Following the Homeplus incident and the recent Lotte Card case, negative public sentiment toward private equity funds (PEFs) has intensified. In this context, a new research report has called for stricter regulations, including the swift expulsion of PEFs that commit serious legal violations. These recommendations are expected to be actively reflected in future regulatory reforms by financial authorities regarding PEFs.
According to a report titled "Research on Regulatory Frameworks for Overseas Institutional Private Equity Funds (PEFs)," obtained by Assemblyman Choo Kyungho of the National Assembly’s Political Affairs Committee on the 21st, the Korea Institute of Finance has proposed that PEF management companies (general partners, GPs) be required to strengthen their reporting of financial market risk-related information and that registration should be revoked if they commit serious legal violations.
In this commissioned report by the Financial Services Commission, the institute argued that entry and business conduct regulations for domestic PEF management companies should be tightened. The report pointed out, "Under the current Capital Markets Act, the registration of a management company can be canceled if there are repeated or continuous violations. However, the regulation can be strengthened to allow for immediate cancellation of registration in cases of serious legal violations, even if they are not repeated or continuous." In the United States, the Securities and Exchange Commission (SEC) can suspend or revoke the registration of a PEF for major legal violations, non-operation, or business suspension.
The report also noted that when a major company acquired by a PEF goes bankrupt or when the scale of acquisition financing increases, the soundness of the financial market could be threatened. Therefore, it recommended strengthening the reporting of risk-related information. The report stated, "Currently, supervisory authorities do not have access to information on the leverage and financial soundness of companies acquired by PEFs, nor on the exposure and risk profiles of financial institutions providing acquisition financing." It added, "Rather than establishing acquisition finance loan guidelines, supervisory authorities should require PEFs and acquisition finance providers to report key related data."
Additionally, the report proposed strengthening internal control policies and procedures for PEF management companies, which are currently in a regulatory blind spot, as well as implementing requirements such as the appointment of compliance officers and mandatory external audits for companies above a certain size. The report also suggested that when a PEF acquires a financial company or increases its stake as a major shareholder, financial authorities should review the eligibility of the PEF.
The report stated, "In the United Kingdom, when a PEF seeks to acquire a financial company, the eligibility of the PEF, the management company, and the fund’s limited partners (LPs) is reviewed. If the PEF seeks to acquire more than a 20% stake, its past acquisition performance, investment policies, decision-making personnel, and ability to inject additional capital are also evaluated." The report suggested that these practices could serve as a reference. In addition, to enhance transparency, the report proposed measures such as providing information on PEF investment portfolios and returns, as well as building and disclosing performance data.
Previously, in late March, immediately after the Homeplus incident, the Financial Services Commission commissioned the Korea Institute of Finance to conduct research on PEF regulatory reform. Based on this report, financial authorities are expected to begin a comprehensive review of PEF regulations.
Assemblyman Choo stated, "The PEF system was introduced to support corporate restructuring and growth, but now there are growing concerns that it is leading to short-term investment perspectives and market distortions." He added, "Beyond the debate over whether to relax or tighten regulations, we need to pursue effective institutional reforms that can protect corporate value and promote responsible investment."
Financial authorities are also continuing their investigation into MBK Partners, the major shareholder of Homeplus, regarding allegations of fraudulent and unfair transactions. They are additionally examining the process of recruiting fund investors at the time of acquisition and the use of leveraged buyouts (LBOs), where companies are acquired with loans that are repaid using the assets and revenues of the acquired company. Recently, with the leakage of personal information of 2.97 million members at Lotte Card, which is also controlled by MBK Partners, criticism has intensified over whether MBK Partners has mismanaged its acquired companies.
Meanwhile, MBK Partners, the PEF management company, issued a statement on the recent Lotte Card hacking incident, saying, "Allegations that we neglected security-related investments are not true, and we have consistently expanded our investments in this area."
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