By Keith W. Rabin, President of KWR International, Inc.

In this issue the KWR International Advisor interviews Mr. Ki-Woong Baek, CEO of KTBnetwork (KTB), Korea’s 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 eBay’s majority investment in Korea’s 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 International Advisor.

KR:	KTBnetwork is 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?
KB:	KTBnetwork 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. I’m 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.
KR:	The 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?
KB:	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 business. 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 end.
KR:	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?
KB:	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.
KR:	Managing relationships 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?
KB:	KTB 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 issues. KTB also supports startups through the KTB Incubating Co. (http://www.ktbi.co.kr). 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.
KR:	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?
KB:	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 activities. 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 investors. 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.
KR:	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 be sustained?
KB:	The 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. It’s 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 Korea’s largest firms have remained virtually unchanged, as they have inflated their asset values through asset recapitalizations and other irregular methods. I’m 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 emphasis.
KR:	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?
KB:	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 factors. 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 KTB’s 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 .
KR:	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?
KB:	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 region’s 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 War. 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.
KR:	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?
KB:	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.
KR:	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?
KB:	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 Korea’s 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.
KR:	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?
KB:	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 KTB’s endeavors to target promising opportunities, including attracting Japanese capital and strengthening our network in the world’s 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 world’s 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.
KR:	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?
KB:	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 to provide.
KR:	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 completed?
KB:	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 I’ve 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.
KR:	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?
KB:	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. We’ve 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 eBay’s take-over of Internet Auction Co. Ltd., Korea's largest auction Web site, in a deal valued at about $120 million.
KR:	Do you have any concluding comments or additional points you would like to address?
KB:	Korea’s 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, we’ve 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.
KR:	Thank you Mr. Baek for your most informative comments.

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