Data reveals that 60% of all private equity funds recorded deficits. Despite an increase in both the total number of private equity funds and their assets under management, the growing number of companies operating in the red indicates an accelerating polarization in the private equity market, according to analysts.
According to the Financial Supervisory Service on Dec. 11, the proportion of deficit companies among 383 general private equity firms reached 59.8% as of the third quarter of this year, approaching 60 percent. Compared to the end of last year at 57.1 percent, the deficit company ratio expanded by 2.7 percentage points, reaching a historical high. The figures improved to as low as 11% due to the profitability enhancement during the bullish stock market period from 2020 to 2021. Since then, however, uncertainties have increased due to interest rate hikes and other domestic and international factors, causing more than half of the private equity funds to struggle with deficits since last year.
At the end of 2015, there were 20 private equity funds, but after the relaxation of requirements that year, the industry has shown an explosive growth trend with an average of around 50 new funds per year. The licensing system for private equity funds establishment, which was in place in 2015, transitioned to a registration system, and the capital requirements were subsequently lowered to as low as 1 billion won. As the government lowered entry barriers, there has been a rapid increase in the number of individuals establishing private equity funds by pooling retirement funds and severance pay.
In fact, the number of private equity funds, which was 352 last year, increased to 383 by September this year, marking a growth of 31 new funds. With a rise in new entrants and diversified investment strategies, the assets under management (AUM) of private equity funds have also significantly increased. The AUM has grown from 200 trillion won (US$151.4 billion) at the end of 2015 to 587 trillion won by the end of September this year, representing a 2.9-fold growth. This is in stark contrast to the number of publicly offered investment firms increased by a cumulative total of nine, and the AUM grew by 1.4 times during the same period.
The issue lies in the fact that while the private equity fund market has experienced rapid quantitative growth since the transition from the licensing system, polarization has deepened in line with economic trends. The aftermath of the large-scale redemption crisis in the private equity fund market in 2019 became a catalyst for exacerbating polarization in the asset management industry.
In response to this, there is advice to fundamentally raise hurdles in the private equity fund market to regulate indiscriminate entry while also creating a system to support companies that have crossed the threshold. Song Hong-sun, a senior research fellow at the Korea Capital Market Institute, explained, “Taking into account the actual operating expenses of newly established management companies, the required capital should be increased to between 1.6 billion and 2.4 billion won and the deregistration requirements should be raised to 1.2 billion won.”