[Initial Insight] The Fatal Allure and Hidden Risks of 'Simo'

[Asia Economy Reporter Lim Jeong-su] In private equity funds, the word 'samo (私募)' means 'privately gathered.' In the capital market, it refers to raising funds and investing from fewer than 50 people. In the bond market, private bonds come with several restrictions, such as limitations on resale. Due to issues like liquidity constraints, 'samo' is not always interpreted positively in professional investor markets.

However, in recent years, the word 'samo' seems to have been perceived quite attractively by those looking to grow their assets. This is because 'samo' has come to mean 'exclusively for you' or 'only for qualified clients.' Who wouldn’t be tempted by the idea that experts personally and privately manage their assets?

Banks and securities firms’ PBs (Private Bankers) actively used this word in marketing. They whispered, "There is a good investment product, but we offer subscription opportunities only to premium clients." One individual investor confessed that the PB’s proposal was enticing and even appreciated. It evoked a psychological urgency similar to the intentional messages on home shopping channels like 'limited product,' 'clearance sale,' and 'closing time approaching,' which create a sense of urgency among potential customers.

The financial authorities ignited the marketing fire of financial companies. They drastically lowered the minimum investment amount for private equity funds from 500 million KRW to 100 million KRW. This deregulation, combined with investors’ desire to differentiate their returns from others, helped the market size leap beyond 100 trillion, 200 trillion, and 300 trillion KRW in no time. By guiding investors from the heavily regulated public offering market to the relatively lightly regulated private market, the authorities effectively exempted themselves from the duty of market oversight for many funds.

Moreover, the credibility of funds listing prominent figures such as former ministers, prosecutors general, and bank presidents as advisory board members rose further. This is considered one of the secrets that attracted leading companies, group owners, public enterprises, and private universities en masse into the private market. The famous advisory boards produced an effect similar to PPL advertising featuring well-known celebrities.

Upon closer examination, all the attractive points of 'samo' that enticed investors are actually risk factors. The famous advisory boards serve as temptation devices to dilute investors’ rational judgment. The weaker regulations mean these funds are outside the authorities’ detailed oversight or in blind spots. Even if the most important investment document, the Investment Memorandum (IM), is falsified, the authorities do not verify the truthfulness of its contents or demand corrections.

The Optimus fund exploited regulatory blind spots by presenting itself as a stable product investing in public enterprise accounts receivable but diverted funds to unrelated places. Even aside from the fraudulent Optimus case, it is common for private funds to excessively beautify investment memorandums under the name of 'samo.' Custodial functions such as those by the Korea Securities Depository also did not operate properly.

The whispers of PBs urging investments without proper market discipline are more likely a desperate struggle for performance rather than for investors’ benefit. We must carefully consider the confession of a securities firm employee that many PBs do not fully understand complex expert markets such as public enterprise accounts receivable, trade finance, and derivatives when selling products.

Systemic risk factors in the private market are gradually emerging, but the focus of discussion tends to lean toward political strife rather than solutions and prevention. While it is important to retrospectively determine right and wrong, once the causes are understood, discussions should be activated on how to remove the triggers and weaken the explosive power of hidden bombs.

Raising the private equity fund subscription qualification back to 300 million KRW and lowering the investor age to judge that risks have decreased is a misconception. Measures to secure transparency in the private market seem urgently needed. Without transparency comparable to the public offering level, it is difficult to guarantee that another private equity scandal will not recur following Germany Heritage, Lime, Alpenroot, Gentupartners, and Optimus.