Last year, the performance polarization among domestic securities firms was severe. While large firms saw an increase in net profit due to higher commissions from brokerage in overseas stocks and corporate finance, the profits of smaller firms declined significantly due to continuing losses in the real estate sector.
In this environment, Leading Investment & Securities, a small securities firm with 290 billion won in equity, achieved impressive performance improvements. Despite the deteriorated business environment, Leading Investment & Securities' net profit increased by 50% compared to the previous year. In a meeting on the 14th, CEO Choi Gyu-won noted the reason for the firm's prominence in the competitive capital market was due to "the ability of sales personnel with substantial field experience to identify potential value in areas that others overlook and turn it into revenue securities."
Choi also said, "Thanks to the governance structure where ownership and management are aligned, we can implement long-term growth strategies rather than pursuing short-term revenue." Leading Investment & Securities acquired a unique governance structure in 2016 by becoming the first in the domestic financial investment industry to engage in a Management Buyout (MBO) transaction, making employees the main shareholders of the company.
In the domestic capital market, larger capital leads to more opportunities. Leading Investment & Securities also faces the challenge of needing to continue to grow. Choi stated, "Due to our governance structure, it is difficult to easily increase capital," adding, "We are actively seeking mergers and acquisitions (M&A) with related companies."
─Leading Investment & Securities has a unique governance structure.
"Leading Investment & Securities, founded by Park Dae-hyeok when he was the chief of the London branch of LG Investment & Securities, came on the market after the savings bank crisis in 2012. While several attempts to sell had failed, employees established a special purpose corporation (SPC) called CKK Partners and became the first in the domestic financial investment industry to secure management rights through a Management Buyout (MBO)."
Thanks to the governance structure with aligned ownership and management, the execution of growth strategies has a long time horizon. They do not postpone contingent liabilities to achieve short-term revenue, nor do they repeat the practice of big bath accounting (reflecting all losses at once) when responsibilities change.
Of course, there are downsides. Recently, the growth strategy for securities firms has focused on maximizing capital expansion to achieve performance, but unlike other securities firms that are part of large corporations or bank holding companies, we cannot increase capital significantly at once. It is challenging to secure enough capital cushion to use in times of crisis.
Our concern is to find our own character despite these limitations. We are trying to maximize the advantages of having experienced personnel in the field managing the company while also owning it.
─Nevertheless, increasing our size is an important task.
"While some financial firms grow based on the capital of their parent companies, others, like us, grow by establishing networks. We think of the company as a "fund" and can use the money entrusted by customers as capital. This does not mean we aim to transform the securities firm into an asset management company, but it signifies that we intend to responsibly manage the money entrusted by investors. We utilize our own funds as subordinated capital and invest the money entrusted by investors as senior capital, effectively leveraging the investments made by those who trust us."
We are also closely examining M&A opportunities in related sectors. We have established Leading Ace Capital to engage in corporate lending and B2C leasing activities. Furthermore, we acquired Ananti Emerson Asset Management, transforming it into Leading Asset Management, and have established a hedge fund within the securities firm. The M&A we envision is not merely acquiring similarly-sized securities firms to quickly increase capital but rather expanding our network to enable various plays.
Not only the ability to manage but also the capability to conduct accurate accounting and risk management is important. With these skills, the type of assets does not matter. We are continuously considering acquiring asset management firms or savings banks with this in mind. We are also interested in P2P lending companies. Our goal is to grow in each area and become a company with assets of 10 trillion to 20 trillion won.
Leading Financial Network's total assets under management (AUM) amount to 1.2427 trillion won, with 756.5 billion won in hedge funds within Leading Investment & Securities, 226.5 billion won in Leading Ace Capital, and 259.7 billion won in Leading Asset Management.
─What is the key for Leading Investment & Securities to profit in the domestic capital market centered around large firms?
"Large firms earn profits through brokerage and fee businesses, but we aim to gather as much capital as possible to deliver investment performance and build a solid track record for growth."
