When OneAsia Partners, a Seoul-based private equity fund operator, revised part of its PEF Havana I’s articles of association on Feb. 14, 2023, the amendment was far from usual.
The 111.2 billion won ($80 million) fund was created by contributions from two limited partners (LPs) – 101.6 billion won from Korea Zinc Inc. and the remainder from Chosun Refractories Co.
The amendment introduced two new clauses. First, LPs must fulfill capital call commitments on one business day’s notice from the manager, OneAsia Partners. Second, the fund manager is entitled to 30% of future profits as performance fees, regardless of the pre-set minimum rate of returns, dubbed hurdle rates.
Both clauses, industry watchers said, were unprecedentedly favorable to the fund manager.
Logos of Kakao Entertainment and SM Entertainment Typically, PEF managers give LPs up to two weeks for capital call notifications. For performance fees, the norm is that managers receive up to 20% of the excess profits if they manage the fund successfully and the annual hurdle rate reaches 6-8%.
SUSPICIONS RAISED
Critics questioned Korea Zinc’s decision to approve the article change that ensured substantial fees for the lesser-known PEF manager OneAsia.
Industry sources said the LPs, particularly Korea Zinc, likely agreed to the article amendment knowing where the fund’s money would go or in anticipation of decent returns from the investment.
Korea Zinc said it judged the amendment reasonable after carefully reviewing the manager’s explanation for an article change and the fund's expected profitability.
SM Entertainment's headquarters in Seoul Some critics, however, raised suspicions that the fund may have been used to purchase SM Entertainment Co. shares at high prices back then – an action currently under prosecution investigation for possible links to a stock price manipulation case.
OneAsia Partners is accused of inflating the stock price of SM Entertainment by colluding with Kakao Corp. to obstruct the takeover bid by Kakao’s competitor, HYBE Co., during their battle for management rights of SM Entertainment in February 2023.
HAVANA’S INVESTMENT IN HELIOS
Industry insiders suspect a possible link between the amendment of Havana I’s articles of association and Kakao’s alleged involvement in SM Entertainment's stock price rigging.
Among the eight funds managed by OneAsia and backed by Korea Zinc, only the articles of Havana I were urgently amended on Feb. 14, 2023.
The next day, Havana I exercised a capital call, securing 49.6 billion won from Korea Zinc and 920 million won from Chosun Refractories.
iScreaM album by SM Entertainment girl group aespa On Feb. 16, Havana I invested in Helios I, a special-purpose company created for investing in SM Entertainment. Helios engaged in a large-scale stock purchase of SM Entertainment for two days from Feb. 16.
Industry speculation suggests that Kakao influenced OneAsia’s urgent actions. According to court records related to Kakao’s stock manipulation trial, a Kakao Entertainment Corp. executive facilitated a phone call between OneAsia Chairman Ji Chang-bae and Kakao Corp.’s chief investment officer on Feb. 10.
During the call, Kakao requested OneAsia’s help and the PEF’s chair likely accepted that, sources said.
The phone call occurred four days before the articles of association were amended.
However, the plan failed as SM Entertainment's stock price exceeded the tender offer price of 120,000 won.
Industry watchers said OneAsia-invested Helios’ purchase of SM Entertainment shares during the early period of the tender offer pushed up SM’s stock price.
Eventually, Kakao secured a 39.87% stake in SM for about $1 billion, thus defeating HYBE, the label behind boyband sensation BTS.
Observers said that the urgent capital injection by OneAsia would have been impossible without the LPs' approval for the article amendment.
"No LP would agree to such unprecedentedly favorable performance fee terms for a newly established PEF without assurances of significant returns,” said a capital market official.
Korea Zinc said it is not implicated in the ongoing investigations or trials over the case.
"Our PEF investment decisions were based on normal business judgment as an LP,” said a Korea Zinc official.
