.

Prior to the Homeplus failure, MBK Partners failed to secure funding from public funds, including the Korea Scientists & Engineers Mutual-aid Association and another fund operated by the Korea Federation of Small and Medium-sized Enterprises last year. Though reasons were not specified, industry officials assume MBK’s involvement in the Korea Zinc proxy fight took a toll.

In March, the NPS issued a rare statement, saying it agreed not to participate in MBK investments related to hostile takeovers. The pension giant seldom makes official comments on individual investments.

Industry officials assume it would be difficult for MBK Partners to secure additional funding from public funds, especially those based in Korea, until its name is fully cleared.

“MBK’s limited partners had been aware that the Homeplus investment was going to be a failure. But the compliance risks come as a surprise. They would have to see whether the current controversies and probes will materialize into legal actions or not,” the official said.

“Every company that MBK touches seems to fall into difficulty, with its retail businesses ending up debt-ridden and its financial operations coming under scrutiny for poor loan management,” an industry insider said.

Meanwhile, MBK asserted its fundraising of capital has been successful regardless of the controversies.

Press Reference Material Provided by Korea Zinc Co., Ltd.

The above is a press reference material provided by Korea Zinc Co., Ltd. Currently, Korea Zinc has declared that it will "do everything in its power to block" the hostile M&A attempt by MBK and Youngpoong. Please refer to this information.

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