Although the benchmark KOSPI index fell below the 2,000 level and the stock market became bearish last month, 5 trillion won (US$4.42 billion) of money has recently flooded into the private equity fund (PEF) market. A sharp decline in stock indexes deglamorized funds but a large amount of money is flowing into private equity funds. In short, the private equity market has become a “black hole” of displaced capital.
According to the Korea Financial Investment Association (KOFIA) on Nov. 18, the combined amount of private equity funds rose about 5 trillion won (US$4.42 billion) from 320.94 trillion won (US$283.51 billion) at the end of September to 325.63 trillion won (US$287.66 billion) on Nov. 16. The figure has increased a whopping 40 trillion won (US$35.34 billion) this year alone, showing a tremendous growth rate. In particular, the growth pace has accelerated following the release of a private equity fund activation plan by the Financial Services Commission (FSC) in September.
Over the same period, the amount of public offering funds grew to 243.85 trillion won (US$215.41 billion) from 220.65 trillion won (US$194.92 billion) at the end of September, an increase of 23.2 trillion won (US$20.49 billion). However, the amount of increase in short-term bond funds came to 25.58 trillion won (US$22.59 billion), exceeding the total increase in public offering funds. When excluding short-term bond funds, public offering funds shrunk nearly 2 trillion won (US$1.77 billion). This is a kind of optical illusion. As the volatility of the stock market and concerns of an interest rate hike incrased investment uncertainty, investors have pulled their funds out of public offering funds and stocks and temporarily put them in money market funds (MMFs), which are considered a short-term instrument to park money.
Public offering funds, which are struggling with a “10 percent of trap” and the bearish stock market, are shunned by investors. The capital market act prohibits public offering funds from investing more than 10 percent of total assets in one company. On the other hand, private equity funds can invest 100 percent of their assets in one company. Moreover, the private equity fund investment activation plans releaste by the government is fueling a rush of money into private equity funds.
The domestic private equity fund market has grown more than 3.5 times for the last 10 years from 93 trillion won (US$82.16 billion) from the end of 2007 to 32.5 trillion won (US$287.1 billion) this year. In contrast, the set amount of public offering funds increased only 20 percent from 203 trillion won (US$179.33 billion) to 243 trillion won (US$214.66 billion) over the same period.
In addition, the financial authorities recently released the private equity fund reorganization plans to increase the number of private equity fund investors to less than 100. Accordingly, more diverse products are expected to be released in addition to bond, real estate and special asset types where private equity funds have strengths.
The private equity fund market showed a rapid growth after it lowered the minimum amount of investments from 500 million won (US$441,696) to 100 million won (US$88,339) in 2015. Some say that the latest plans can also provide a catalyst for the private equity fund industry. A senior official from the investment banking industry said, “There is no single favorable factor in the public offering fund industry, while funds are backed by the government. Accordingly, it is worrying that the polarization toward private equity funds can become more serious.”