‘Microscopic’ oversight needed for PEFs
Financial regulators should take a “microscopic” approach to regulating the private equity fund (PEF) market by not overhauling the rules for the entire market and instead focusing on a few players engaged in wrongdoing, experts said Wednesday.
The advice came amid the unfolding of incidents involving PEFs that prompted authorities to review the current system to better protect individual investors.
“Tightening regulations defeats the purpose of having relaxed them,” Yun Chang-hyun, a professor at the University of Seoul, said, referring to the government easing regulations in 2015 to enable the PEF market to grow.
The remarks come after investors in certain financial derivative options sold at some banks saw huge losses. Investors in derivative-linked funds (DLFs) tied to yields of German treasury bonds were estimated to have lost up to 351.3 billion won as of the end of September.
The banks were found to have sold the products despite a fall in yields of underlying assets and also engaged in mis-selling.
“The case arose due to the fault of a few players. Just as a teacher would not ban all students from running in the school grounds just because one student fell and got injured, it would equally not make sense for the government to regulate the market due to a few players,” Yun said.
“What the government needs to do is to save the benefits of easing regulations while coming up with complementary measures that can reduce the side effects.”
Some view the system that enabled PEFs to be sold at banks as the problem. This is because customers are generally not experts in making investments and have a limited understanding of investment options.
In the DLF case, bank customers in their 60s and over accounted for about half of the individual investors in the derivative option.
Allowing banks to sell PEFs was one of the government’s measures to ease regulations to expand the PEF market.
“It was wrong for the government to expand sales channels to enable investors without expertise to invest,” said Park Chang, senior research fellow at the Korea Capital Market Institute.
Financial authorities have implied that strengthening regulations to a degree may be necessary to better protect individual investors.
Financial Services Commission (FSC) Chairman Eun Sung-soo said in a recent press conference that his stance is “shifting from easing regulations on PEFs.”
He added, “But the asset managers should not be regulated. What the government should do is prevent individuals without expertise from investing in PEFs.”
In the latest case involving PEFs, the country’s largest hedge fund manager suspended redemption of its PEFs, citing liquidity issues.
Lime Asset Management delayed payment on three funds Oct. 1 and halted redemption of other funds worth 620 billion won ($524 million) invested in private bonds and Mezzanine instruments, a hybrid of debt and equity capital.
The hedge fund manager’s CEO Won Jong-jun said last week the scale of funds for which redemption could be suspended may amount to as much as 1.33 trillion won.
The halt in fund redemption does not mean the investors will not be able to get their money back, but the delay is increasing concerns.
The liquidity crisis is seen to have occurred due to highly risky investment practices undertaken by the hedge fund manager for which the prime aim was to increase returns.
The PEF market grew rapidly after regulations were relaxed in 2015.