Tougher Private Equity Fund Regulations, but Concerns Over Foreign Firms' "Blind Spots" Remain

Supervision of GPs to Match Banks and Insurers
Foreign Firms Remain in Regulatory Blind Spots
Will This Be a Step Toward Global Standards?

The Financial Services Commission has significantly strengthened regulations on institution-only private equity funds (PEFs). The key measures include the immediate expulsion of fund managers (GPs) found to have committed illegal acts and the imposition of reporting and internal control obligations at a level comparable to those required of banks and insurance companies. However, the market has raised concerns that, contrary to the intended purpose of the system, regulatory blind spots for foreign fund managers still remain, and that the regulatory burden may be disproportionately concentrated on domestic private equity funds, resulting in what some see as "reverse discrimination."

Private Equity Funds to Be Supervised Like Banks and Insurers

According to the reform plan announced by the Financial Services Commission on December 22, eligibility requirements for major shareholders will now be introduced for institution-only private equity fund GPs. If a serious legal violation occurs, registration can be revoked after a single infraction. The establishment of internal control systems and the appointment of compliance officers will also become mandatory.

In particular, reporting obligations will be greatly expanded. Previously, individual PEFs were only required to report on limited items such as derivatives trading, debt guarantees, and borrowing status. Going forward, they must regularly submit: ▲ management status of all PEFs, including assets, liabilities, liquidity, leverage, and returns ▲ financial and liquidity status of acquired companies ▲ fees (including performance fees) received by individual PEFs and their calculation methods ▲ status of third-party outsourcing, among other items. This effectively holds GPs to responsibilities similar to those of financial companies.

Furthermore, GPs will be required to notify the representatives of employees at acquired companies, within two weeks of acquisition, regarding the purpose of exercising management rights and the impact on employment. The intent is to bring the influence of private equity funds' management activities on companies and the labor market under regulatory oversight.

Foreign Firms Remain in the Blind Spot... Reverse Discrimination Concerns Persist

The question is whether these regulations can function as intended in the actual market. The Financial Services Commission emphasizes that these measures are intended to prevent side effects stemming from short-term profit-seeking and to ensure that private equity funds remain faithful to their original roles of investing in innovative companies and facilitating industrial restructuring.

However, some point out that foreign fund managers still fall into regulatory blind spots. Foreign fund managers that establish a legal entity in Korea and register as a GP are subject to regulation, but if they register as a GP overseas and only establish a fund in Korea for investment, domestic authorities have limited means to impose sanctions. The head of a domestic PEF management firm stated, "Overseas limited partners may hesitate to invest due to concerns about information disclosure, and this regulation is likely to apply only to domestic PEFs. There are also concerns that confidential information such as fees and calculation methods could be leaked during the reporting process."

Confusion is also expected regarding detailed rules. The provision requiring notification of management plans to the "representative of employees" at acquired companies does not adequately reflect the reality that many companies do not have labor unions. A PEF industry insider commented, "While the intent is understandable, there are many ambiguities in practical application. In fact, general private equity funds have caused more incidents, and institution-only PEFs have already been operated under strict oversight by limited partners, so there is a sense of unfairness."

Will This Become an Opportunity to Reach Global Standards?

However, financial authorities and some market participants argue that this institutional reform should not be viewed solely as a regulatory tightening. The domestic PEF market has faced criticism for not meeting global standards in internal control and accountability, despite its rapid growth. Given that major foreign private equity managers already operate under strict disclosure and oversight systems in the United States and Europe, the new domestic regulations can be seen as a belated step toward aligning with global standards.

The industry is paying attention to the possibility that this reform could lead to structural changes between large, system-based GPs and small- to mid-sized, project-based GPs. Large management firms with internal control personnel and management systems in place are expected to adapt relatively quickly, while some smaller firms that have relied on short-term profits and leverage may be forced to reconsider their overall management strategies.

Another PEF management firm head commented, "There are some shortcomings, but the reform reflects efforts to balance global practices with domestic realities. The key will be how precisely the detailed standards are established during the legislative and enforcement decree revision processes."