Financial Restructuring
According to the Korea Capital Market Institute (KCMI), a large-scale structural change is expected to be made in the local financial and investment industry this year amid M&As by major securities companies, the introduction of the Fund Supermarket, and the reorganization of the private equity fund management system.
The KCMI held a seminar on January 15 at the Korea Exchange located in Yeouido, Seoul, to forecast future trends in the local capital market and financial industry.
“The private equity and alternative investment fund sector has grown at an average rate of 30% for years,” said Song Hong-seon, head of the Fund & Pension Office of the institute. He added, “Convergence is on the horizon in the industry as hedge, real estate, and special asset funds are likely to be combined functionally with one another during the overhaul of the private equity fund management system, and the boundary between PEF and venture investment is blurred.”
This change in investment environment can be attributed to the less-than-expected rate of return of conventional types of assets such as stocks and bonds. An increasing number of investors are focusing on alternative investment means for an earnings rate higher than the market interest rate.
He continued, “The introduction of the Fund Supermarket is likely to bring out a significant change in individual investors’ environment this year, and the asset management sector will have to adapt itself to the whole new environment.”
A sea change is predicted in the securities industry as well. “The combined capital of the stock firms currently for sale, including the four on the top 10 equity capital list, increased by 11 trillion won [US$10.4 billion] to account for 25% of the total capital of the securities industry,” said researcher Lee Seok-hoon at the Office of Financial Service Industry, continuing, “The reorganization of the market caused by M&A and the change in the regulatory environment will compel the firms to achieve higher cost efficiency while bringing more intense competition for customer attraction.”
These days, the brokerage income of local securities companies is on a downward spiral in spite of the bullish movement mainly in advanced economies’ stock markets. Their return on equity (ROE), for example, dropped from 8 times to 0.27 times between 2008 and last year. The annual fund sales fee reached over 100 billion won (US$94 million) until 2012, but fell to 40 billion won (US$37 million) or so in 2013.
“The retail segment as well as the brokerage are weakening to result in a drop in profits for major and minor firms alike,” The researcher explained, advising, “They would be well-advised to improve their services for higher profit rates with the brokerage income unlikely to increase in the near future, due to the expansion of mobile-based trading.”