with Korea's Leading Venture Capitalist:
Mr. Ki-Woong Baek, CEO of KTBnetwork
the Interview IN
By Keith W. Rabin, President of KWR
this issue the KWR International Advisor interviews Mr. Ki-Woong
Baek, CEO of KTBnetwork (KTB), Koreas oldest and largest venture
capital firm. KTB possesses a twenty-year history, 20% market share
and a record of about 1,000 investments and 170 public offerings
on the KSE, KOSDAQ and NASDAQ stock exchanges.
Mr. Baek is a leading figure in the Korean venture industry, having
engineered many substantial transactions since joining KTB in 1999.
This includes eBays majority investment in Koreas leading
cyber-auction house Internet Auction Co. Ltd. in a deal valued at
approximately $120 million . Rising to the CEO position in only
two and a half years, Mr. Baek joined KTB after a distinguished
career as a senior manager at the Hyundai Group and SK Telecom.
In this capacity he developed the marketing, planning, financing,
and other management skills that have helped him gain one of the
most enviable investment records in this emerging sector. Mr. Baek
holds a Bachelor of Science degree in Mechanical Engineering from
Hanyang University in Seoul, Korea. Mr. Baek
has graciously agreed to the following interview with Mr. Keith
W. Rabin, publisher of the KWR
Korea's largest Venture Capital company. Can you tell us more
about your organization and personnel as well as the emerging
venture phenomenon in Korea? How has your organization and
venture investment in Korea evolved over the past two decades?
was established in 1981 as a government agency and privatized
in 1999. As the largest domestic private equity investor in
Korea , KTB has invested almost 1,400 billion won in more
than 1,000 companies. We currently have $1 billion in total
assets. This consists of approximately $600 million in equity
investments and $400 million in loans and other assets. Our
return on investment has been 28% over the last twenty years,
48% over the past decade and 79% over the past five years.
While this shows a progressively improving trend and is respectable
within the present environment we are not satisfied. During
our first eighteen years as a government agency we dedicated
ourselves to technical and financial assistance rather than
shareholder return. Since our privatization in 1999, however,
our mission and mindset has changed dramatically and you can
see our progress reflected in the numbers indicated above.
We are now actively moving to put into place the corporate
culture and systems needed to raise our performance and establish
a world class investment firm.
KTB was initially formed as the Korea Technology and Development
Inc. to help Korean firms overcome the second oil crisis.
Our name changed to the "Korean General Technology &
Banking Corporation in 1992 and in 2000, to KTBnetwork, our
present name. KTB differentiates itself not only through our
knowledge and relationships within Korea but also through
our ability to provide superior information, financial techniques,
business systems and know-how. We are also able to access
a worldwide network of investors and business relationships.
This allows us to extend financial support as well as management,
marketing and other specialized assistance. Our investment
teams consist of the brightest minds in electronics, communications,
the Internet, industrial and consumer-oriented manufacturing,
nano, bio, environmental and other technologies, as well as
entertainment, marketing, services and other targeted industries.
In my own case, I worked for Hyundai and SK Telecom for 13
years as a strategic planner and new project manager before
joining KTB in 1999. While the venture capital industry and
private equity investing is well known and established in
the United States and many European markets -- it is comparatively
unknown in Korea. We have many financial managers but few
with the range of skills needed to identify and manage venture
investments. Im proud of my contribution in helping
to build this industry from a background that combines both
financial as well as operation and technical experience. I
believe this type of broad experience is essential to deliver
successful results over the long term.
last few years have not been kind to technology firms and
even less so for large portfolio-style VC companies such as
Softbank or CMGI. How is KTB doing in this environment? Is
it fair to compare KTB to companies such as Softbank or CMGI?
Most venture companies
have suffered over the past two years and we are no exception.
