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24 March 2004
Rexiter is a Global Emerging Markets Fund Manager with funds under management of approximately USD1bn founded in 1997
Rexiter is owned 25% by its employees and 75% by State Street Global Alliance LLC, a joint venture between State Street and ABP (largest Dutch Pension Fund)
Headquartered in London, Rexiter also have an office in Korea staffed by two senior fund managers and three Korean analysts seconded from its local sub-adviser (Hansset)
Encourage SMEs Dismantle Chaebols Improve corporate governance Improve balance sheets
1-Jan-92
1-Dec-94
1-Jul-95
1-Apr-96
1-Oct-96
1-May-97
1-Jul-99
Limits on aggregate foreign investment in: Corporations KEPCO, POSCO SK Telecom 10% 8% 1 10% 12% 8% 12% 15% 10% 15% 18% 12% 18% 20% 15% 20% 23% 18% 23% 26% 21% 26% 50% 25% 33% 55% 25% 33% 100% 30% 33% 100% 30% 49%
Limits on single foreign investors investing in: Corporations (non-bank) KEPCO, POSCO 1% 1% 1% SK Telecom Banks
1% 4%
5% 1% 5% 4%
6% 1% 6% 4%
7% 1% 7% 4%
50% 3% 2 33% 4%
50% 3% 33% 4%
100% 3% 33% 4%
Notes KEPCO opening effective 23 Nov 92, POSCO opening effective 13 Oct 92 (on amendment of companies' articles of incorporation). 2 KEPCO increase effective 31 Aug 98, POSCO increase effective 21 Aug 98 (on amendment of companies' articles of incorporation). 3 Banks: individual ownership limits on banks were removed at the start of 1999. However, foreign investors wishing to buy a controlling interest in a bank must be a bank or financial institution. Korea T elecom: ownership limits (aggregate/single) = 33% / 15%. Effective 1 July 1998 foreign investors were permitted to invest in all securities in Korea. T his measure effectively allowed foreign investors to purchase unlisted stocks and unlisted bonds. Individual or aggregate limits on ownership of these instruments do not apply unless mandated by specific industry laws (eg in the telecoms industry).
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25%
20%
15%
Malaysia removed from Free indices on 30 Sep 1998 following imposition of capital controls Korea inclusion factor raised to 100% of market capitalisation on 31 Aug 1998
10%
Korea added to regional indices on 31 Jan 1992, at 20% of total market capitalisation
5%
0% Jan-92
Jul-92
Jan-93
Jul-93
Jan-94
Jul-94
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Source: MSCI
Korea first entered the MSCI regional indices at the end of January 1992, at 20% of market capitalisation. At the end of September 1996, the inclusion factor was raised to 50% of market cap, at the end of August 1998, to 100% MSCI ACFEFJ % Korea 1/92 5.1 12/95 4.5 11/99 25.1
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One of the policy initiatives taken by the Korean Government to counter the economic crisis that befell Korea in 1997/1998
The CRFs consisted of four funds totalling USD1.3bn. State Street, Templeton and Scudder received USD250m each in balanced mandates. Rothchild Inc. received USD500m in a debt mandate
The funds were provided by 23 Korean Financial Institutions coordinated by the Government owned Korea Development Bank
The CRFs were targeted at small and medium sized Korean companies
Must invest in newly issued debt or equity thus private equity in nature
technology
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Introduced to Potential Investee Companies Screen 300+ companies SSgA visit 100+ companies Sign Letter of Intent and Confidentiality Establish financial projections and verify assumptions used See customers of potential investee companies Sign Term Sheet Propose Investment to Investment Committee Negotiate Final Terms and Contract
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Made capital distributions every June totalling KRW 220bn (approx $190mn )
Fund currently worth KRW 173bn (approx $147mn) All listed investments to be sold and distributed to shareholders by Sept 04.
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Arirang Characteristics
Sectors
Cash 14%
Instrument
Bond with Warrant 5% Cash 14% Convertible Bond 5%
Industrial 20%
Technology 49%
Straight Bond 9%
Listing
KSE 25% Unlisted 17%
As at December 3, 1999
KOSDAQ 58%
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when:
employment.
Veto on debt/equity issuance Veto on Capex Board seats Tag-along rights Monthly reports
Improved investor relations (IPOs at higher prices in Arirang invested) Managers had investment discretion
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Political football constant criticism by opposition parties hindered objectives. Range of investments too wide (venture, work-out). Balanced of fund size/No of investments not quite right. Too many other funds CBO funds, Venture funds. Korean banks (write-offs, collateral). Chaebol influence, family and alumni influence. Legal background.
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Funds to be raised internally Policy vs Performance dilemma. Reasonably large economy (number and size of companies) Investment discretion for Fund Managers. Liquid stock market for exits. Appropriate fund and fee structure. Clear and appropriate investment guidelines. Acceptance of best practice Due diligence requirements.
