[Uhujuksoon Asset Management Firms] To Prevent Recurrence of Private Equity Fund Scandal... "Create Investor-Centered Market, Significantly Increase Punishment Severity"

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[Asia Economy Reporter Ji-hwan Park] As the sales volume of private equity funds with suspended redemptions, from Lime Asset Management last year to Optimus recently, has reached 5.6 trillion won, calls for institutional improvements are growing. Experts argue that to prevent the recurrence of damages caused by fund redemption suspensions, a private equity fund market centered on investors with expertise should be established, and the issue of information asymmetry among asset managers, distributors, and investors must be resolved. There are also voices calling for significantly harsher penalties to ensure that those involved in illegal activities never set foot in the market again.

According to financial authorities on the 22nd, the Financial Services Commission lowered the minimum investment amount for individual investors from 500 million won to 100 million won in 2015. This effectively opened the door wide for individuals to invest in private equity funds.

However, the market moved in an unexpected direction. As seen in recent private equity fund incidents, many non-professional individual investors lost principal amounts in the hundreds of millions of won, which they had saved from key funds such as jeonse deposits or retirement funds.

In response to this situation, the FSC raised the minimum amount for general investors to invest in professional private equity funds from 100 million won to 300 million won again in December last year. However, there are strong voices that the improvement plan, which focuses simply on the amount, will once again be a case of too little, too late.

Professor Tae-yoon Sung of Yonsei University’s Department of Economics pointed out, "Setting private equity fund investment requirements simply based on amount is not an appropriate solution to the problem," adding, "Even among individual investors who invest more than 1 billion won, many understand private equity funds as products that offer slightly higher interest than savings accounts." Professor Sung argues that the market threshold should be raised so that only investors who can properly understand the risks and returns of investment portfolios can enter.

There is also a suggestion that stronger penalties are needed in cases of illegal activities. The case of Bernard Madoff, former chairman of the NASDAQ Stock Exchange, who was sentenced to life imprisonment in 2009 for a $65 billion (approximately 77 trillion won) multi-level financial fraud, is cited as a reference. Researcher Se-woon Hwang of the Korea Capital Market Institute explained, "The most certain way to prevent the recurrence of private equity fund damages is to increase punitive fines against illegal actors and significantly strengthen criminal penalties," adding, "However, raising the level of punishment involves changing the domestic judicial system, so it is not something that can be achieved in the short term."

From the investor’s perspective, improving the environment where access to product information is significantly lower compared to distributors or asset managers is also an urgent task. As seen in recent private equity fund incidents, investors have no way to verify activities such as 'Ponzi schemes,' where money from later investors is used to pay earlier investors, or investing in insolvent companies despite claims of investing in safe public asset bonds.

Professor Do-jin Jung of Chung-Ang University’s Business Administration Department pointed out, "Fraud starts from the problem of information asymmetry, so how to equalize information asymmetry among distributors, asset managers, and investors is an urgent task," adding, "If final investors do not have access to information as they do now, similar damages will inevitably be repeated."

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