Calls grow for stronger LP oversight in national strategic asset M&As

MBK Partners’ takeover attempt of Korea Zinc Inc. has exposed the vulnerability of national strategic assets to private equity ownership, posing risks to global supply chains and regional security amid China’s growing dominance in rare earth materials, business academics warned.

Amid the lack of regulations in South Korea that protect companies in backbone industries from unfriendly bids, calls are growing for limited partners (LPs), especially state pension funds, to step up oversight of general partners’ investments, which often prioritize shareholder returns at the expense of national interests.

“It was a shock that one of our backbone companies became a target of a private equity firm,” Ryou Hyo-Sang, head of the Unicorn Business Management Research Institute, said at the KED Global expert panel discussion on Wednesday.

In September last year, an MBK-led alliance launched a tender offer for Korea Zinc. It has since ramped up its bid for the world’s largest lead smelter – a deal estimated at over 2 trillion won ($1.5 billion).

Their management dispute is now in court, and a final ruling, potentially from the Supreme Court, could take several years. 

MBK’s unfriendly bid has exposed the clash between private equity interests and the protection of national security assets, as its LPs were unintentionally drawn into a potential deal that could run counter to the national interests of their allied countries, said the panelists.

The North Asia-focused buyout firm mobilized its sixth buyout fund which reportedly includes commitments from the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers’ Pension Plan (OTPP).

“Some of the LPs might not have committed to the MBK blind pool fund if they had known it would be used to invest in a strategic asset in their allied country – especially in a way that runs counter to its national interest,” said Ryou.

“It highlighted that national security and geopolitical issues beyond traditional financial valuation are emerging as key risk factors to investments,” said the former business management professor at Dongkuk University. “This could mark a turning point in the global investment paradigm.”

He warned that if MBK succeeds in gaining control of Korea Zinc, it could sell it to a foreign buyer, possibly in China – a scenario MBK has denied – within three or five years later as few companies would be able to afford the acquisition at a high premium.

Ryou added that MBK is unlikely to back down, given the financial costs it has already incurred, including borrowings from securities firms in the trillion won range.

Kang Won, professor in the College of Business Administration at Sejong University, emphasized that the MBK-Korea Zinc dispute underscores the need for pension funds to consider not just capital gains, but also the impact of their investments on allied nations’ economic security and regional stability – which could ultimately affect their own economies.

NATIONAL INTERESTS OVER MINORITY SHAREHOLDERS' RIGHTS

As a key supplier of zinc, lead and indium – critical for semiconductors, secondary batteries and defense systems – a possible sale of Korea Zinc to foreign capital could risk the leakage of South Korea’s core technologies and cede control of global supply chains to China, they warned.

In November last year, South Korea designated Korea Zinc Inc.'s precursor manufacturing process as a national core technology and advanced industrial technology.

Kang noted that national interest must take precedence over that of minority shareholders – particularly for companies in backbone industries.

He suggested the government implement safeguards to ensure minority shareholder interests do not conflict with national priorities.

LEGAL LOOPHOLES

Additionally, lenient regulations on domestic private equity firms are giving them greater leeway to pursue hostile bids with minimal restrictions. Foreign capital is also exploiting the legal framework by setting up Korea-based investment vehicles.

Kim Do-young, a lawyer, calls for legislation to address these concerns.

INVESTMENT SCREENING

Choi Gyoung-Gyu, a professor in the business administration department at Dongkuk University, said South Korea lacks investment screening mechanisms like CFIUS, leaving strategic sectors exposed to unchecked foreign capital. 

CFIUS is short for the Committee on Foreign Investment in the US, which reviews foreign investments in their companies to assess potential national security risks.

Yoon Jongyeon, CEO of Mainstreet Investment, a Seoul-based private equity firm, said the private equity industry is likely to face pressure from LPs to include clauses addressing geopolitical risks tied to portfolio investments.

"This shift could prompt broader reforms in their investment governance," he added.

Write to Yeonhee Kim at yhkim@hankyung.com
 


Jennifer Nicholson-Breen edited this article.