Concerns grow over shrinking PEF market
Concerns have grown over Korea’s private equity fund (PEF) industry, as the market is showing signs of contraction due to controversies involving the collective investment scheme used for limited partners, according to industry officials, Thursday.
In addition to justice minister nominee Cho Kuk’s alleged dubious link to a private equity firm, the unfavorable factors include huge losses related to investments in derivative-linked products, Lime Asset Management’s alleged illegal trading and KB Securities’ involvement in overseas real estate investment fraud.
Industry officials have worried about market shrinkage, citing a rapid decline in the contract amount of hedge funds that invest in stocks.
According to the Korea Financial Investment Association, the amount was 15.5 trillion won ($12.9 billion) at the end of August, down from 16.4 trillion won at the end of June.
The Financial Supervisory Service (FSS) data also showed 101 domestic hedge fund management firms among 186 suffered losses in the second quarter.
“Still, many hedge fund management firms are suffering losses,” an FSS official said. “Internal and external risk factors still remain in the market, due to uncertainties in the domestic stock market caused by trade feuds and political turmoil in Hong Kong.”
Contrary to concerns over hedge funds, private equity firms that manage funds to intervene in the management of companies said they are immune to the unfavorable factors.
In Korea, financial authorities categorize private equity funds into hedge funds and those used for involvement in the management of companies.
Given that the fund related to the justice minister nominee is the latter, some industry officials fear lawmakers may refuse to pass the revision bill for the Financial Investment Services and Capital Market Act.
The bill has been pending at the National Assembly since Rep. Kim Byung-wook of the ruling Democratic Party proposed it in November 2018 to boost the nation’s private equity fund investments.
It aims to ease regulations on private equity funds by unifying rules that have been applied differently to hedge funds and funds for involvement in the management of companies.
Although the bill had been expected to pass without difficulty, negative public sentiment toward the term “private equity fund” has weighed on the lawmakers who support it.
Moreover, Rep. Yu Eui-dong of the minor opposition Bareunmirae Party even proposed a revision bill for the Capital Market Act, Tuesday, which aims to tighten regulations on private equity firms.
His bill is nicknamed the “anti-Cho Kuk law.”
The nation’s financial regulators have been concerned about negative public sentiment toward private equity funds.
In August, Financial Services Commission (FSC) Chairman Choi Jong-ku said, “It is regrettable that the private equity fund itself is regarded as an evil,” expressing his concerns over possible market shrinkage.
Eun Sung-soo, the FSC chief nominee, stressed his belief in the deregulation of private equity funds.
A top executive of a domestic private equity firm said the deregulatory measures should not be delayed, adding that customer protection should be conducted differently.