The new Act on External Audit, which went into effect last year, is expected to put the brakes on listed companies’ investment in private equity funds (PEFs), as accounting firms are applying stricter valuation standards to it.
Geumhwa PSC Co. and Green Cross Lab Cell Corp. announced plans this month to invest 7.10 billion won (US$5.93 million) and 5.50 billion won (US$4.59 million) in private equity funds, respectively. Their announcements attracted attention from investors because until now, KOSDAQ firms have received investment from private equity funds, not the other way around. They cited business diversification as reasons to invest in PEFs.
Analysts say that listed companies’ investment in PEFs is, in fact, common, although the size of such investments is not so big. Listed firms are required to make an official announcement only when the investment amount surpasses 10 percent of their equity capital (5 percent for conglomerates). They are reluctant to disclose their investments in PEFs when the amount is below the level. Listed companies prefer PEFs as the investment destination as they can get a higher return than financial products in the market.
However, firms are now more cautious toward investment in PEFs due to stricter accounting standards. Under the new Act on External Audit, the accounting standard for investment in PEFs has changed from acquisition cost to fair value.
This change makes companies uncomfortable not because the new valuation method is inconvenient to them but because it discloses the value of their investment more clearly to investors.