Half of Asset Management Firms in the Red due to Outflow of Money from Private Equity Funds

Due to a continued outflow of capital from private equity funds (PEFs), fund management companies are experiencing increasing financial difficulty.

According to data released by the Financial Supervisory Service (FSS) on Nov. 26, the combined net profit of 275 asset management companies stood at 206.4 billion won in the third quarter, down 3.0 percent from the previous quarter. It is up 25.6 percent compared with the same period last year. Among the 275 companies, 142 (51.5 percent) were in the black but 133 (48.4 percent) were in the red.

PEF management companies were found to have serious financial difficulty. Out of the 200 asset management companies specializing in PEFs, 113, or 56.5 percent, reported a loss in the third quarter. In the previous quarter, 101 (54.3 percent) out of the 186 in total were in the red. The number of PEF management companies increased by 14 during the period and that of fund management companies in deficit also went up.

One reason is a continued outflow of money from PEFs due to a growing distrust among investors following the debacle of the derivatives-linked funds (DLFs) tied to German state bond yields and Lime Asset Management Co.’s suspension of fund redemption.

The balance of Lime Asset Management Co, a representative PEF management company, dropped from 5.89 trillion won at the end of June to 4.23 trillion won on Nov. 22, a decline of 1.66 trillion won over the past five months or so. Timefolio Asset Management, which has turned into a public offering fund management company, also witnessed a decrease of 38.7 billion won in balance over the same period.

Small and medium-sized asset management companies are in more serious conditions. As of Nov. 22, 22 asset management companies had total net assets of less than 10 billion won, 73 had less than 50 billion won and 105 less than 100 billion won.

Under these circumstances, the financial authorities have tightened regulations on PEF sales to protect consumers. There is a growing concern that due to the measures many small and medium-sized asset management companies will go bankrupt. “Small and medium-sized asset management companies whose total net assets are below 100 billion won have sold funds with a minimum investment requirement of 100 million won. If the minimum investment requirement is suddenly raised to more than 300 million won, about 100 private equity fund management companies will face the danger of bankruptcy,” said an industry insider.

There were 116 private equity fund management companies in 2017. As the minimum starting capital requirement sharply dropped from 2 billion won to one billion won in 2018, the number of private equity fund management companies began to surge. The number increased to 156 at the end of last year and has gone up further by 44 this year, reaching 200 as of the end of September.

In response, the financial authorities will take preemptive actions to better protect consumers. “Due to a steady rise in entry of new asset management companies, the proportion of private equity fund management companies in the red is still high,” said the FSS, adding “We will thoroughly inspect the asset data, investment structure, liquidity and leverage of hedge funds and repurchase pattern by fund.”