April 19, 2024

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[THE INVESTOR] Korea might see bigger and more active private equity funds as the country’s financial regulator plans to ease outdated regulations that have put local firms behind their global rivals.

The Financial Services Commission on Sept. 27 unveiled its plan to relax some regulations including a higher cap on the number of limited partners and removing the controversial 10 percent stake rule that limits PEFs’ participation in management.

Under the current rule, there are two types of PEFs and each have a different 10 percent stake rule. Firms that aim to engage in management, have to hold 10 percent or more stake in the target company for six months or longer, while investment-only PEFs cannot participate in management even if they own more than 10 percent stake. 

The financial watchdog plans to eliminate these separate restrictions and give more freedom to the funds in an effort to boost jobs and global competitiveness of domestic players.

Once the 10 percent rule -- which only applies to the local PEFs -- is lifted, they can participate in corporate governance even with a minor stake just as overseas PEFs.

“Some have pointed out that domestic PEFs are being discriminated against,” FSC Chairman Choi Jong-ku said. “We are going to reform the regulatory system by straightening the sloping field.”

While overseas activist funds such as Elliott Management pressured Hyundai Group and Samsung Group with a minor stake of less than 3 percent to improve corporate governance, it is nearly impossible for domestic rivals to obtain 10 percent of those large-cap companies with a valuation of trillions of won to get involved in management.

Industry experts welcomed the changes and expect they would boost the industry that has 501 PEF s with the total commitment amount reaching to 66.5 trillion won (US$59.80 billion), according to the FSC.

“The private equity industry will see dramatic changes this year just like in 2004 when PEF-related rules were first introduced in the country,” Unison Capital Korea CEO Kim Soo-min. “This means that we are moving in the direction of global development in accordance with the original purpose of PEFs, which is to maximize profits from private investments,” Kim added.

“It is a welcome move that management firms will be given more freedom without many regulations,” said Song In-jun, managing partner at IMM Investment.

By Park Ga-young (gypark@heraldcorp.com)