Given our financial strength, however, we are using this time
to refocus and renew our competitiveness. To facilitate this
process, we began working with Bain & Company, a renowned
management-consulting firm, last year. The vision that we
developed will help KTB to diversify its investment focus
and to advance our operations beyond Korea. Our goal is to
establish a leading global investment firm by the end of this
decade. To achieve this vision, we are actively improving
our core capabilities in venture capital and corporate restructuring,
while expanding the entertainment and overseas facets of our
As a result, KTB registered to become the first Corporate
Restructuring Company (CRC) in Korea. We are currently the
most robust company domestic or foreign -- in this
sector with a number one market position. Since entering this
field as a pioneer in 1999, we have assembled a team of top-tier
experts, building an excellent market reputation and abundant
capital -- totaling 43% of total corporate restructuring funds
in Korea. As the undisputed leader, we have, as of the end
of last year, invested 336 billion won in 34 companies. This
includes positions in StarCo, Wise Control, Samhan and Kumkang
Industrial, which emerged from bankruptcy or court receivership
status and Curitel, Korea PTG, Dongshin Pharmacy and Samsung
Pharmacy, which are rapidly moving to normalize their operations.
While the Korean restructuring business is at most three years
old, we have made substantial progress and look forward to
realizing considerable profits in this sector during the latter
half of this year.
By introducing this value-oriented and restructuring component
to our business we seek to differentiate ourselves from firms
such as Softbank and CMGI who retain their primary focus on
technology. This will help to stabilize our profitability
and revenue flow.
I would add, however, that venture capital is a business that
bets on the future. Therefore, there will always be an element
of uncertainty in what we do. The current market environment
exacerbates these inherent difficulties yet I am certain we
will overcome these problems and emerge even stronger in the
What is the balance
of time you spend on new vs. existing investments? With the
tech downturn, has your focus shifted away from technology
toward other sectors? Are there any areas that look particularly
attractive or that you are seeking to avoid?
Although we are in a downturn, our basic
investment view remains the same. However, we are applying
more conservative standards than in the past. This is true
not only in respect to investment criteria but also to the
level of disclosure and transparency we demand. We find this
serves not only to satisfy investors, but also to enhance
the underlying competitiveness of these firms. When considering
investments we apply four distinct criteria, including an
evaluation of: a) their overall competitiveness, b) technology,
c) product marketability and d) management. Many Korean companies
have technological capabilities that are on par or which exceed
what is available in the U.S., Europe and Japan. This is especially
true when we are talking about mobile communications, broadband,
gaming and consumer electronics. We continue to fund companies
that specialize in these areas as well as information, bio,
nano, environmental and other emerging technologies where
we also show strength.
Additionally, as mentioned, we are very interested in value
and distressed investments. Restructuring and reorganization
is an area that offers tremendous potential. We are likely
to see major increases in M&A transactions as Korea shifts
from an economy dominated by large conglomerates to one that
emphasizes competition and a venture-oriented approach.
Finally, we are also stepping up our presence in foreign markets.
This is being done both to identify promising investment opportunities
and to help our portfolio companies diversify their investor
base and international competitiveness.
with more than 400 portfolio companies must be very difficult.
How do you maintain a level of control that will protect and
nurture your investment without stifling the ability of these
companies to innovate and build their businesses?
maintains a core team of in-house professionals who enhance
value through our network of information, knowledge, technology
and management advisory services. We generally maintain investments
in portfolio companies and take an active role in the governance
process. In addition, we believe that at each stage of growth,
the appropriate information, knowledge and resources must
be provided. In this regard, we offer a range of on- and off-line
support services. This includes helping these firms to define
and implement coherent strategies, to develop appropriate
management, accounting, corporate governance and information
technology systems, to initiate domestic and internationally-focused
public relations and marketing initiatives, as well as assistance
with legal, regulatory, licensing and other important issues.
In addition, in 2000 we organized an alliance known as the
"KTB n-club" to facilitate networking and the development
of corporate infrastructure within our portfolio companies
and other firms that have a relationship with KTB. The club
now encompasses about 400 registered members. Meetings, training
sessions and other events are organized on a regular basis.
This provide members with assistance in accounting, tax, law,
licensing, public relations, marketing, human resource management
and other important management, operational and financial
KTB also supports startups through the KTB Incubating Co.
It is equipped with top-quality facilities and assists across
a range of business functions, backed by a solid global network
with equity participants including Silicon Valley Bank, Techfarm,
Compaq and Hanhwa. KTB and The Federation of Korean Industries
(FKI) also co-founded a training center for startup firms.
