"Will They Drop the 'Institutional' Label?... Homegrown PEFs Squeezed Amid Reverse Discrimination"

Financial Regulators Finalize Stricter Reform Plan
Controversy Grows Over Public Disclosure of GP Compensation
"Reverse Discrimination Against Domestic Firms Compared to Foreign Players... Industry Faces Contraction"
Move Toward Converting from Institutional-Only to General PEFs Emerges

Domestic private equity fund (PEF) managers dedicated to institutional investors are on edge amid mounting pressure for stricter regulations. Their concerns go beyond the method or intensity of the regulations, as they fear the risk of reverse discrimination vis-à-vis foreign asset managers could worsen.

According to the investment banking industry on March 25, financial authorities including the Financial Services Commission have finalized an amendment to the Capital Markets Act, proposed by the government, which includes measures to strengthen regulations on private equity funds. It is reported that the amendment consolidates the proposals of lawmakers Han Jeongae and Yoo Dongsoo of the Democratic Party of Korea, along with additional details. The bill is scheduled to be reviewed by the National Assembly’s Political Affairs Committee’s Subcommittee on Bill Review on March 31.

According to Assemblywoman Han Jeongae's proposal, the maximum leverage ratio that PEFs can use for mergers and acquisitions (M&A) will be reduced from 400% to 200%. Reporting requirements to financial authorities will also be significantly strengthened. PEFs will be required to provide detailed descriptions of fund operations and asset status at regular intervals.

Internal control mechanisms for general partners (GPs) managing large assets will also be enhanced. Assemblyman Yoo Dongsoo's proposal stipulates that GPs with over KRW 500 billion in assets under management must appoint at least one compliance officer. In addition, the Financial Services Commission will be granted the authority to revoke the registration of underperforming or unqualified asset managers in a prompt manner.

The regulation of GP fees is also included. According to Assemblywoman Han Jeongae’s proposal, not only the amount of GP compensation but also the method for calculating fees and the total compensation of key executives and staff must be reported. Industry insiders worry that if areas effectively considered trade secrets, such as the profit structure or personnel management of GPs, are made public, it could undermine management autonomy and competitiveness.

The head of a major domestic PEF manager said, "We already report most information to the authorities, so it is questionable what effectiveness there is in disclosing the individual compensation of executives and employees, which the industry considers highly sensitive, in the name of PEF system reform." He added, "The fallout from the Homeplus incident involving MBK Partners is unfairly impacting other local asset managers."

The industry is especially concerned about the possibility of reverse discrimination. If regulations are concentrated only on managers registered and operating in Korea, overseas managers who maintain only offices in Korea could be subject to less regulation. A private equity industry source said, "Global managers, operating large sums from the United States or Singapore, could leverage their financial power to dominate Korea’s large-scale M&A market while avoiding these regulations. As domestic PEF managers’ flexibility becomes more restricted, both talent acquisition and fundraising will become more difficult."

Some industry participants are going so far as to consider removing the “institutional-only” label and converting to private equity funds open to general investors if regulations become excessive. An executive at a mid-sized PEF manager said, "There is even talk that we should shed the institutional investor-only PEF label and switch to general private equity funds, even if they are smaller in scale," adding, "There is concern that the competitiveness of homegrown PEFs, built up over 20 years, could be eroded."

This content was produced with the assistance of AI translation services.