Momentum grows for tightening rules on private equity firms' leveraged buyouts
Investors, who face losses after purchasing Homeplus asset-backed short-term bonds, stage a protest in front of MBK Partners' headquarters in Seoul, Thursday, criticizing the retailer's entry into court-led rehabilitation. Yonhap
Financial authorities and lawmakers are accelerating discussions on tightening regulations on private equity firms to prevent them from abusing leveraged buyouts, industry officials said Sunday.
A leveraged buyout is a strategy in which the acquirer borrows money using the target company’s assets as collateral, then repays the debt or recoups its investment by selling off or liquidating those assets. This approach has long been a key acquisition tactic in the private equity industry.
The discussions have gained momentum amid controversy surrounding Homeplus, which recently entered court-led rehabilitation.
MBK Partners acquired a full stake in the supermarket chain from British retailer Tesco for 6 trillion won ($4.2 billion) in 2015, with nearly half of the acquisition cost — about 2.7 trillion won — financed through loans. Since then, the firm has focused on repaying debt by selling off prime store locations and recovering its investment through dividends.
Criticism has been mounting over MBK’s abrupt filing for rehabilitation for Homeplus on March 4, with many arguing that excessive borrowing and aggressive efforts to recoup its investment contributed to the company’s financial decline.
In a bid to enhance regulations for the private equity industry, the Financial Services Commission (FSC), the country’s financial regulator, tasked the Korea Institute of Finance with conducting a study.
As part of this initiative, authorities are also examining regulatory frameworks and examples from overseas markets, including the United States and the European Union.
According to the FSC, EU rules require private equity firms acquiring unlisted companies to avoid involvement in decisions related to dividends, capital reductions or share buybacks for two years following an acquisition.
Based on the findings of the study, which will be finalized in the latter half of the year, the FSC plans to move forward with comprehensive regulatory reforms.
Kim Byoung-hwan, left, chairman of the Financial Services Commission, speaks during a March 18 National Assembly session regarding Homeplus' entry into court-led rehabilitation. Yonhap
“The leveraged buyout method is commonly used as a means of financing mergers and acquisitions, but this recent case has raised several issues,” FSC Chairman Kim Byoung-hwan said during his appearance before the National Assembly on March 18. “We will look into how it is operated in other countries and, based on those examples, consider whether improvements are needed.”
The main opposition Democratic Party of Korea has also expressed agreement on the need to revise the Capital Markets Act to improve the private equity system and is currently discussing specific measures.
“While there are existing financial supervisory regulations to address the misuse of leveraged buyouts by private equity firms, it may be necessary to integrate these regulations into the Capital Markets Act," said Rep. Kim Nam-geun of the party.
Experts suggested introducing regulations on the leverage ratio limit and implementing fair value assessments for alternative investment assets in order to reduce information asymmetry among market participants.
“The introduction of leverage ratio limits and fair value assessments for alternative investment assets on a quarterly basis should be considered,” said Lee Hyo-seop, a researcher at the Korea Capital Market Institute.