It is helping them to develop corporate strategies, obtain
a KOSDAQ listing, initiate investor and public relations programs,
practice prudent capital and asset management and manage corporate
restructurings and financings that build real value.
KTB has enlisted
a number of prominent financial institutions and other entities
from Korea and other countries as co-investors and partners
in its work. Can you tell us more about these relationships
and your policy toward other VC firms and investors?
KTB works with many
outside VC firms and investors inside and outside of Korea.
Recently we began to shift our approach from one that focused
almost exclusively on majority investments in individual firms
to one that includes investment funds . This has helped us
to strengthen our leadership position
and to generate stable fee income through fund management
It also helps foreign investors who are seeking exposure to
Korea, but who prefer a funds-based approach to one that focuses
on individual firms. We welcome investors in either capacity
and are seeking to expand these relationships moving forward.
Beginning in 2002 we introduced a fund manager system and
the deployment of a performance-based compensation system
that will significantly contribute to our fund¡¯s
performance. These measures are aimed at improving quality,
transparency and accountability. They will also help in our
efforts to attract capital from pension funds and other overseas
This year we launched several funds through the participation
of the Mitsui Group of Japan and several domestic investors
we have already amassed assets of approximately $100 million
and made approximately $63 million in investments during the
first six months of 2002.
KTB offers a proven ability to source deals and a history
of value creation. Investors can benefit from our powerful
in-country network and relationships with major Korean conglomerates
and other important institutions in and outside of Korea.
For example, we have invested in American companies including
XYLAN Corporation, Sonus Networks, Inc. and Copper Mountain
Networks, Inc., who have generated high profits through our
ability to help them expand to Korea and other Asian economies.
We are also now working with Mitsui to raise funds to invest
in promising companies that have plans to advance into Japan.
We're also speaking with prominent VC firms and investors
in India, China, Singapore and the United States.
The Korean economy
has changed dramatically over recent years. There has been
a notable shift from large conglomerates to more focused enterprises,
and the Korean consumer has emerged as a source of dramatic
growth and diversity at a time when the traditional driver
of Korea's economy -- exports -- suffers due to slackening
demand in the U.S., Japan and Europe. How do you view current
trends in Korea? Can it maintain its relatively high performance
without a U.S. recovery? Can the growth in consumer spending
Korean economy has been strengthened since the IMF bailout
and has recorded considerable growth over the past 2-3 years.
While growth moderated last year, many firms have regained
their momentum, showing impressive earnings during the first
six months of 2002. This is especially impressive in the face
of a worldwide slowdown and strong won. In addition to rising
consumer demand, exports in July were an eye-opener. They
increased almost 20 percent over July 2001. They also recorded
double-digit growth rate for the first time in 21 months.
The financial structures of Korean firms have also improved
markedly since the 1997 financial meltdown. The debt-to-equity
ratio at some 2,100 manufacturers stood at 182.2 percent as
of the end of 2001, the lowest level seen since 1967, when
the ratio was 151.2 percent. The borrowings-dependency ratio
also stood at 39.8 percent, the lowest level since 1989.
Its true that the Korean economy is dependent on the
United States. It is also effected by developments in Japan,
China and other major trading partners. But our economy is
fundamentally stable. One encouraging sign is the emergence
of the Korean consumer, which gives our economy additional
depth and strength. Despite such accomplishments, however,
our efforts to restructure our economy have yet to be fully
realized. There are still problems in corporate governance
and management transparency. Moreover, the actual debt volumes
of Koreas largest firms have remained virtually unchanged,
as they have inflated their asset values through asset recapitalizations
and other irregular methods.
Im confident, however, that the Korean economy will
continue to exhibit positive growth as we continue to resolve
these problems. Part of the solution will undoubtedly be more
corporate divestitures, through expanded M&A activity.
As I have mentioned this is an area where we believe KTB can
add real value and that is why we are targeting it for special
A dramatic decline
in U.S. market indices has caused investors to begin reappreciating
the benefits of international diversification and so far this
year, the Korean market has been one of the strongest in the
world. How should corporate and portfolio investors view Korea
within this context? Are there any differences between the
strategies and viewpoints that should be adopted by these
two classes of investors?
