Bo-eun leads the digital content team. She has covered foreign affairs, North Korea, tech, economy and gender issues at The Korea Times. She did a short stint at the South China Morning Post in Hong Kong, where she obtained a new perspective on news production and life. Small sources of joy for her are lounging in the sun, having a good latte and swimming.
What went wrong with private equity funds?
This file photo shows the office of Optimus Asset Management in Seoul, which is mired in a scandal involving mismanagement of private equity funds. / Korea Times file
By Kim Bo-eun
Regulatory loopholes, lax monitoring blamed for PEF fiasco
By Kim Bo-eun
The latest series of cases in which investors face losses due to investment entities' poor management of private equity funds (PEFs) is pointing to the need for better regulation of the market.
In the latest case, Optimus Asset Management suspended redemption of funds worth 38 billion won after making what was found to be questionable investments. According to investors, Optimus stated over 95 percent of assets the funds were invested in were accounts receivables of state-run agencies. However, Optimus was found to have invested instead in private loans issued by moneylenders. Based on the findings, the investment firm could possibly halt payments for up to 500 billion won in funds.
The Financial Supervisory Service (FSS) has begun an on-site inspection of Optimus. The agency was unavailable for comment on the matter.
Regarding the case, Financial Services Commission Vice Chairman Sohn Byung-doo said, "The FSS is conducting an inspection and we will reach a conclusion based on its outcome."
This is only one of a series of cases in which redemptions were suspended for funds and investors face losses. Other such funds include the Discovery Fund, Italy Healthcare Fund and Popfunding Fund each distributed by Industrial Bank of Korea (IBK), Hana Bank and Korea Investment & Securities.
Most of these funds were not managed in the way investors had been notified they would be. This is possible because PEFs, which pool money from a few, limited investors, are not subject to the many regulations applicable to funds open to the public.
The government in 2015 eased related regulations as a means to foster the market making it easier for private fund managing entities to be set up.
Eased regulations enabled the number of such entities to grow from 93 in 2015 to 292 last year. Managing assets more than doubled from 200 trillion won to 416 trillion won in the same period.
But because the entities are small, few of them have divisions in charge of compliance.
The FSC stated last November it would take measures to better monitor the market after authorities were hit for oversight failures in the “Lime fiasco.”
Investors of Lime Asset Management's funds have been unable to redeem their investments as the hedge fund froze redemptions based on a liquidity crisis stemming from investments in questionable assets.
However, the latest series of cases proves that authorities have failed to improve monitoring.
The FSS has stated it is impossible to look into how all of these entities manage their funds.
The FSC in April unveiled tighter rules on PEFs, stating external audits will be mandatory for PEFs with assets exceeding 50 billion won. The measures are expected to go into effect in coming months.
Authorities also devised measures to screen inexperienced investors from making high-risk investments.
Following the scandal involving derivative-linked funds (DLFs) that surfaced last year, the FSC said it would ban banks from distributing PEFs and raised the amount individual investors need to hold in order to be able to invest in PEFs, from 100 million won to 300 million won.
Some say individuals without expertise in investment should not be able to invest in PEFs at all.
“Due to the nature of PEFs it is not feasible that investment firms explain in detail to investors how funds are managed,” an official in the finance sector said.
“The companies by no means manage the funds to guarantee returns for investors. The scandals arise as they take advantage of inexperienced investors.”
An official of the private sector said, “Even if these are PEFs, if irregularities continue it means further regulation is needed, such as by requiring entities to submit monthly reports on management of funds.”