Jumping Korea's fundraising hurdles

Korean LPs want to invest in foreign funds, but raising capital in the country is not a straightforward process, according to speakers at PEI’s GAI Forum in Seoul.

Foreign fund managers aiming to raise money in Korea have to follow restrictive market solicitation rules, which include burdensome registration of offshore funds with the Financial Supervisory Service, according to Alex Yang, partner at Kim & Chang in Hong Kong.

Speaking at PEI’s Global Alternatives Investment Forum in Seoul, Yang said a foreign fund manager has to register before soliciting begins, which some see as an unnecessary cost because they may end up not raising any capital after paying for registration.

For first time fund managers, capital needs to be committed by an offshore LP before they can register as an offshore fund in Korea, Yang said, adding that officials will nonetheless listen to circumstances of specific cases.

Foreign funds that do register their vehicles in any case have to market them through locally-licensed intermediaries such as securities firms or banks. Foreign placement agents cannot operate directly in Korea, but must go through a local intermediary. 

If you don’t market or solicit, but if the Korean LP picks the offshore GP, then that could be a reverse inquiry and that’s a gray area. But to rely on that, you need some well-documented evidence, otherwise it’s just somebody’s word

Alex Yang, partner, Kim & Chang in Hong Kong

“If you do register a fund and don’t go through a local distributor, that’s a violation,” Yang said.

If officials determine a violation of fund solicitation rules has occurred, the penalties are a nullification of any capital raised in Korea and a ban on fundraising in Korea for five years, he added.

Another way to enlist capital in Korea is through a local feeder fund vehicle that can be set up by an asset management company (AMC), which is different than other intermediaries, he said. Brokers and banks are capable of advising someone else to raise money whereas an AMC can raise capital only for funds they manage, not for someone else. An AMC could set up a feeder fund vehicle and invest that money into offshore funds.

“If the local feeder fund vehicle is truly a fund of funds, then offshore funds don’t have to register because they are not really marketing. It’s the Korean manager who’s finding and investing in those [offshore] funds.”

Despite all the restrictions, some unregistered foreign funds have been raising Korean capital by taking advantage of a gray area –reverse inquiries. 

Especially after the global financial crisis, Korean investors prefer to work with comfortable names and one solution is making a connection with a local asset manager

Sung Sik Cho, MD, Mirae Asset Life Insurance

“If you don’t market or solicit, but if the Korean LP picks the offshore GP, then that could be a reverse inquiry and that’s a gray area,” Yang said. “But to rely on that, you need some well-documented evidence, otherwise it’s just somebody’s word.”

“Some fund managers say they’ll do some marketing and see how it goes and they’ll try to register when very close to getting the capital. They take the position that it’s not truly marketing but high level introduction.”

Sung Sik Cho, managing director at variable insurance management office, Mirae Asset Life Insurance, said Korean asset management companies can play a key role in bridging overseas managers and Korean LPs.

“Especially after the global financial crisis, Korean investors prefer to work with comfortable names and one solution is making a connection with a local asset manager,” Cho said.

A final point, from Joong-Il Kim, CIO of Specific Post Office Pension Service Agency, is about communication when fundraising. He suggested using frank and candid language about investment risk and translating PPMs and other documents in Korean language – and discussing them.

He recalled a past experience with a foreign manager that involved misunderstandings between the English and Korean versions of the contract and parts not translated into Korean. It led to international litigation, Kim said.