Korean and other Asian economies began weakening
in 1997 -- a year or so before the U.S. technology boom went
into full swing. Investors who neglected international markets
in favor of the U.S. during this time found themselves earning
above average returns. While international diversification
has weakened over the past decade in the face of greater global
alignment, this basic principle of portfolio theory has not
been repealed. Furthermore, as you have mentioned, over the
past year Korea and I might add Russia, Indonesia, Thailand,
the Czech Republic and Japan have come to be seen by many
as safe havens. Interestingly, it is often domestically-focused
firms, that are offering the highest returns rather than exporters,
who are more closely aligned with the U.S. and global economic
Financial investors are primarily concerned with risk-based
returns while corporate investors also seek relationships
and synergies to enhance their overall competitiveness and
productivity. They often utilize different criteria and have
different motivations. For example, financial investors can
search from the entire universe of sectors and geographies
to select the ones holding the greatest promise. They can
also hedge their risk and transaction costs by buying into
funds rather than stand-alone investments. Corporate investors
generally look within particular sectors or geographies that
benefit their overall operations. They also usually look to
create a closer relationship with the targeted firm. Private
equity investors have a bit more latitude but also seek influence
over management. They are also focused on exit opportunities.
Korea offers numerous opportunities for all types of investors.
Local market knowledge, however, and a partner with substantial
in-country experience, is critical. In KTBs case, we
offer both investment funds well as co-investment deals for
those interested in acquisitions and private equity. We can
also act in an advisory capacity.
KTB achieved a 93% return on investment during the first half
of 2002, despite a severe downturn in the KOSDAQ market. This
was helped by an IPO of IDIS Co., Ltd., a company that specializes
in Digital Video Recorder production, which earned KTB a ROI
of 962%. Our net income for the first six months of 2002 was
approximately $2.4 million. This is down considerably from
last year, yet we remain profitable while many firms of our
kind find themselves unable to sustain their operations .
While the Korean
economy has perhaps an unequalled record when viewed over
several decades, it is small in comparison with the major
G7 economies. Is Korea simply a niche market promising above
average growth or is it a vehicle that can offer what the
Korean government has envisioned as a "dynamic hub of
growth" for North Asia? What other issues should investors
keep in mind?
Korea is a small
open economy and therefore does not have the scale or "elephant-like"
nature of some other G7 economies. However, as demonstrated
by our rapid recovery from the 1997 financial and numerous
other crises since the Korean War over fifty years ago, Korea
is resilient with a high degree of flexibility. In fact, one
can make a good argument that our small size, lack of natural
resources and dependence on external factors -- combined with
our aggressive drive and dedication to the development of
human capital -- is the secret of our success.
Korea has a number of prominent high-tech companies and young
entrepreneurs. This is creating a win-win relationship between
large companies and smaller firms. The changes we have endured
over the past few years are simply astounding. They are creating
a far more stable economic infrastructure than we possessed
in the past. As you mention, our government is moving to position
Korea as the "Dynamic Hub of Asia". We are creating
the regions largest airport at Inchon and it is hoped
that improved relations with the North will allow unprecedented
new business possibilities including a resumption of
rail freight all the way from Pusan to Europe over the next
few years -- for the first time since before the Second World
KTB is working hard to take advantage of these trends by strengthening
its North-Asian network. Combining Korean technology and human
resources with capital and the economic scale of Japan as
well as Chinese industrial facilities and other available
resources, we hope to build and expand our competitive advantage.
Korean companies have traditionally
competed on cost, with an emphasis on OEM rather than branded
production. Rising wages and costs would seem to make this
approach unsustainable, especially in the face of a rising
China. While we are beginning to see changes in recent years,
Korean firms remain far stronger in production and the technical
side of business as opposed to marketing, brand development
and the other more intangible skills that often drive value-added
strategies. What steps do Korean firms need to take to advance
beyond cost-based into value-added strategies, particularly
as they seek to expand their international focus and operations?
This is a fair and accurate point.
