FSS warns private equity firms over employee irregularities

The headquarters of the Financial Supervisory Service (FSS) in Seoul / Newsis

By Anna J. Park

The Financial Supervisory Service (FSS) has sent a warning message to local private equity firms (PEF) operating trillions of won of funds entrusted to them by institutional investors. The move comes as the state-run financial watchdog cracks down on irregularities by employees as well as major shareholders of asset management companies.

According to the financial industry, an FSS bureau in charge of inspecting asset management firms recently sent an official document to the local association of private equity firms in the country. Titled “Guidelines for preventing actions that pursue illicit interests of major shareholders or employees,” the document detailed the financial authorities' policy directions aiming to uncover unlawful deeds by private equity firm members.

“There have been continuous occurrences by major shareholders or employees of some financial investment firms pursuing private interests unlawfully and unfairly,” the official letter stated. “To crack down on this, the FSS has placed a priority on conducting inspections focusing on detecting illicit self-interest-seeking behaviors,” the letter added.

So far, large-sized private equity funds that specialize in leveraged buyouts in the corporate M&A market have typically been excluded from inspections and audits by the FSS, as such the PEFs were only available to institutional investors, such as state pension funds, cooperatives or financial companies.

Instead, the financial authorities had mainly focused investigative efforts on PEFs that heavily rely on funds financed by individual investors. Yet, the warning message to the PEF association is interpreted as heralding the FSS' shifted stance in expanding the scope of inspections with regard to PEFs. The PEF association is an organization of over 60 medium- and large-sized private equity firms, most of which operate their funds from institutional investors.

There are 415 institution-specific PEF management companies, operating an aggregated funding amount of 130.9 trillion won ($99.5 billion), as of the end of the first quarter. Thirty-five of them operate over one trillion won ($760 million) of committed funds, while 160 of them manage funding between 100 billion won and one trillion won. The total number of PEFs in the country stood at 1,098, as of the end of last year, which is a record-high level.

With the increase in the number of PEFs in the country, the FSS sees that there are a growing number of cases of irregularities by PEF employees or shareholders.