[PE Moving to Retail]② Only Global PEF Products Can Be Sold to Individuals... 'Concerns of Reverse Discrimination'

Global PEF Products Can Be Sold to Individuals by Securities Firms
Verified Large Domestic PEFs Prohibited from Selling to Individual Customers
Environment Created Where Unverified PEFs Like Lime and Optimus Scandals Run Rampant

Global private equity funds (PEFs) have expanded their share of individual clients and entered the retail competition, but large domestic private equity funds are unable to join this battle. This is because the domestic PEF system is divided into general PEFs that accept funds from general investors and institution-only PEFs in which institutions with investment expertise participate, resulting in a segmented market. Most large funds with strong performance and investment competitiveness are institution-only PEFs, which limits the choices of individual clients who want to invest in competitive PEF products.

A senior official from a private equity fund stated, "Global PEFs are increasing sales to individual clients through domestic securities firms, but individual clients are blocked from investing in verified domestic funds invested in by the National Pension Service and Government Employees Pension Service." He added, "Private alternative investments are blocked for individuals due to the perception that they are inherently risky, but preventing investment in verified funds managing pension assets has no practical benefit."

Issues of fairness between domestic PEFs and global PEFs are also raised. Under the current legal framework, individual participation is allowed in global PEF products but prohibited in large domestic PEF products, creating clear reverse discrimination. Critics argue that by shackling capable domestic funds as institution-only, an environment may be created where only overseas funds that are difficult to manage and supervise, and unverified small domestic funds, thrive. A representative from Fund A said, "Financial authorities need to clearly state their position on fairness between domestic and foreign funds," adding, "Given that only global PEFs can attract individual clients through securities firms, it is questionable whether securities firms can properly act as gatekeepers without engaging in mis-selling."

A senior official from a global PEF said, "In Korea, PEF investment is regressing due to negative perceptions caused by incidents like Lime and Optimus, but Japan has eased individual client access to private equity funds alongside value-up policies." He mentioned, "It is questionable whether it is appropriate to restrict individual investors from opportunities to make money through large funds with good investment processes and fund selection, providing them only to institutional investors." While investment naturally involves risks, alternative asset investments offer higher expected returns relative to risk through diversification. Pension funds and mutual aid associations also invest directly in stocks and bonds, but entrust money to PEFs for alternative asset investments.

The CEO of Private Equity Firm B said, "In an aging society, deposit-type investments alone are insufficient," and added, "Institutional practices and systems must support active investment of personal pensions and retirement pensions, which are the retirement funds of the public, into alternative investments."

Meanwhile, according to the Wall Street Journal (WSJ), the allocation of private equity assets in U.S. public retirement pensions increased from 6.99% in 2018 to 8.94% in 2021.