Fund of 420 Trillion Won in the Dark
Redemption Suspension Losses Already 4.5955 Trillion Won
[Asia Economy Reporter Minji Lee] The damage caused by the suspension of redemptions in private equity funds has exceeded 4 trillion won. This means that more than 1% of the private equity fund market, which is worth 420 trillion won, has suffered losses. This figure only accounts for cases that have come to light since last year, and as the abnormal management practices of private equity fund operators continue to be revealed, the scale of mismanagement is expected to grow even larger.
According to the financial investment industry on the 30th, the estimated size of major private equity funds that have delayed redemptions due to inclusion of non-performing assets and the derivative-linked securities (DLS) based on these funds amounts to approximately 4.5955 trillion won. Considering that there are many funds likely to suspend redemptions in the near future, the damage is estimated to approach 5 trillion won. As of this month, the total funds set in the private equity fund market amount to 420 trillion won, of which more than 1% of investment capital has been damaged due to mismanagement.
Following the large-scale principal loss of about 900 billion won caused by the low-interest rate-linked derivative-linked fund (DLF) incident last year, Lime Asset Management, which sold funds containing domestic mezzanine, private bonds, and trade finance bonds, declared a suspension of redemptions amounting to 1.6 trillion won. Discovery Real Estate Fund (200 billion won), JB Australia Real Estate Fund (320 billion won), German Heritage Real Estate DLS (530 billion won), and Italian Healthcare Bonds (180 billion won), which invested in overseas non-performing assets, also declared redemption suspensions. Recently, it was revealed that Optimus Asset Management swapped assets from sales receivables ordered by public enterprises to general unlisted bonds, and the damage is estimated to reach 550 billion won.
The mismanaged funds revealed so far are just the tip of the iceberg, and the number of private equity fund victims is expected to increase. Private equity funds are operated in a closed manner, and investors do not know the management methods, earning them the nickname "dark funds." There is no disclosure obligation, and since the fund operators are small in scale, there is a lack of internal monitoring functions to prevent misconduct such as asset swapping. A senior official in the securities industry pointed out, "Looking at the Lime incident and the Optimus Asset Management fraud case, which caused a massive suspension of redemptions after the deregulation of private equity funds, the structure allows operators to manipulate everything if they want. In the case of overseas assets, it is questionable how many sales companies actually go abroad to verify documents one by one before selling to investors."
In the case of the Optimus Asset Management incident, it has also been pointed out as a problem that the financial authorities recognized the risk of the situation in February but failed to take significant action. NH Investment & Securities continued to sell 'Optimus Fund No. 54' to investors until last month, exacerbating the damage. A financial authority official explained, "During the written inspection, we found mismatches between the fund maturity and asset maturity dates and investments in other unlisted companies, but on-site inspections were delayed due to COVID-19."
Professor Junseo Lee of Dongguk University’s Department of Business Administration diagnosed, "Not only is there a problem with market discipline not functioning properly, but the pace of deregulation in the private market was also too fast. Considering that problematic operators have rapidly increased their managed assets in the short term, supervisory authorities need to prepare exceptional measures for some private equity funds."
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