[The Betrayal of Private Equity Funds] It Will Take at Least Several Years... Controversy Over the Effectiveness of a Full Investigation into Private Equity Funds

[Asia Economy Reporter Koh Hyung-kwang] As the private equity fund redemption suspension incidents continue, financial authorities are preparing to conduct a full-scale investigation of private equity funds. A 'four-party cross-check' method, which verifies whether the asset details recorded by the four fund-related financial institutions?fund management companies, distributors, custodians, and administrative service companies?match each other, is considered likely. However, since it takes at least several years to review all 14,000 private equity funds, there are doubts about how effective a supplier-centered full investigation excluding investors can be.

According to the financial investment industry on the 30th, the Financial Services Commission and the Financial Supervisory Service plan to hold a joint inspection meeting with related organizations within this week to finalize the full-scale investigation plan for private equity funds. Son Byung-doo, Vice Chairman of the Financial Services Commission, said to reporters the day before, "We are preparing the full-scale investigation plan for private equity funds aiming for this month, and it will be announced by this week at the latest."

When the Lime Asset Management incident broke out last year, the financial authorities conducted a fact-finding survey from November last year to January this year over about two months, targeting 52 management companies and 1,786 private equity funds, but they failed to detect any abnormal signs in Optimus Asset Management, which recently became problematic. On the 23rd, Eun Sung-soo, Chairman of the Financial Services Commission, said, "In past investigations, authorities only examined documents submitted by management companies, but in cases like Optimus, it is necessary to compare with actual assets," adding, "I hope we investigate everything even if it takes 10 years."

The financial authorities are seriously considering the 'four-party cross-check' method. This method involves the four parties?management companies, distributors, custodians, and administrative service companies?verifying whether their asset details and document contents match each other. If problems are found during the cross-checking process, a focused investigation through on-site inspections is expected.

However, in the market, there are concerns about whether it is physically possible to conduct a full-scale investigation targeting over 230 asset management companies and 14,000 private equity funds. Even within the financial authorities, skeptical views have been expressed. The Financial Supervisory Service Labor Union pointed out, "The Asset Management Inspection Division, which has only five teams and 32 people, would take decades to conduct detailed inspections of over 10,000 funds."

The financial authorities are reportedly considering receiving manpower support from related organizations with inspection functions, such as the Korea Exchange and the Korea Deposit Insurance Corporation, in addition to the Asset Management Inspection Division staff. However, even with manpower support, since there is a limit to the inspection workforce, the prevailing opinion is that a full-scale investigation will take at least 3 to 5 years.

Some experts point out that a supplier-centered full investigation excluding investors cannot be a fundamental solution to the problem. Professor Kim Sang-bong of Hansung University emphasized, "The financial authorities' full investigation is focused only on suppliers and does not consider the investors, who suffer significant damage," adding, "A fundamental measure to normalize the private equity fund market must be prepared." The National Federation of Office and Financial Workers' Unions also argued, "A full investigation of over 10,000 private equity funds is not only unrealistic but also does not naturally resolve incidents that have already occurred even if the investigation is conducted."

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