[The Betrayal of Private Equity Funds] Fund Redemption Suspension, Various Reasons

Problems Arise Due to Inclusion of Non-Performing Assets
Also Victimized by Overseas Asset Investment Fraud

[Asia Economy Reporter Koo Eun-mo] Since last year's Lime Asset Management's fund redemption suspension incident involving approximately 1.6 trillion KRW, private equity fund redemption delays have continued for various reasons. While the suspension of private equity fund redemptions began due to the occurrence of asset insolvency within the funds, the background of the asset insolvency varies slightly.

According to the financial investment industry on the 30th, a representative type of recent private equity fund redemption suspension incidents is when problematic insolvent assets are included that differ from the initially presented product description. These funds purchased insolvent assets different from those stated in the original investment plan, causing a sharp decline in asset returns. To conceal this, they committed fraud such as falsely reporting returns and the value of investment assets, ultimately leading to redemption suspension.

The recent case of Optimus Asset Management, where the possibility of a 500 billion KRW fund redemption suspension has been raised, falls into this category. Initially, Optimus Management attracted investors by claiming to invest in public institution accounts receivable with almost no risk of loss. However, in reality, there were no accounts receivable from public institutions such as Korea Expressway Corporation or Gyeonggi Provincial Office of Education as initially promised. Instead, they invested in illiquid insolvent bonds such as private bonds issued by unlisted companies, private loans, and real estate. Although documents such as transfer contracts and fund specifications were forged to appear as if products aligned with the management purpose were included, asset insolvency eventually forced the decision to suspend redemptions.

The Lime Asset Management incident last year, which caused losses in the trillions to investors, is similar. Lime Management is accused of investing in insolvent assets and using a Ponzi-like scheme to cover fund returns. While Lime Management's inflation of returns was aimed at attracting investors, the purpose behind Optimus Management's substitution of investment targets has not yet been clearly revealed.

Another type leading to redemption suspension occurs when rapid fluctuations in asset values within the fund arise due to changes in domestic and international economic conditions. This type struggles with asset liquidation as asset values plummet. The recent redemption delay of the bond-type fund by Gentwo Partners (Gentwo) is an example.

Gentwo is a Hong Kong-based hedge fund that mainly manages funds investing in high-quality overseas financial bonds. While the investment assets are stable, it primarily uses leverage with investor funds to increase returns. Domestic financial companies reportedly sold Gentwo-related private equity fund products in the form of fund-of-funds or derivative-linked securities (DLS) trusts. However, due to the impact of the novel coronavirus disease (COVID-19), bond prices plummeted, causing losses in the fund and difficulties in asset liquidation. During this process, problems arose such as the failure of early redemption of DLS related to Gentwo funds sold by Shinhan Financial Investment.

Last year's overseas interest rate-linked private derivative-linked fund (DLF) incident also led to massive investor damage when approximately 800 billion KRW worth of DLF products sold by Woori Bank and Hana Bank suffered total principal losses in some funds due to interest rate declines.

Another keyword in private equity fund redemption delay incidents is overseas asset investment. As the low-interest rate trend continues, overseas assets, which can potentially yield relatively high returns, are increasingly popular investment destinations. However, it is pointed out as a problem that it is relatively difficult to ascertain the condition of overseas assets compared to domestic assets. The fact that most recent insolvent fund issues occurred in private equity funds investing in overseas assets demonstrates this.

JB Asset Management's Australian real estate fund is a private equity fund investing in rental apartments for the disabled in Australia. It was sold last year to institutional investors for 236 billion KRW and to individual investors for 90.4 billion KRW, totaling 326.4 billion KRW. However, the local management company was involved in fraud by purchasing different land, resulting in principal losses and suspension of fund redemptions. Legal disputes are currently ongoing.

The Discovery Bond Fund, which experienced a redemption delay of 200 billion KRW, is a product that purchases private bonds of the U.S. asset management company DLI Fund, which lends investment funds to P2P companies. The Hana Bank Italian Healthcare Fund, with 110 billion KRW sold, is also structured as an offshore fund reinvesting in medical accounts receivable paid from the healthcare budget of Italian local governments through a total return swap (TRS) method.