2.7 Trillion Won in Poor Private Equity Funds... Lime the Largest

Concerns Over Losses Including Redemption Deferrals
537 Dispute Resolution Applications Submitted to FSC

[Asia Economy Reporter Park Jihwan] It has been revealed that the total scale of private equity funds (PEFs) in the financial sector facing redemption delays or full loss concerns amounts to 2.7 trillion KRW.

According to the Financial Supervisory Service on the 31st, the total sales amount of private equity funds that have experienced redemption delays or increased loss concerns due to insolvency, including Lime Asset Management funds with a redemption delay incident worth 1.6 trillion KRW, was tallied at 2.6846 trillion KRW.

The Lime Asset Management private equity fund, which had a redemption delay last October, is the largest with sales amounting to 1.6679 trillion KRW. Lime Asset Management was involved in illegal operations such as concealing fund asset insolvency and manipulating returns. Next is the German Heritage derivative-linked securities (DLS) trust, which has raised loss concerns due to delayed principal and interest repayments, with sales amounting to 427.6 billion KRW. This product involved a project by the German developer German Property Group to purchase locally registered historic buildings and develop them into luxury residential facilities, but redemption was delayed due to issues with development permits.

The Alpenroute Asset Management private equity fund, which experienced redemption delays in January and February this year, has sales of 229.6 billion KRW. Liquidity problems arose due to the termination of total return swap (TRS) contracts by securities firms that were supporting operating funds. The Discovery DLG fund, with sales of 159.3 billion KRW, had its redemption delayed due to an investigation by the U.S. Securities and Exchange Commission (SEC) into misconduct by the U.S. asset management company operating the fund assets. The Italian health insurance bond fund sold by Hana Bank also experienced insolvency, with sales amounting to 152.8 billion KRW. This fund invested in securitized bonds that Italian hospitals claim from local government health organizations, and liquidity issues occurred.

Due to the COVID-19 pandemic causing a sharp drop in the Japanese Nikkei index, the Nikkei Index Option Fund sold by KB Securities (sales amount 22.9 billion KRW) is facing increasing concerns of total loss as KB Securities initiated forced sales. Additionally, the KTB fund faced redemption delays due to manipulated returns on investment assets, and the Kyobo Royal Class fund experienced liquidity issues in its U.S. small business loan assets, also resulting in redemption delays.

Among these private equity funds, four cases?Lime Asset Management, German Heritage DLS trust, Nikkei Index Option Fund, and Italian health insurance bond fund?have received over 500 dispute mediation applications at the Financial Supervisory Service. As of the 20th, the Lime Asset Management fund had the highest number of dispute mediation applications at 431. The German Heritage DLS trust had 85 applications, the Nikkei Index Option Fund had 19, and the Italian health insurance bond fund had 2.

However, since most losses have not been confirmed, the Financial Supervisory Service’s dispute mediation process is likely to be prolonged. Dispute mediation proceeds only after investor losses are confirmed, and most losses have yet to be determined.

Some fund sellers have begun voluntary compensation amid concerns over prolonged dispute mediation. KB Securities refunded principal to investors in an Australian real estate fund that became insolvent last November, and Shin Young Securities recently agreed to compensate Lime Asset Management fund investors at a certain rate. Shinhan Investment Corp. decided to prepay 50% of the investment amount starting next month to customers whose principal repayments were delayed in the German Heritage DLS trust.

Victims should carefully review contract terms and decide whether to agree. Financial companies can autonomously set voluntary compensation standards and methods through agreements with victims, considering the causes of fund insolvency and investor types. However, if victims agree to voluntary compensation and withdraw dispute mediation applications, additional compensation may be difficult.

A Financial Supervisory Service official emphasized, "We recommend that sellers include in voluntary compensation agreements a clause allowing for additional compensation depending on future dispute mediation results or court rulings. Investors should fully understand such conditions regarding the possibility of additional compensation when drafting agreements and decide accordingly."

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