Private equity a tricky term in Korea
Financial jargon is difficult to decipher for ordinary people, because in many cases it is created with that very intention — otherwise, fund managers and brokers cannot charge customers high commissions, and government regulators may lose their jobs. What is more confusing is that an investment vehicle of the same name may have a different definition and usage in different countries. See below for the usage in Korea.
In the U.S.: A popular form of investment fund that buys stocks, bonds and other liquid assets. One of its varieties known as ETFs (exchange-traded funds) are traded on the stock market like shares of individual companies. Mutual fund managers charge a low commission compared to hedge funds, often less than 2 percent of asset. Examples: Fidelity, Vanguard
In Korea: A mutual fund is tightly defined as a “closed-end fund” — investors cannot increase or decrease their shares until the fund liquidates. Therefore, most retail investors in Korea prefer non-mutual funds (known as “beneficiary certificates), which are more flexible to trade.
In the U.S.: An exclusive fund that manages money for very rich people. It is supposed to “hedge” its risk by investing in various liquid or less liquid asset classes (not only financial assets but also properties, commodities, wine and artifacts) with the least limitation. Another difference from mutual funds is that hedge funds can borrow money to have a 'leverage' effect.
But unlike the name’s claim, a hedge fund can be the most risky investment since it is highly leveraged (relies on big loans), can invest in complex derivative products, and can take “short” positions (selling in advance of buying). Commission is high, with the industry norm being “2-20” — 2 percent of net asset value for management fees and 20 percent of net profit for performance fees. In the U.S., most hedge funds require a minimum wealth of $1 million for individual customers. Examples: Soros Fund, Man Group, Renaissance Technologies
In Korea: The general idea of having less regulations and more freedom in investing is the same. But there will be a higher entry barrier for both fund managers and customers. The consensus in the government is that fund managers should have more than 4 billion won of their own capital, and a minimum investment of over 500 million won will be required from individual investors.
Private equity (PE) funds
In the U.S.: A private equity fund is called so because it buys privately held equities (stocks of companies that are not listed on the public stock market). The purpose of a PE fund is to take absolute control of a firm, revamp the organization and financial books, and then exit by selling the shares to other private investors or by floating them on the stock market at a higher price. Examples: Blackstone, KKR, Lone Star Funds
In Korea: Confusingly, a private equity fund, or “samo” fund in Korean, is defined as a fund that raises money from a small number of rich investors in a “private” manner. It is used as the opposite of retail funds that are open to unlimited members of the public, so it has little to do with the American definition. In this regard, a hedge fund can be categorized as a private equity fund. The number of “partners” (investors) cannot exceed 49.