As the South Korean private equity fund (PEF) industry has grown in size at a rapid pace over the past decade, it is suffering “growing pains.” One symptom is the appearance of PEF products that allured investors with high returns but are about to make a huge loss. Another is the emergence of PEFs that intervene in the management of invested companies. Accordingly, there is growing concern that the private fund industry, which has fueled the growth of the capital market, can shrink.
The net assets of private equity funds have nearly doubled in less than four years from 199 trillion won (US$165.16 billion) in 2015 to 390 trillion won (US$323.68 billion) as of Aug. 16 in 2019. This is because a large amount of money has flowed into private equity funds, instead of public offering funds which have stricter rules on fundraising.
The hedge fund market sounds the alarm at the moment. The problem is that hedge funds have raised the risk by increasing the proportion of mezzanine products, including convertible bonds (CB), and derivative products, including real estate funds, in order to attract investors with a promise of a high rate of return. A case in point is the derivatives linked securities (DLS) products that were sold by commercial banks in the form of private equity funds. Investors in these products are at risk of losing money. Banks that sold these products to retail investors focused only on profits and neglected to verify the safety of the products. Lime Asset Management Co., the largest hedge fund manager in South Korea, is under investigation by the prosecution and financial authorities on suspicions of juggling the rate of return and stock parking.
PEF firms, which were expected to the nation’s industrial landscape, have mushroomed and caused side effects. The number of PEF management companies has surpassed 230 thanks to all but no regulations on their establishment and the easiness in financing. However, it is hard to find good companies and a considerable amount of investments has been made in insolvent companies.
Investment banking (IB) experts pointed out that Justice Minister nominee Cho Kuk’s investment of 1.05 billion won (US$872,960) in Co-link Private Equity Co. cannot be considered a normal investment considering the investment target and method. Some express concerns that small and mid-size PEF companies may attempt to manipulate stock prices and distort the capital market, as shown in the case of Samco Co., an aircraft component producer whose stock prices soared following the news that a PEF firm decided to acquire the company’s management rights.