[Why&Next] MBK drew the sword, but... Financial authorities face challenges as inspections and regulations are not easy

The so-called 'Homeplus incident' did not only target MBK Partners, the private equity fund (PEF) management company and major shareholder. Following the financial authorities' commencement of an inspection of MBK Partners, the need for regulation across the entire PEF sector has gained stronger momentum. However, considering the unique characteristics of PEFs, both the Financial Supervisory Service's inspections and regulatory measures at the government level are analyzed to be not as straightforward as they seem. Even within the authorities, there is a clear sense of concern.

Substantial Investigation Difficult Without Cooperation

According to the financial authorities on the 25th, the Financial Supervisory Service (FSS) began an inspection of MBK Partners on the 19th but is facing difficulties in securing sufficient data. Unlike securities firms and asset management companies under the authorities' surveillance, regulations on PEFs have been relatively relaxed until now. In particular, PEFs composed solely of institutional investors, unlike general PEFs where individual investors can also invest, are regarded as a different domain. Since they mostly invest in unlisted companies, disclosure obligations are minimal and their management methods are somewhat opaque. As a result, even if the authorities launch an investigation, it is difficult to clearly scrutinize how investment decisions and profit realizations have been made.

An FSS official admitted the difficulty, saying, "There is fundamentally a lack of established data itself." It was reported that even before the inspection began, there were concerns within the authorities that MBK Partners would not provide data unfavorable to themselves. This is precisely why FSS Governor Lee Bok-hyun raised his voice when announcing the start of the inspection, urging "to cooperate with sincerity." A former official, who requested anonymity, said, "The inspection process is relatively difficult, and there seem to be limits to the sanctions the FSS can impose," adding, "since the issue expanded to the bond (ABSTB) side, they probably could not avoid taking action."

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"Excessive Regulation Will Shrink the Market," Frequent Criticism

Inside and outside the industry, while acknowledging problems such as PEFs' excessive short-term profit-seeking tendencies and leveraged buyout (LBO) techniques highlighted by this incident, there is a strong voice that regulation itself will be realistically difficult. This is because there is a significant risk of undermining the original institutional purpose and function of PEFs.

The financial authorities' concerns are directly linked to these worries. Previously, after the Lime and Optimus fund incidents, the Financial Services Commission divided private equity funds into ▲general private equity funds and ▲PEFs, applying more relaxed regulations to PEFs, which only institutional investors can invest in, to activate the positive functions of PEFs. By granting operational autonomy to investment capital in the so-called 'players-only domain' that does not harm general investors, they effectively supported capital market revitalization and corporate restructuring.

In other words, the financial authorities cannot ignore the fact that excessive PEF regulation could make it difficult for small and medium-sized enterprises to raise funds and could shrink the domestic capital market. Professor Kim Woo-jin of Seoul National University's Business School said, "PEFs have played a role in continuous market-driven restructuring. It is not desirable to deny their positive functions such as capital market activation and restructuring," warning against regulation by saying, "You should not burn down the whole house to catch a flea." Furthermore, as domestic PEF regulations strengthen, there is a possibility of capital flowing to overseas PEFs, which in turn target domestic companies, creating a backlash.

An official said, "It is true that regulating PEFs like existing financial companies is difficult," but added, "Considering the impact on the capital market and various risks, it is a situation where they cannot be completely left outside the regulatory scope." The FSS has previously commissioned the Korea Capital Market Institute to conduct research on improving the PEF system.

Accordingly, voices inside and outside the industry argue that regulation should be limited to the minimum necessary in terms of enhancing operational transparency and risk management. A financial sector official said, "PEFs, unlike public funds, are based on private contracts between management companies and investors, so financial authorities' intervention may not be appropriate," but added, "If regulation is implemented, it should be limited to appropriate PEF monitoring to increase transparency and minimal intervention."