Korean companies can no longer rely upon cost as our primary
strategy. To borrow a local phrase, many of our companies
are like frogs in the well, which know nothing of the great
ocean. To succeed they must develop a global focus and adopt
value-added business models. This will require a talented
workforce whose understanding of overseas markets can be used
to establish sound and powerful resource networks.
The adoption of global needs and standards will require dramatic
changes, but cannot be avoided if we are to sustain our economic
viability. Samsung, Hyundai Auto, and LG are good examples
of consumer-oriented Korean firms that understand the essential
importance of overseas marketing and public and investor relations
in the development of successful globally-scaled businesses
-- but they are exceptions rather than the rule.
At KTB, one of our primary goals is to prepare portfolio companies
to meet the challenges of global competition -- both from
a marketing as well as an investment perspective. Working
with startups and established firms as well as assets that
are to be divested from large conglomerates we help to plan
globally-viable marketing and financing programs. This is
necessary both in foreign markets as well as in Korea
where the environment has become far more difficult as we
have opened ourselves to foreign competition.
In recent years we have seen many
companies emerge in Korea that have adapted business models
that already achieved a measure of success in the U.S. and
other markets. Can you give us examples of Korean companies
that lead rather than follow trends in the U.S. and other
markets? Do you think these companies have the capabilities
and resources needed to expand outside of Korea? What type
of opportunities does this present for foreign investors?
Korea leads the world by many technological
measures, such as broadband penetration and stock trading
online. It is also in the forefront of mobile telecommunications,
Internet gaming, e-commerce and many other technologies. Additionally,
we have made great strides in consumer electronics, computers
and the emerging field of Internet appliances. I might add
the Korean branded goods many American consumers are just
starting to notice are the tip of the iceberg. A far larger
portion of our exports is merchandised under the name of U.S.
and European firms.
As you suggest, however, many Korean firms are not prepared
to leverage their underlying strength in overseas markets.
This is an area where foreign investors can add real value.
In addition, many of Koreas leading conglomerates are
now restructuring through the disposal of non-core assets.
Financially sophisticated investors who appreciate the inherent
strength and intricacies of the Korean market can find real
value. Similarly, companies that are able to work with Korean
firms to develop the increasingly technologically-sophisticated
products and services that are emerging from our economy will
find opportunities that are perhaps unrivalled in the world.
I see KTB has been making a concerted
effort to expand its international activities, opening offices
in the U.S., China and Japan. I am told the purpose of these
operations is not only to service Korean portfolio companies
but also to make investments in these markets. Can you tell
us more about your plans?
The establishment of our office in
Tokyo in 2000 and Beijing in 2001 enables KTB to expand its
critical North Asian network. A Silicon Valley office was
opened in 1988. These offices help our portfolio firms and
allow the introduction of new ideas and portfolio diversification.
Our Tokyo office supports KTBs endeavors to target promising
opportunities, including attracting Japanese capital and strengthening
our network in the worlds second largest economy. The
Beijing office is part of a long-term strategy of thorough
investigation of the overall environment and venture market
in the worlds fastest-growing market. The proven success
of our operations and investments in the U.S. demonstrates
our dedication to the "think global, act local"
strategy we believe will successfully develop KTB into a strong
highly-competitive global financial institution.
Korean businesses have traditionally
relied upon commercial bank loans and the entrepreneurial
equity-oriented VC culture that has begun to emerge is relatively
new. Many business principals lack experience dealing with
outside investors, particularly from countries outside of
Korea. What has been your experience in developing transactions
between Korean companies and foreign corporate and portfolio
investors, both in the public and private markets? What are
the opportunities, obstacles and warning signs that foreign
investors should be looking out for?
As you note, the venture phenomenon
in Korea is quite new. While our move toward a greater dependence
on equity and capital markets is now irreversible, many firms
lack the skills and experience needed to attract, and interact
with, investors and business partners. As a result fundamentally
sound companies have not been able to actualize their potential.
KTB addresses these deficiencies by utilizing over two decades
of experience managing 1000+ investments and 170 IPOs. This
enables us to identify promising Korean firms and under-performing
assets, which we absorb into our own portfolio -- often in
cooperation with outside investors. By helping these companies
to define and communicate their mission and business plan
we help them to focus and achieve many benefits beyond the
actual funding itself. This enhances their overall competitiveness,
maximizing value for shareholders and other important constituencies.
