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Buyout rules easing in Asia to lure money, jobs

  China and South Korea, long ambivalent toward foreign investors, are both set to issue new rules to encourage investment from overseas in 2009 with one simple goal in mind: creating local jobs.


At its annual congress in March, China’s parliament is expected to approve a set of new laws on asset appraisal, which could make it easier for foreign firms to value, and therefore bid for, local companies. China may also establish laws easing fund-raising and management of private capital, lawyers and regulatory sources say.

In Seoul, the finance ministry and antitrust agency have both said government policy priorities this year are on loosening regulation over the services sector to create more jobs, as well as easing rules on buyout funds and financial holding companies.

China and South Korea have long attracted, and frustrated, foreign private equity investors. Protective of a number of industries deemed strategically sensitive and wary of speculative, short-term investments more like bets on a market, Beijing and Seoul have been cool on private equity firms seeking access to their fast-growing economies.

“We expect the Chinese government to try to balance between more immediate objectives of stability and longer term plans for the economy,” said Maurice Hoo, a lawyer specializing in global private equity investments in China with law firm Paul Hastings. “Individual transactions, especially those in industries and locations where foreign investments are encouraged in China, may receive approvals faster,” said Hoo.

Such moves come after foreign dealmakers, especially private equity funds, have complained for years about protectionism, opaque rules and long waits for deal approvals in Asia. In September, Europe’s biggest bank, HSBC, abandoned its $6.3 billion offer for 51% of Korea Exchange Bank, the country’s No. 6 lender, after legal wrangles over the investment activities of KEB’s owners delayed the acquisition process for a year.

Early last year, US buyout giant Carlyle Group finally walked away from three years of negotiations to buy Xugong, China’s top construction equipment maker, after running into bureaucratic obstacles.


Those failures have come to symbolize the frustrations faced by global dealmakers in Asia. But with capital scarce around the world, China and South Korea are finding they have to make it easier for foreign investors if they want to bring in funding and expertise.

Private equity firms still have significant funds earmarked for investments in Asia, in contrast to the dire financial circumstances of many industry leaders, who are scaling back as global demand slumps. Some have long and successful histories in the region. In the Asian financial crisis of a decade ago, foreign investors such as Carlyle Group and TPG Capital bought distressed assets and led some industry consolidations, helping to revive the regional economy.

Now, the South Korea government is pushing forward new rules to allow private equity funds to own as much as 10% of a bank, or control it, depending on the fund. The limit is now 4%. It will also allow foreign investors to hold bigger stakes in broadcasters in 2009.

Apart from service industries, construction companies such as Hyundai Engineering & Construction could attract foreign investors following a recent relaxation of South Korean regulations to revive the housing market.

“Deregulation in the financial sector in the long term will increase foreign investment, which in turn will create jobs, the government believes,” said Kim Jae-eun, an economist at Hana Daetoo Securities in Seoul. “But it can’t be a cure-all in the short term in the face of economic slowdown,” said Kim.

Those moves, plus others to lure investment to areas including infrastructure and environmental projects, aim to create over 140,000 new jobs in South Korea in 2009, the government said last week.

In China, new rules will allow foreign private equity firms to set up yuan-denominated funds with local partners more easily, in particular for funds under CNY 5 billion ($732 million). Barriers will remain to certain private equity investments.

In China, the government encourages investors to go to the less-developed west, but some have complained about lack of professionals to support their business plans. Companies such as Xugong, meanwhile, which Beijing says is strategically sensitive, remain closed to foreign money. “We do not expect wholesale promulgation of longer term regulations to sell assets cheaply or let foreign investments into industries or companies considered strategic to China,” said Hoo of Paul Hastings. (Reuters)