Case Study

Sovereign invested in Korea starting in 2002 as the country was still recovering from a financial crisis that had significantly weakened its economic foundations.

Uneconomic Miracle

South Korea's economic miracle, since the end of the Korean War in 1953, has been spectacular. The country has emerged from an agrarian economy into an industrial powerhouse in little over one generation. It is the world's 11th largest economy with a GDP of USD 680 million and provides a home to a diverse collection of large manufacturing industries and global brands including Samsung Electronics, Daewoo and Hyundai. However, the economic growth model was aggressively mercantilist with the government sponsoring the build up of a number of large, diversified, export-oriented family groups or 'chaebol'. Unhealthy government-business relationships resulted in the chaebol monopolising available credit through government directed funding. These funds in turn were misallocated to a wide variety of capital destructive activities, including donations to political parties.

The Economy Implodes

In 1997, the Korean economy collapsed after the reckless debt-fuelled expansion by the chaebol brought down a system that had prioritised scale over profitability. The chaebol owed USD 350 billion to Korean banks which could not be serviced. The banks could neither foreclose nor write off bad loans without themselves collapsing. Indeed, much of the banking system was ultimately bailed out by the government. Between July 1997 and June 1999, 11 of the 30 largest chaebol collapsed. The country was given USD 58 billion in financial assistance by the IMF, the largest bailout in history.

Helping to Build Role Models

Sovereign made its first investment in Korea in 2002, when the country became the leading financial centre in North East Asia, acquiring a 3% stake in Kookmin Bank, one of Korea's leading financial institutions. However, it was the collapse of the share price at the country's third largest chaebol, following an accounting scandal, that led to one of Sovereign's most publicised investments. In 2003, Sovereign became the largest shareholder in SK Corp, South Korea's largest oil refining company.

In February 2005, Sovereign acquired a 7.2% stake in LG Electronics, a leading manufacturer of white goods and consumer electronics, and a 7% stake in LG Corp, the holding company for the LG Group. The group is widely regarded as a well managed modern chaebol. All of Sovereign's investments in Korea have reflected a desire to help build national role models transitioning to international standards essential to meet the global ambitions of Korea's leading corporations.