There is growing uncertainty over the involvement of retail investors in the New Deal funds of Korea Growth Investment Corp (K-Growth), as the stock market rally and fund fraud scandals have reduced the appeal of private funds.

K-Growth, the state-controlled fund of funds operator, last month issued a request for proposals for private funds to invest in companies that fit South Korea’s New Deal growth policy. The funds include those whose investors consist only of institutions, and those allowed to raise capital from retail investors. For the latter type, K-Growth plans to award 20 billion won ($18.1 million) mandates to 10 managers.

Funds in this category need to raise 68.5% of the fundraising target from individuals by selling retail funds through five asset managers tied to K-Growth, including Golden Bridge Asset Management and Shinhan Asset Management. K-Growth will invest 30% and general partners will contribute the remaining 1.5%.

This fund structure was designed to share profits from the government’s New Deal investments with the general public. However, industry watchers said it will not be easy to raise sufficient capital from retail investors, because they are not familiar with the fund’s complex investment strategies.

Private investment funds also have become far less popular with retail investors following financial fraud scandals involving hedge funds Lime Asset Management and Optimus Asset Management broke, which were accused of misappropriation and embezzlement. An investigation caused huge redemptions by investors in their funds.

South Korean retail investors also are more inclined now to invest in equities directly, rather than through funds, as they try to captalize on a rally in the stock market.

Funds that invested in the material, parts and equipment (MPE) industries last year, designed and backed by K-Growth, failed to achieve their fundraising targets as they were shunned by individual investors. The new funds have the same structure.

K-Growth has expanded target assets of the funds in a bid to attract interest from retail investors, with the inclusion of mezzanine securities, which typically have downside protection, and private debt.

“We are planning to sell funds through five asset managers, an increase from last year when funds investing in MPE companies were sold,” an official at K-Growth said.

“We believe this will help draw interest from retail investors and raise more money from them.” (Reporting by Jung-woo Yang)