[Fund Market Crisis] Even Bank Custodians Have Disappeared

Private Equity Fund in the Consignment Refusal Crisis

[Asia Economy Reporter Minji Lee] "Since the Optimus scandal, finding a custodian has become as difficult as catching a star in the sky. Now that banks have locked their doors refusing to accept funds, it looks like we'll be twiddling our thumbs until the end of the year."

An asset management industry insider sighed. Commercial banks have been suspending custody services for private equity funds one after another following the redemption suspension incidents involving Lime, Optimus, and Gentwo, causing difficulties in fund establishment. There is speculation that if the refusal of private equity fund custody by custodians continues until the end of this year, a wave of bankruptcies among small-scale asset management firms with deteriorating profitability could begin in earnest.

According to the financial investment industry on the 21st, except for Shinhan Bank, all commercial banks have stopped custody services for private equity funds. Until last month, it was said that a waiting period of about 1 to 2 months was necessary at commercial banks, but recently even that has become difficult. Some custody services are still being performed, but only one or two funds offered by large firms are accepted. In the case of small and medium-sized asset managers, even if all preparations (deal making) are complete, commercial banks do not accept new fund establishments at all.

Custody services involve holding physical securities such as stocks and bonds, and commercial banks typically handle this work. According to the Securities Investment Trust Act, asset managers must entrust the securities invested with customers' money to a separate institution, so if a custodian cannot be found, fund establishment itself is impossible.

The recent notifications from commercial banks that they will no longer provide custody services were largely influenced by a series of private equity fund redemption crises. The custody fees earned by commercial banks for custody services are set at a very low level of about 0.03?0.04%, compared to other products. Nevertheless, after the Optimus scandal, excessive responsibility was imposed on custodians, causing them to feel burdened. In June, prosecutors conducted a search and seizure at Hana Bank related to the Optimus Asset Management scandal, and the Financial Supervisory Service conducted an on-site inspection of Hana Bank. At that time, Hana Bank stated, "In the case of private equity fund custody, unlike public fund custody, there is no obligation to monitor the asset manager's illegal or unfair acts," but some investors claimed that the custodian's actions constituted breach of trust.

Another securities industry insider said, "In the past, when seeking a custodian through securities firms' Prime Brokerage Services (PBS), they tended to accept it well, but after the private equity fund scandals, even going through PBS, fund establishment has become difficult." PBS provides private equity funds with services such as asset management, securities lending, credit extension, and TRS, and indirectly contracts custody services with banks for fund management. Accordingly, some securities firms providing PBS are considering directly taking on private equity fund custody services. Among securities firms, KB Securities is reportedly reviewing the business feasibility. However, whether this will actually happen remains uncertain.

A financial investment industry insider said, "Banks specializing in custody services do not need to install separate IT systems or newly deploy personnel for private equity fund custody services," adding, "Securities firms will not rashly attempt to start custody services now due to the cost burden of installing IT systems and building organizations."

Within the industry, there is concern that some small private equity asset managers may go out of business this year. The scale of new private equity fund establishments has already significantly decreased compared to last year. According to the Korea Financial Investment Association, from July to the present, the number of private equity funds established domestically was 197 in July, 197 in August, and 71 in September, totaling 443, which is about a 65% decrease compared to the same period last year (1,272).