We look at where the most troubled companies are at every moment and identify where residual value lies among their assets. We find value in movable assets that others do not recognize and turn them into securities, spreading out the risk, with us holding the riskiest securities. In return, we generate revenue.
This is a significant difference from merely handling loans. We are trying to create a virtuous cycle of providing various investment opportunities and generating revenue through each subsidiary excelling in its area.
It is impossible for us to compete with large firms like Mirae Asset Securities. We believe we have our own path. Currently, Leading Investment & Securities does not have the capacity to secure 13 trillion won in equity and does not pursue that goal. Instead, we believe that if we can form 13 trillion won in a fund format, we can achieve the same revenue-generating capability.
─The capacity for private investment (PI) is crucial.
"Brokerage involves only half the responsibility for the securities firm. The investor who chooses and invests assumes half the responsibility. In contrast, PI is the most strategic and long-term investment approach. We are strengthening our PI organization and boldly expanding strategic investments."
PI is not an independent type of full-time investor. It results from collaboration based on the information brought by sales personnel. When we categorize assets into stocks, bonds, and real estate, 80% of the keys to generating investment performance depend on how accurately we assess the macroeconomic conditions.
Fundamentally, one must accurately grasp the current state of the world. This is not a matter of creativity. To make accurate judgments, long-term trustworthy relationships must be built with investors. By maintaining relationship metrics (RM) with clients, we can improve our macro-assessment capabilities. Once this judgment is made, we then decide whether to be aggressive or defensive with each asset and consider how to structure the finance.
─Please tell us about a successful investment case.
"Regarding real estate, we have executed several projects in the multi-trillion won range. We also invested in a general industrial complex within the Yongin semiconductor cluster."
Investing in Kosdaq-listed companies recently represents a mutually beneficial case. The company in question was attempting to change its industry but was burdened by heavy debt and lacked available assets. Among the assets of this listed company in need of funds, we focused on a factory located near Seoul. Those unfamiliar with industrial real estate often do not recognize its value as collateral and underestimate its loan-to-value (LTV) ratio.
We assisted in acknowledging the collateral value of a factory with no established collateral, enabling the issuance of corporate bonds and convertible bonds. Thanks to this, the listed company is now transitioning its industry and pursuing new businesses. This exemplifies our ability to assess the value of overlooked assets and open up opportunities.
Although ultimately unsuccessful, there is another case where Leading Investment & Securities identified value that others did not see. They planned a funding solution recognizing the value of second-hand containers, which domestic shipping companies like Hanjin Shipping and Hyundai Merchant Marine had previously regarded as expendable.
Shipping companies spend several hundred thousand won to purchase a new container but did not recognize them as assets. Leading Investment & Securities identified that in the U.S., used containers are often utilized for residential purposes, with an established secondary market for them, making trading feasible. They explored a plan to issue bonds based on the collateral value of used containers held by shipping companies.
At the time, Hyundai Merchant Marine (now HMM) was facing financial difficulties due to a significant downturn in shipping conditions. Leading Investment & Securities proposed to Hyundai Merchant Marine, "We can provide credit enhancement, so let us issue a 100 billion won convertible bond (CB) using used containers as collateral." At that time, Hyundai Merchant Marine's stock price was around 3,000 to 4,000 won. Under Korean law, CBs cannot be issued below the face value (5,000 won for Hyundai Merchant Marine), so the funding condition was based on a 5,000 won conversion price.
However, this idea could not be realized. The Korea Ocean Business Corporation and Korea Development Bank, which were major shareholders of Hyundai Merchant Marine, began to provide funding at low interest rates, and shortly after the onset of the COVID-19 pandemic, the prices of used containers skyrocketed.
Choi stated, "The key to this case is finding new collateral and developing a funding solution. Currently, the permanent bonds held by the major shareholders, Korea Development Bank and Korea Ocean Business Corporation, are hindering the sale of HMM. If we had secured funding in the market back then, I think we could have achieved a much better outcome."