[Proliferating Asset Management Firms] Private Equity Firms Turned 'Gumeonggage' (Mom-and-Pop Stores)

Tenfold Increase in 5 Years After Eased Establishment Criteria
7 Out of 10 Operate at a Loss
High Risk of Poor Management Due to Profitability Decline

[Asia Economy Reporter Oh Ju-yeon] Asset management company A failed to set up an aircraft fund this year due to the impact of the novel coronavirus disease (COVID-19). This came on top of a net loss of around 900 million KRW last year, making the situation even worse. The total capital of company A decreased from about 778 million KRW at the end of June last year to 455 million KRW at the end of March this year. Asset management company H, which had maintained about 10 to 11 employees since its establishment in 2015, recently reduced its staff to 8. Although it still exceeds the minimum professional management personnel requirement (3 or more), its total capital was only 36 million KRW at the end of March. This is one-tenth of the 311 million KRW recorded at the end of December last year. These asset management companies with equity capital below 700 million KRW are highly likely to be subject to the fast-track exit system to be introduced by financial authorities next year.

The number of asset management companies facing the risk of market exit due to losses and capital erosion is rapidly increasing. Although the number of asset management companies tripled over five years after the financial authorities relaxed the establishment criteria in 2015, less than half of them are profitable. In particular, the number of asset management companies operating private equity funds (PEFs) increased tenfold during the same period, but 7 out of 10 are in the red. The temptation to engage in poor management to prevent profitability deterioration is growing, raising concerns that a second Lime incident may occur.

According to the Korea Financial Investment Association on the 22nd, the number of asset management companies and employees surveyed over the past 10 years showed that the number of asset management companies, which was only 80 in 2010, increased by 275% to 300 by the end of March this year. During the same period, the number of employees more than doubled from 4,373 to 9,847. With an increase of 302 employees in the first quarter alone, the number of employees in asset management companies is expected to exceed 10,000 by the end of this year.

The number of asset management companies surged in the last five years. From 2010 to 2015, the number of asset management companies increased by only 18, but since 2015, it has increased by double digits annually. In the past year alone, 51 new asset management companies were established, and 8 more were added in the first quarter of this year. In terms of growth, the number increased by 18 from 2010 to 2015, but from 2016 to 2019, it rose by 194, more than tenfold. The number of employees also increased by about 1,000 from 2010 to 2015, but from 2016 to last year, the increase exceeded 4,200 over four years.

The rapid increase in asset management companies since 2015 is largely due to changing the establishment requirements for professional private equity fund (PEF) operators, which were previously under a licensing system, to a registration system. As of the end of March this year, there were 75 public fund operators and 225 professional private fund operators. All eight asset management companies added this year are private fund operators. Compared to only 20 private fund operators in 2015, this represents more than a tenfold increase.

The performance of the rapidly growing private fund operators is dismal. Among the 225 private fund operators, 158 (70.2%) posted losses in the first quarter of this year. This is 29.2 percentage points higher than the 41% loss ratio (89 out of 217 companies) last year. Seven operators failed to meet the minimum equity capital requirement of 700 million KRW to maintain professional private fund business. The financial authorities will introduce a fast-track system next year to immediately exit operators that do not meet the standards. This means these poorly performing operators are likely to be the first to shut down.

There are calls to reorganize the risk management organizations and systems, as well as internal controls, of private fund operators. Kim Jong-min, senior researcher at the Korea Capital Market Institute, emphasized, "Even within the domestic asset management industry, to regain investors' trust, regardless of regulatory requirements, companies should reorganize their own risk management organizations and systems, internal control standards, and strengthen their capabilities."