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Private equity industry voices concern over bill to halve leverage limit
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By Jun Ji-hye
The private equity (PE) industry expressed concerns over a bill proposed by a Democratic Party of Korea (DPK) lawmaker to halve the current borrowing limit for PE firms, according to industry officials, Tuesday.
They argue that applying uniform regulations to all firms constitutes excessive interference and could undermine market stability.
The bill sparked further backlash from the industry, as legislative efforts led by the DPK are expected to gain momentum following the launch of the new administration.
President Lee Jae-myung's DPK currently holds 167 seats, securing a majority in the 300-member National Assembly. When including seats held by minor parties and independent lawmakers aligned with the ruling party, the pro-government camp is estimated to control a total of 186 seats.
DPK lawmaker Rep. Kim Hyun-jung recently introduced an amendment to the Capital Markets Act that would reduce the borrowing cap for PE firms from the current 400 percent of net asset value to 200 percent.
The bill, however, includes an exception for firms that obtain an evaluation of their debt repayment capacity from an external agency and receive approval from the Financial Services Commission. In such cases, the current 400 percent limit would remain applicable.
The legislative proposal comes amid growing calls for the tighter oversight of PE firms' leveraged buyout strategies, triggered by MBK Partners' abrupt filing for court-led corporate rehabilitation of Homeplus on March 4.
The incident reignited concerns over PE firms' practice of excessively raising acquisition financing by borrowing against the target company's assets and subsequently recovering investment returns through dividends or asset sales.
Critics argue that such practices pose risks to the financial stability of the acquired firms.
Nevertheless, industry insiders caution that the proposed restrictions could adversely affect the overall PE industry.
"In an already subdued investment climate, imposing additional limits on leverage would effectively prevent firms from pursuing bold investment opportunities," said an official from the PE sector. "Any new regulations should be carefully considered in terms of both timing and approach."
Concerns have also been raised that PE firms might adopt a more conservative approach to buyouts of publicly traded companies due to the higher volatility of their stock prices.
Another industry official said that even if acquisition financing secured against listed shares initially meets debt ratio requirements, a sudden drop in the stock price could cause those ratios to fall out of compliance.
"Consequently, the market may shift toward focusing primarily on transactions involving unlisted companies," he added.