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Korean version of Elliott becomes elusive


Domestic PEFs still call for level playing field

By Park Jae-hyuk

The government's grand scheme of fostering a world-class asset management company here by abolishing discriminatory regulations against domestic funds has hit a snag, following a series of fiascos involving private equity funds (PEFs) that have caused massive damage to local investors.

Although financial authorities have continuously pushed forward to offer a "level playing field" to domestic asset management companies despite the negative public sentiment on PEFs, lawmakers seem to fear a possible backlash from voters over their attempts to reform the rules on PEFs.

According to an aide to Rep. Kim Byung-wook of the ruling Democratic Party of Korea, who proposed a revision of the Capital Markets Act in November 2018 to ensure the equal treatment of domestic and foreign funds, the lawmaker has yet to decide whether to propose a revision bill similar to the previous one which expired automatically with the end of the 20th National Assembly.

"The revision bill that we proposed in the previous Assembly did not intend to relax regulations on PEFs, but we are talking about the appropriate moment to propose it again, because the public sentiment on PEFs themselves has become more negative after unexpected fiascos involving such funds," she said.

"We are reviewing bills we proposed in the previous Assembly, and we have yet to decide whether to propose them again."

Kim's revision bill was proposed at that time as then Financial Services Commission (FSC) Chairman Choi Jong-ku announced the government's plan to reform the rules on PEFs in September 2018.

"Domestic PEFs have suffered from discriminatory regulations so far, compared to foreign funds," Choi said at that time. "To level the playing field and help domestic PEFs become world-class, the government will push ahead with the reform."

Since then, the FSC has sought to abolish the so-called "10 percent rule."

Under the rule, PEFs raised to intervene in the management of companies have had to acquire more than 10 percent of the voting shares in companies in which they invested, and hedge funds have been barred from participating in the management of companies with more than 10 percent of the voting shares.

Given that the rule was imposed only on domestic funds, however, foreign fund management companies, such as Elliott and Sovereign, could freely meddle with the management of Korean conglomerates, including Samsung, Hyundai Motor and SK, using only a small number of shares.

This has also hindered domestic funds from stepping in to protect Korean conglomerates from the threats of foreign funds.

For these reasons, Kim's revision bill did not cause a conflict between the ruling and opposition parties during the 20th Assembly, but at the same time, lawmakers were indifferent to it until the session ended in May.

Against this backdrop, the Korea Financial Investment Association (KOFIA) urged the 21st National Assembly in June to pass the revision of the Capital Markets Act.

"We admit there has recently been some side effects of the government's efforts to boost the private equity industry," the KOFIA said in a statement.

"However, most asset management firms have achieved sound and manageable growth in contrast to the public concerns. Rather than regarding some companies' recent misdemeanors as a problem of the whole industry, the Assembly should support the development of the private equity industry for the growth of innovative businesses and the supply of private capital."

A PEF lobby group representing 60 firms also called for lawmakers to revise the regulations.

"When we make investments overseas, the government has not lifted regulations applied to our investments in Korea, so it has been difficult to explain requirements for domestic investments to foreign companies in which we sought to invest," Kwag Dae-hwan, the chief operating officer of STIC Investments chairing the lobby group this year, said in a recent interview with The Korea Times.

In response, the FSC promised it would continue its efforts to reform the regulations.

"We are waiting for the beginning of the National Assembly after its formation," FSC's asset management division head Ko Sang-beom said. "Since we also came up with complementary measures to prevent accidents, we will be able to strengthen our supervision of PEFs, despite our attempts to reform the regulations."



Domestic PEFs still call for level playing field

By Park Jae-hyuk

The government's grand scheme of fostering a world-class asset management company here by abolishing discriminatory regulations against domestic funds has hit a snag, following a series of fiascos involving private equity funds (PEFs) that have caused massive damage to local investors.

Although financial authorities have continuously pushed forward to offer a "level playing field" to domestic asset management companies despite the negative public sentiment on PEFs, lawmakers seem to fear a possible backlash from voters over their attempts to reform the rules on PEFs.

According to an aide to Rep. Kim Byung-wook of the ruling Democratic Party of Korea, who proposed a revision of the Capital Markets Act in November 2018 to ensure the equal treatment of domestic and foreign funds, the lawmaker has yet to decide whether to propose a revision bill similar to the previous one which expired automatically with the end of the 20th National Assembly.

"The revision bill that we proposed in the previous Assembly did not intend to relax regulations on PEFs, but we are talking about the appropriate moment to propose it again, because the public sentiment on PEFs themselves has become more negative after unexpected fiascos involving such funds," she said.

"We are reviewing bills we proposed in the previous Assembly, and we have yet to decide whether to propose them again."

Kim's revision bill was proposed at that time as then Financial Services Commission (FSC) Chairman Choi Jong-ku announced the government's plan to reform the rules on PEFs in September 2018.

"Domestic PEFs have suffered from discriminatory regulations so far, compared to foreign funds," Choi said at that time. "To level the playing field and help domestic PEFs become world-class, the government will push ahead with the reform."

Since then, the FSC has sought to abolish the so-called "10 percent rule."

Under the rule, PEFs raised to intervene in the management of companies have had to acquire more than 10 percent of the voting shares in companies in which they invested, and hedge funds have been barred from participating in the management of companies with more than 10 percent of the voting shares.

Given that the rule was imposed only on domestic funds, however, foreign fund management companies, such as Elliott and Sovereign, could freely meddle with the management of Korean conglomerates, including Samsung, Hyundai Motor and SK, using only a small number of shares.

This has also hindered domestic funds from stepping in to protect Korean conglomerates from the threats of foreign funds.

For these reasons, Kim's revision bill did not cause a conflict between the ruling and opposition parties during the 20th Assembly, but at the same time, lawmakers were indifferent to it until the session ended in May.

Against this backdrop, the Korea Financial Investment Association (KOFIA) urged the 21st National Assembly in June to pass the revision of the Capital Markets Act.

"We admit there has recently been some side effects of the government's efforts to boost the private equity industry," the KOFIA said in a statement.

"However, most asset management firms have achieved sound and manageable growth in contrast to the public concerns. Rather than regarding some companies' recent misdemeanors as a problem of the whole industry, the Assembly should support the development of the private equity industry for the growth of innovative businesses and the supply of private capital."

A PEF lobby group representing 60 firms also called for lawmakers to revise the regulations.

"When we make investments overseas, the government has not lifted regulations applied to our investments in Korea, so it has been difficult to explain requirements for domestic investments to foreign companies in which we sought to invest," Kwag Dae-hwan, the chief operating officer of STIC Investments chairing the lobby group this year, said in a recent interview with The Korea Times.

In response, the FSC promised it would continue its efforts to reform the regulations.

"We are waiting for the beginning of the National Assembly after its formation," FSC's asset management division head Ko Sang-beom said. "Since we also came up with complementary measures to prevent accidents, we will be able to strengthen our supervision of PEFs, despite our attempts to reform the regulations."


Park Jae-hyuk pjh@koreatimes.co.kr

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