South Korea opens private equity to retail investors

In its latest move to cultivate private equity investment, South Korea’s Financial Services Commission will allow retail investors to buy into private equity funds of funds.

South Korea’s Financial Services Commission (FSC) is taking steps to open the private equity market to retail investors. The regulator plans to allow the public to invest in funds of funds that will make investments in private equity funds, it said in a statement.

The proposed measure will allow individuals to invest a minimum of KRW 5 million ($4,200; €3,700) in a private equity fund, which could account for up to 20 percent of the private equity fund’s total value.

Restrictions on investments for Korean private equity funds have been in place since the inception of the industry in the early 2000s. Individuals are currently banned from directly investing in private equity funds in Korea, which makes it difficult for retail investors to get access to the asset class.

“This is good news for Korean GPs because our LP pool is broadened,” Sunho Choi, a co-chief executive at Korean private equity firm Corstone Asia said. “It’s still quiet and calm right now but once the details of the regulation are in place, I would expect private equity firms to retool their strategy.”

Within South Korea’s PE market, limited partners are mainly pension funds, banks, insurance companies and mutual aid associations. Among these, national pension funds such as the National Pension Service and the Korea Finance Corporation play the biggest role, according to Invest Korea’s Private Equity and Venture Capital 2015 Report.

South Korea’s financial regulator, which oversees all aspects of Korean private equity funds, including fundraising, fund establishment and registration, said the proposed measure would increase the variety of fund products in the local market, allow investors to seek higher returns from private equity funds in a low interest environment, as well as support “long-term and stable national wealth” for the country.

In its 2016 Financial Reform Policy, the FSC has said it will promote innovation and competition in the asset management sector and establish the financial industry as “Korea’s new economic driver.”

FSC chairman Jong-yong Yim had recently written in the Wall Street Journal, that the organisation seeks to boost South Korea’s capital markets because it “currently has an unbalanced structure, weighted towards banks, which tend to be conservative in nature.” He added that private equity fund rules will be relaxed so money can flow to their “optimal uses”.

Last year, South Korean lawmakers amended the Financial Investment Services and Capital Markets Act (FSCMA) to make it easier for managers to raise funds in the region. It introduced the “private collective investment vehicles for professional investment”, which would allow companies to invest in funds comprising any type of asset, as previously reported by Private Equity International.

According to Bain & Company, South Korea posted record deal flow in 2015, with 67 deals amounting to $15 billion or a 135 percent increase last year, compared with averages from 2010 to 2014. The consultancy expects Korea’s robust deal flow to continue in the next two to three years, especially in distressed, non-core carve-outs and cash-outs.

Meanwhile, data from South Korea’s Financial Supervisory Service showed that local fund managers raised KRW 10.2 trillion in 2015, the highest number since 2004.

The FSC has not yet announced details of the proposed regulation.