Rhyme and Jogeuk Both 'Si Mofund'... No Investment Destination Due to Money Circulation Scheme

Private Equity Funds, What Is the Problem?
Pooling Money from Minority Investors
Main Investment Vehicle for Wealthy Individuals
Increasing Undervalued Company Values for Profit
Minimum Threshold Reduced from 500 Million to 100 Million KRW
Rapid Growth to 400 Trillion KRW by End of Last Year
Financial Authorities Focused on After-the-Fact Regulation

[Asia Economy Reporter Ji-hwan Park] #A, a 79-year-old suffering from hearing loss and dementia, went to Woori Bank and signed up for a derivative-linked fund (DLF). Trusting only the bank employee he frequently saw, A invested over 100 million won and faced a principal loss risk exceeding 20%. Although the product was only available to aggressive investors, the bank employee arbitrarily changed A’s investment profile to 'actively investing' and obtained A’s signature on a 'risk grade exceeding subscription confirmation' without any explanation.

#B, in his mid-50s, visited a bank’s private banking (PB) service and was introduced to a product that was insured and guaranteed 100% safety. Especially after hearing that it invested in bonds, considered a representative safe asset, B assumed it was like a regular deposit and invested his entire retirement fund in a Lime fund product. B is now facing a redemption suspension situation where he has no idea when he will get his investment back.

Private equity funds, whose names are difficult for the general public, have become a 'hot potato.' Following last year’s overseas interest rate-linked DLF, which was highlighted for incomplete sales issues, and Lime Asset Management’s recent announcement of about 1.67 trillion won in redemption suspensions, all these funds are private equity funds. The family fund of former Minister of Justice Cho Kuk, which caused controversy in August last year, was also a private equity fund.

According to the financial investment industry on the 17th, private equity funds refer to funds that pool money from a small number of investors to manage assets. There are no special restrictions on management methods, allowing for flexible operation. They mainly invest in undervalued companies, increase corporate value, and gain profits by reselling.

Until now, private equity funds were considered a major investment tool for wealthy individuals. However, financial authorities lowered the minimum investment for professional investor-type private equity funds, so-called Korean-style hedge funds, from 500 million won to 100 million won. For management participation-type private equity funds, the minimum was reduced from 1 billion won to 300 million won, attracting more money. The private equity fund market, which was 173 trillion won in 2014, grew more than twice to 400 trillion won by the end of last year.

In this process, following the DLF incident last year that caused principal losses of several billion won, the redemption suspension amount of Lime’s funds is estimated to be close to 2 trillion won, bringing private equity fund issues, which had been veiled, to the surface.

The Lime Asset Management private equity fund redemption suspension incident is attributed to aggressive fundraising focused on external growth. During this process, a so-called 'rolling-over method' was used, where normal funds were mobilized and reinvested into other troubled funds of Lime Asset Management, which was pushed into a liquidity crisis.

The problem with private equity funds is that investors find it difficult to know exactly where their subscribed funds are invested. It was revealed late that up to 47.2% of the investment in the Credit Insured Fund, originally classified as a normal fund, was invested in Pluto FI D-1 and Pluto TF, funds that suspended redemption last year and were not disclosed in the product prospectus.

Public funds, which anyone can invest in, are obligated to regularly report management reports and returns to investors, but private equity funds have no such regulations. Although they are not subject to strict regulations like public funds, which have asset management regulations such as diversification, disclosure and delivery obligations of investment prospectuses, and external audits, a certain level of investor protection measures is necessary.

A financial investment industry official said, "Due to the nature of the private equity fund system, it is inevitable that financial authorities focus on ex-post regulation," adding, "However, considering that the sales channels have expanded to banks and the investment scope has greatly increased, it was necessary for financial authorities to also make efforts to establish preventive measures in addition to focusing on deregulation for industry development."

The DLF incident originated from incomplete sales of high-risk products by banks. DLF refers to funds containing derivative-linked securities (DLS) linked to various underlying assets such as interest rates, credit, gold, and crude oil. DLF pays a promised return if the underlying asset price stays within a certain range for a set period but incurs principal loss if it goes outside that range. Such high-risk products were sometimes sold to elderly people with low product understanding without proper risk warnings. Among 3,243 investors who subscribed to the problematic product, 92.6% were individual general investors. Those aged 60 or older numbered 1,462, accounting for 48.4% of individual investors. Investment funds from subscribers with no derivative product experience amounted to 143.1 billion won.

In the case of the management participation-type private equity fund invested by former Minister Cho’s family, weaknesses were exposed during the fundraising process. Professor Jung Kyung-shim of Dongyang University, Cho’s wife, pledged to invest 7.455 billion won in the fund management company Korink Private Equity (PE) fund along with their daughter and son, but the actual investment was only 1.05 billion won. The management company arbitrarily changed the minimum subscription amount. There are also suspicions that they violated regulations preventing investors from participating in fund management. Reporter Ji-hwan Park

This content was produced with the assistance of AI translation services.