The dispute over high labor costs of Macquarie Korea Infrastructure Fund (MKIF), which makes a profit from its investment in 12 private sector-funded infrastructure projects, is escalating.
The controversy was triggered by Platform Partners Asset Management Co. (PPAM), a Korean activist institutional investor that has a stake in the fund. PPAM sent a letter to MKIF on June 5, urging the fund’s board of directors to stop entrusting the management of the fund to Macquarie Korea Asset Management (MKAM).
PPAM argues in the letter that MKIF pays excessive management fees to MKAM and excessive wages to employees of the 12 companies established to manage each of the 12 infrastructure projects. The disgruntled shareholder also raised other issues in the letter.
MKIF issued a statement on June 26, refuting the assertions made by PPAM. Yet PPAM has requested MKIF to provide it with additional data related to the disputed issues and made an allegation that MKAM has made sweetheart deals with an affiliate of Macquarie Group.
At the heart of the controversy are six issues – professionalism of the fund’s employees, the structure and size of the fund’s labor costs, average salary of the employees at the 12 portfolio entities, sale of the Cheonan-Nonsan expressway rest area, double payment of wages to MKIF officials working at the 12 portfolio entities, and road operation and maintenance costs.
Some shareholders point out that only two to three out of the 27 employees at MKAM are actually involved in the management of MKIF, with others involved in the management of other funds. As a result, MKIF has been virtually neglected. In particular, they argue that MKIF employees and executives, who have been managing the fund since 2012, were reassigned to the 12 portfolio entities, increasing the labor costs of MKIF, which already spends more than 40 billion won (US$35.59 million) a year on wage costs.
In addition, the sale of the Cheonan-Nonsan expressway rest area to Korea Private Concession Fund (KPCF), another fund run by MKAM, has become an issue. KPCF signed a long-term lease contract for 20 years at 169.8 billion won (US$151.07 million) in January 2013 but relent it to another company for 20 billion won (US$17.79 million) in 2017. PPAM argues that MKIF suffered 11.5 billion won (US$10.23 million) of losses in the process and, as a result, dividend payouts to shareholders decreased.
PPAM argued that MKIF paid tens of billions of won in consultancy and brokerage fees to a financial advisory service firm affiliated with the Macquarie Group, separate from the fund management fees paid to MKAM.
It also argued that the operation costs for private-sector funded roads have increased 4.9 percent a year on average, although they could be cut with the introduction of information technology (IT), such as Hi-Pass, and the improvement in road management equipment and pavement materials. PPAM also pointed out that MKIF signed private contracts with outsourcing service providers.
In response, MKIF said that the Cheonan-Nonsan expressway suffered a severe shortage of cash in the past and chose KPCF through an auction where four institutional investors participated. Based on this, the company managing the highway was able to pay unpaid interests on subordinated loans and improve its cash flow. MKIF also said that it received advisory service from a subsidiary of Macquarie Group only once in 2012. It also stressed that it pays road operation and maintenance costs with approval from the board of directors and its accounting books are audited by an outside accounting firm.
An official from PPAM said, “Macquarie clarified its position through a press release without responding to its demand for convocation of a general meeting of stockholders. If the structure of wages cannot be reformed by the board of directors, the management company should be changed.” Another official from another institutional investor said, “We will clarify our stance after hearing opinions of both sides, including Macquarie.”
MKIF investors include UK-based Newton Investment Management Limited with an 8.2 stake, Hanwha General Insurance Co. and Shinyoung Asset Management Co. with a 6.1 percent each. In addition, the Government Employees Pension Service, Public Officials Benefit Association, Teachers Pension and Korea Post have also invested in MKIF.