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Sales forecast to rise from KRW77bn in 1998 to over KRW 300bn in 1999
Needed capital to offset debt used to build new factory (opened April 1999) Arirang subscribed US$5m in a November 1998 convertible bond issue for 8% stake. Converted December 1999.
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stepping motors used in CD Roms, FDDs and air conditioners possibilities for vibrating motors used in mobile phones
Needed capital to reduce debt and expand Chinese factory Arirang subscribed US$6.4m at 3 times the share price for a 21.6% equity stake Arirang took up a US$1m rights issue.
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Needed funds to reduce debts incurred in setting up factory and for working capital Arirang subscribed US$7.3m in equity for a 14% stake Listed on Kosdaq in November 1999.
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The Corporate Restructuring Funds (CRFs) were encouraged to execute at least one pure financial restructuring of a troubled company in the course of investing their funds.
The Arirang investment in Chefline Corporation (Chefline) in July 2000 represented a financial restructuring investment.
Chefline had agreed a work-out programme with creditors in April 1998 which collapsed shortly thereafter - Chefline then went into court-receivership (Hwa-eui). In July 2000, Arirang invested W4.6bn in equity for 922,350 shares or a 48.99% holding, and W7.695bn in convertible bonds; this was part of a comprehensive restructuring. This investment was the culmination of 18 months highly complex negotiations with 41 bank and non-bank financial institutions, the secured and unsecured creditors; the transaction involved a merger of two companies, a capital reduction, goodwill write-offs and debt rescheduling out to 2015 and 2019, all of which had to be agreed by the creditors, certain of whom had their own financial problems. The Arirang equity investment proceeds were used for working capital, and the convertible bond proceeds were used to redeem 10% of the outstanding secured and unsecured liabilities. The Arirang investment decision was predicated upon a hoped for strong recovery in the companys sales and earnings to pre-crisis levels, and a consequent ability to service the rescheduled liabilities. In July 2001, Mukoonghwa invested W2bn in a convertible bond to provide additional working capital - this CB is outside the transaction described herein.
A Complicated First Phase Restructuring concluded in July 2000..
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Established in August 1990 as a small receipt mini-printer manufacturer and computer network software company with capital of W100m and 13 employees
In 1992 entered the CAT (Credit Authorisation Terminal) business
In 1996 established subsidiary Wide Telecom to develop pager products; founded IT Information (Intelligent Building System), and merged with Seoul Information Co to strengthen mini-printer marketing
In 1997 CNI listed on KOSDAQ; paid-in capital increased to W2.7bn with 540,000 shares in issue (Soon Lee, President held 51,104 shares - 9.46%) Also in 1997, CNI merged with IOTel to acquire pager and wireless data communication technology and established Puloon Technology to manufacture bank note sensors
In 2H-1998, CNI provided the following income projections in their Investment Memorandum with wireless data accounting for 50% of revenues. W m Sales EBIT Net Income 1997a 24,935 2,247 761 1998e 25,000 3,528 732 1999e 45,000 7,008 3,480 2000e 65,040 9,768 5,592 2001e 90,000 15,900 10,320 2002e 120,000 22,428 15,516
CNI qualified under CRF investment guidelines; a venture company in technology with export
potential. The original investment of W15bn was 4.5% of Arirangs paid-in capital, the W25bn investment amount post-rights issue was 7.5% of Arirangs paid-in capital.
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416,667 shares at W24,000/sh; invested amount W10,000,008,000 for a 38% stake at a 18.6% discount to the market price. Shares had W5,000 par value. 2,083,330 shares at W2,400/sh; invested amount W4,999,992,000 for a 16% stake. Shares had W500 par value following 10:1 stock split Total holding 6,250,000 shares for a 48.5% stake.
Aug 1999
Rights issue of 0.3435876 new to 1 old share at W5,060/sh; Arirang took up its rights subscribing to 2,147,422 shares for a consideration of W10,865,955,320. Total Arirang holding 8,397,422 shares for an invested amount of W25,865,955,320. Percentage holding in CNI is unchanged.
Disposal of the rights shares in the market; 2,147,422 shares sold at an average W6,943.8/share to realise W14,911,300,680. Arirang holding 6,250,000 shares for a 33.2% stake. Disposal of 2,000,000 shares in the market at W5,511.8/sh raising W11,023,508,780. Recovery totals W25,934,818,460; Arirang holding 4,250,000 shares for a 21.2% stake. Disposal of 4,250,000 shares by competitive auction/block trade at W440/sh to raise W1,870,000,000. Total recovery is W27,804,878,460, or a gross return of W1,938,863,140 or 7.5% on invested amount
Nov 1999
May 2000
Mar 2003
Arirang was the major shareholder in CNI from the date of its initial investment in Feb 1999 until its final exit in March 2003 and made best efforts to exert influence over management.
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