Gento 1.3 Trillion Redemption Suspension... Financial Authorities 'Helpless'

Leveraging Contracts with Local Financial Firms Make Redemptions Difficult for Other Funds, but Opaque Information... Shinhan Investment Corp "We Are Also Affected"

[Asia Economy Reporters Jihwan Park and Minwoo Lee] Recently, a Hong Kong-based private equity fund manager, Gentu Partners, experienced a fund redemption suspension incident involving approximately 1.3 trillion KRW, but neither financial authorities nor distributors have taken significant action yet. Gentu stated that the reason for the redemption suspension was due to leverage contracts made with local financial firms, making it difficult to redeem the entire fund. However, financial authorities and distributors have not even been able to ascertain precise information about the contracts Gentu entered into during the leverage process.

◇ Shinhan Investment Corp. "We are also victims" = According to the financial investment industry on the 7th, Gentu Partners, a Hong Kong-based private equity fund, notified domestic securities firms and banks on the 3rd of a redemption delay for a fund worth 1.3 trillion KRW. Industry insiders observe that this case is fundamentally different from recent consecutive redemption suspension incidents involving Lime Asset Management and Optimus Asset Management. Shinhan Investment Corp. created derivative-linked securities (DLS) based on Gentu Partners' 'KS Asia Absolute Return Fund' as a trust-type product and sold about 400 billion KRW worth. Half of these involved leveraging up to five times. The structure was designed to increase profits not only from bond interest but also by selling bonds when their prices rose. Normally, this would not be problematic, but due to the impact of the novel coronavirus disease (COVID-19), bond prices plummeted, causing losses to snowball.

Additionally, Gentu inserted an 'Asset Under Management (AUM) trigger' clause requiring the overall fund size to be maintained above a certain level when borrowing locally. If the AUM falls below a certain threshold, the loan could be recalled, which led Gentu to suspend redemptions for all other funds as well. Shinhan Investment Corp. stated, "We have never heard from Gentu about the existence of the AUM trigger," adding, "Even if it exists, it is the fund manager's judgment and decision, and entirely a problem the manager must resolve."

◇ Financial authorities helpless due to lack of information = The problem is that the circumstances revealed so far are only speculative. Gentu holds all the information but has not provided specific details. The Financial Supervisory Service (FSS) began on-site investigations targeting distributors on the 6th, but it is uncertain whether all suspicions can be resolved.

A distributor official lamented, "Since Gentu Partners is based in Hong Kong, it is difficult to find a direct contact point to grasp the situation," adding, "Distributors with local branches have contacted Hong Kong financial authorities, but we understand it is even difficult to arrange meetings."

Cooperation among financial authorities is also challenging. The FSS's Hong Kong office, which had been a hopeful resource, was closed in early 2018. Although the increase in overseas expansion by domestic financial firms made strengthening cooperation with local financial authorities essential, the closure was decided following the Board of Audit and Inspection's criticism regarding efficient organizational management, leading to a reduction of overseas offices.

An FSS official explained, "The fund in question is registered not in Hong Kong but on the British Crown dependency Jersey Island, making asset identification difficult." Particularly, the closure of the Hong Kong office has regrettably affected communication with local supervisory authorities. The official added, "Even the authorities lack routine communication channels, so we are at the stage of seeking contact points," and further stated, "We plan to attempt conference calls with Hong Kong authorities and urge local authorities to conduct inspections on Gentu."