KTB spends a lot of time teaching portfolio firms that the
full potential of their technologies and business models will
not be recognized unless they explain themselves to investors
and other important entities. Otherwise they will need to
pay a premium in their financing and business dealings. While
I am not seeking to apologize for these firms, foreign investors
need to understand the rapid changes now taking place within
Asian corporate cultures. The rules by which we operated for
several decades are changing rapidly. In many cases the regulatory
standards are moving more quickly than the companies themselves.
Foreign investors need to look beneath the surface to accurately
gauge the potential of these enterprises and to develop a
structure and relationships that will remain viable over the
lifetime of the investment. This usually requires the help
of a local partner or service firm. It is most important to
look for a fundamentally sound business model along with a
management and ownership base, that is looking -- not only
for capital -- but also the oversight, value and expansion
possibilities that outside investors and partners can help
What are the obstacles in completing
transactions with Korean firms? Do they have the corporate
governance and management structures needed to maintain successful
relationships with foreign investors and what steps can foreign
investors take to ensure success after a transaction has been
Korean corporate practices are changing
rapidly as our economy shifts from an environment that was
primarily domestically-focused and which relied upon large
conglomerates funded primarily through commercial bank loans
to one that rewards efficiency, entrepreneurship and equity
investment. As Ive mentioned, however, all of this is
quite new and it is important to access the relationships
and knowledge of local conditions needed to manage changing
expectations and circumstances over the long term. In addition
to providing this support and to promoting corporate best
practices, KTB maintains ongoing relationships with our portfolio
companies. We often maintain sizable investments in these
firms. By understanding the needs of both sides and using
our influence as necessary and warranted, we can provide foreign
investors with added security and work to maximize value over
the lifetime of these investments.
With the IPO market troubled, many
analysts, VCs and investors look to M&A as an exit vehicle.
Do you see this as a viable alternative and can you point
to any examples where KTB portfolio companies have employed
this strategy in recent years?
M&A activities will certainly
become more prominent as Korea continues to reorganize its
domestic industry. Similar opportunities are likely to arise
in Japan. We organized an M&A team a month ago that specializes
in this area and have completed six M&A transactions during
the first half of 2002. This is twice the level we completed
in 2001. Weve also registered as the first Corporate
Restructuring Company (CRC) in Korea with planned services
including equity acquisition, debt restructuring, management
consulting, asset acquisition, M&A and the organization
of corporate restructuring cooperatives.
One notable transaction managed by KTB last year includes
eBays take-over of Internet Auction Co. Ltd., Korea's
largest auction Web site, in a deal valued at about $120 million.
Do you have any concluding comments
or additional points you would like to address?
business environment is rapidly changing. What worked yesterday
will not necessarily work today and a more global focus is
essential. At KTB, we realize to expand and prosper, we can
no longer be content with simply being the largest venture
capital firm in Korea. This will require an active commitment
to becoming a premier globally-viable investment company.
Since launching our Silicon Valley office in 1988, we have
been actively engaged in overseas investments. Since 1990,
weve invested $39 million in 34 U.S. and Israeli companies.
KTB has since listed thirteen and merged six of these firms.
On these transactions we realized a total gain of $87 million
on $15.3 million in investments a return of over 500%.
In 2001, we placed US $3.8 million in new investments and
realized $14.6 million during the weakening market environment.
Moving forward, we hope to build on these successes and continue
to expand our expertise beyond the start-up oriented technology
investments we emphasized in the past. We are especially interested
in building our value and corporate restructuring capabilities.
Despite these achievements, however, few people outside of
Korea know of our existence. In a sense we suffer from the
same problems as the Korean firms I mentioned who are similar
to a frog that knows nothing of the ocean. While we remain
confident of our ability to compete on a global scale, we
need to do more to communicate our capabilities and potential
and to build the brand awareness that will enable us to reach
out to more effectively to foreign investors and business
partners. This is a task to which we now dedicate ourselves.
It is essential to our long-term success and survival.
|Thank you Mr. Baek for
your most informative comments.
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