Investor apathy greets new Korean funds

Efforts to stimulate the domestic private equity industry in South Korea appear to be failing, as new funds cut their targets or abandon fundraising efforts completely.

Following new legislation designed to open up the South Korean private equity market to domestic investors for the first time, new funds launched since then have struggled to generate any significant interest, according to a report in Joins.com.

In September 2004, the country’s Indirect Investment and Asset Management Business Act was revised to relax restrictions on banks, state-run companies and pension funds from investing in domestic private equity vehicles.

This was a seminal development in a country where only foreign-based private equity funds had been allowed to invest following the Asian financial crisis in 1999, in a move designed to entice foreign investment back into the country.

But funds launched to take advantage of the new legislation have struggled to generate interest. Perhaps the most dramatic example was Kookmin Bank – Korea’s largest lender – that completely abandoned plans to raise a 300 billion won (US$293 million) fund.   

Meanwhile, says the report, Korea Development Bank has delayed the launch of its fund from October 2004 to late March 2005, and reduced the target size from 1 trillion won to 300 billion won. And Industrial Bank of Korea, which is said to be launching its fund next month, has cut the target from 300 billion won to 100 billion won.

According to the report, there have been calls for certain regulations to be amended in order to encourage more investment: for example, the lowering of the minimum subscription, which currently stands at 2 billion won for individuals and 5 billion won for corporations. In addition, there has been criticism of the stipulation that a fund must have no more than 30 investors in total: in the US, the limit is 100.

However, the report says regulatory restrictions are not the only problem for potential investors. In addition, they are concerned by domestic funds’ lack of operational experience and that some of them do not even appear to have detailed investment plans.

For the time being, overseas investors appear to have no threat to their monopoly. On Friday, Hong Kong-based Affinity Equity Partners completed the buyout of Himart, Korea’s largest electronics retailer, for an undisclosed sum.