Private Equity News & Analysis

South Korea to loosen private equity regulations

Operating a private equity fund in South Korea may become easier.

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Korea’s top financial regulator Financial Services Commission (FSC) is seeking to relax rules related to the setting up and operation of private equity funds to attract more local and overseas investors to the asset class.

The FSC has appointed a taskforce comprising private research institutions and commissioned a study on revising current regulations on the asset class to bring them more in line with global standards, according to an FSC statement. The study period, which begins now, will end in April, the statement added.

Private equity funds in Korea account for approximately 34 percent of the country’s KRW306.6 trillion ($266 billion; €192 billion) investment funds market, the statement noted, but operate under regulations that are more complex and restrictive than those in many other countries.

As an example, any registered private equity fund must follow a buyout strategy under the law. However, there are tight restrictions on the amount of debt funds are able to borrow, which makes it very difficult for them to actually pursue buyout strategies. 

Separately, the country’s tax authorities are looking to impose a capital gains tax on US private equity firms exiting deals in Korea, according to a recent report in the Wall Street Journal. The move is directed at US-based Lone Star Fund, which is primed to exit its stake in Korea Exchange Bank this year, the report said.

While sources at Korea’s Ministry of Finance and Strategy, which oversees the nation’s financial policies, confirmed there had been discussions on the capital gains tax, they said nothing had yet been decided.

“Talks were initiated two years ago and resumed in June 2008. However, no agreement was reached and there is no firm schedule as to when the talks will be resumed again,” the sources said.

“If there are changes, they will likely be applied to all US-based investors, not just private equity, and the tax rate will be the same as that imposed on domestic institutions,” the sources added.