Private Equity Funds Disappear from Banks... No New Products at All (Comprehensive)

Commercial Banks' Private Equity Fund Sales Halve
Widespread Distrust, Difficulty in Finding Non-Interest Income

[Asia Economy Reporter Jo Gang-wook] "At one time, the best-selling and most confident product was private equity funds. Now, we have no confidence. Private equity funds, once welcomed as a new alternative investment sector, have now become the ugly duckling." (A commercial bank official)

The outstanding sales balance of private equity funds at commercial banks has plummeted by a staggering 6 trillion KRW compared to a year ago. This is interpreted as a result of growing investor distrust following a series of incidents: the overseas interest rate-linked derivative-linked fund (DLF) scandal that caused massive principal losses last year, the Lime Asset Management shock which led to a suspension of redemptions worth about 1.65 trillion KRW, and the Optimus Asset Management redemption suspension. Furthermore, with financial authorities announcing a large-scale comprehensive investigation, it is expected that banks' private equity fund sales will shrink even further.

According to the financial sector and the Korea Financial Investment Association as of the end of May this year, the outstanding sales balance of private equity funds at 16 domestic commercial banks totaled 22.5495 trillion KRW, shrinking by 5.9458 trillion KRW compared to a year ago. Compared to a month ago, it decreased by about 830 billion KRW, and over the first five months of this year alone, it declined by approximately 2.8 trillion KRW.

Over the past year, Woori Bank experienced the largest decrease. As of the end of May, Woori Bank's sales balance was 3.0459 trillion KRW, down by a massive 4.4485 trillion KRW from a year ago. During the same period, Hana Bank and Shinhan Bank decreased by 1.3565 trillion KRW and 1.2142 trillion KRW, respectively. Following them were NH Nonghyup Bank (-497.5 billion KRW), Industrial Bank of Korea (-379.2 billion KRW), and Busan Bank (-147.5 billion KRW). In contrast, KB Kookmin Bank increased by 2.2128 trillion KRW, showing a stark contrast. It is analyzed that KB Kookmin Bank avoided the backlash from the private equity fund scandal by hardly selling high-risk products such as DLF or Lime funds.

As distrust in private equity funds increased due to suspicions of incomplete sales and redemption suspensions, demand from individual investors for private equity funds drastically shrank. The outstanding sales balance to individual investors at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?decreased by about 7.9392 trillion KRW compared to a year ago, while the decrease among institutional investors was only 512.7 billion KRW.

The private equity fund market, which showed rapid growth following the government's private equity fund activation policy in 2015, was hit hard by the DLF and Lime fund scandals, followed by redemption suspensions declared one after another by the Italy Healthcare Fund, UK Rooftop Fund, Discovery Fund, and Optimus Fund. The outlook for banks' private equity fund sales is also negative. This is because distrust in private equity funds is widespread, and financial authorities have strengthened regulations on private equity funds. In particular, the financial authorities announced that by 2023, they will inspect all approximately 10,000 private equity funds and about 230 private fund managers. The fact that all responsibility for incidents is being shifted to the sellers is also cited as a factor in market contraction. On the 1st, the Financial Supervisory Service ordered sellers of the Lime trade finance fund to return the full principal to investors. The sales amounts for Woori and Hana Banks reached 65 billion KRW and 36.4 billion KRW, respectively. Additionally, fines imposed on Woori and Hana Banks related to DLF were 16.78 billion KRW and 19.71 billion KRW, respectively.

Currently, banks are not launching new private equity fund products. Instead, they have proposed sales strategies centered on relatively stable public funds and bancassurance as alternatives. Woori Bank, banned from new private equity fund sales until September due to DLF sanctions, is focusing on strengthening asset management services to expand non-interest income. Hana Bank, which became able to sell private equity funds again after the court accepted a suspension of the heavy sanctions, has not yet decided to resume sales. However, it plans to expand sales of public funds such as installment savings funds. Shinhan Bank is supplying ELT products with enhanced stability and developing products related to bonds and real estate physical assets, while KB Kookmin Bank is strengthening its investment portfolio centered on public funds.

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An official from a commercial bank said, "In the current atmosphere, there is a concern that if we sell carelessly, we might get hurt, so we are hardly paying attention to private equity fund sales," adding, "In the second half of the year, we are planning sales strategies focused on products and services such as public funds, bancassurance, card agency, foreign exchange (currency exchange and remittance), and trusts."

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