South Korea’s financial authorities have announced they will conduct a large-scale inspection of the private equity market which is engulfed in a string of controversial mismanagement scandals.
“We are discussing with the Financial Supervisory Service (FSS) to inspect all private equity funds (PEFs). I think it is a process that we have to go through at least once,” FSS chairman Eun Sung-soo told reporters on June 23.
As of June 19, Korea had 10,282 PEFs with net assets totaling 424 trillion won ($353.3 billion), according to the Korea Financial Investment Association (KOFIA).
The financial authorities scrutinized 1,786 funds of 52 professional PEFs from November last year to January this year but Eun said that this was not enough. “We planned to look into suspected areas when we conducted the investigation but unfortunately the FSS’ on-site inspection has been delayed due to the outbreak of coronavirus pandemic,” he said.
Market analysts have been calling for the need for stricter regulation of the PEF market, as the number of investors who face losses due to a series of scandals involving mismanagement of PEFs is rising rapidly.
For example, Optimus Asset Management recently suspended redemption of funds worth 38 billion won after being found to have invested in dubious assets. Investors insisted that Optimus had invested in private loans issued by a moneylender instead of investing in accounts receivables (AR) of government agencies as initially promised. AR is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.
Before this incident, another PEF – Lime Asset Management – halted a withdrawal worth 1.7 trillion won in January amid liquidity shortage. Prosecutors have launched a probe over allegations that Lime concealed massive losses and sold products to customers without providing adequate information about the high risks of the investment.
Over the past year, nearly 3 trillion won worth of funds have reportedly suspended redemptions due to mis-selling and other irregularities. Besides the aforementioned two PEFs, AlpenRoute Asset Management has suspended withdrawals worth 229.6 billion won since January. German Heritage DLS (derivative-linked securities) has 427.6 billion won in locked-up assets and the Italian health insurance fund 152.8 billion won, according to The Korea Times.
The Financial Services Commission (FSC) has been criticized for not having prepared at least minimum safeguards while it is focusing only on fostering the PEF market. Most importantly, FSC made it possible for anybody with 1 billion won capital to set up a PEF by lifting many regulations in 2015. It helped the PEF market experience rapid growth but problems have increased as well. The size of the PEF market has more than tripled from 120 trillion won in 2010 to 416 trillion won last year, according to KOFIA. (Reporting by Jinwon Lee)