Private Equity Investors Suffer Huge Losses
South Korea’s financial regulator is to conduct an emergency inspection into commercial banks’ sales of private equity investment products to their VIP clients and corporate clients. The inspection was prompted by heavy losses suffered by investors who purchased private equity investment products through banks’ private banking (PB) centers.
The Financial Supervisory Service (FSS) has decided to launch an investigation into all banks that sell private equity investment products. Woori Bank and KEB Hana Bank recently put investors at risk of heavy loss by selling DLS products linked to the interest rates in advanced countries, including Germany’s interest rates on government bonds, according to investment banking (IB) industry sources on Aug. 11.
The financial regulator is aiming at the private equity investment market as an increasing number of private equity investment products sold at PB centers in banks and securities firms have recently caused a heavy loss to their clients.
Shinhan Investment Corp. and Shinhan Bank sold 300 billion won (US$247.52 million) worth of German Heritage DLS through the Private Wealth Management (PWM) center and decided to extend the maturity of the product as they cannot pay the principal. This is a DLS product based on Singaporean funds that invest in Germany’s old downtown development projects and will come due over the next two years. The sellers are planning to preserve the principal even through the sale of their assets, but it is still clear whether they will be able to make up for investment losses.
Woori Bank has been selling the DLS linked to the interest rate of Germany’s 10-year government bonds from March this year. Investors who purchased the product has suffered up to 90 percent valuation losses. The product will mature starting from Sept. 19. At this time, however, investors cannot avoid taking losses unless German interest rates go up sharply.
An FSS official said, “We will look into banks’ sales practices and the structures of private equity type-funds and derivates-linked securities products they have sold. We will first inspect individual cases of consumer damage and then expand the inspection to private equity investment products sold by all financial institutions.”
Unlike public offering products which are open to all investors, private equity products have a simple sale approval procedure and lax regulations. The financial regulator is planning to make a close investigation on the possibility of mis-selling. If it finds problems, it can abolish business practices itself of private equity products for individual investors.
Meanwhile, the sale of private equity products for individual investors through PB channels surged over the last two years due to expansion of branch in branch of banks and securities companies. The sales balance of private funds sold to individual customers by commercial banks rose by more than 22 percent from 9.10 trillion won (US$7.51 billion) in June 2017 to 11.15 trillion won (US$9.20 billion) in June this year, according to data from the Korea Financial Investment Association. Combining private funds sold by securities firms, the total size of the individual private fund market grew 55.9 percent over the last two years to 26.81 trillion won (US$22.12 billion). DLS products for individual investors also have a high proportion of sales. The balance of DLS product issuance for individuals came to 48.23 trillion won (US$39.80 billion) as of the end of June this year, and 40 to 50 percent of the total DLS products were issued to individual investors, said the Korea Securities Depository.