Ban on Layered Investment Structures in 'Nominal Private Equity Funds'... 'Lime Prevention Act' to be Enforced This Month

[Asia Economy Reporter Ji Yeon-jin] From mid-this month, management of funds with complex circular investments, such as Lime Asset Management which caused a large-scale redemption suspension crisis, will be strengthened. The multi-layered investment structure of private equity funds will be prohibited, and self-dealing that inflates assets under custody will be deemed an unsound business practice and become impossible.

On the 9th, the Financial Services Commission announced that the amendment to the Enforcement Decree of the Capital Markets and Financial Investment Business Act containing these measures was approved at the Cabinet meeting. This amendment is a follow-up measure to the "Private Equity Fund Status Evaluation and System Improvement Plan" prepared in April last year due to the Lime fund redemption crisis, and includes institutional improvements to strengthen investor protection and supervision of private equity funds.

First, the amendment effectively prohibits the "multi-layered investment structure" involving circular investments between parent funds and sub-funds. Currently, private equity funds are limited to 49 or fewer investors, and only when one fund (sub-fund) invests 10% or more in another fund (parent fund) are the number of investors combined. Because of this, if multiple funds make "split investments" below 10%, they could bypass the 49-investor limit. Lime is a representative case. Although Lime was effectively a public offering fund with more than 50 investors, it used a loophole by splitting into sub-funds with fewer than 50 investors to recruit many investors and then operated them as one parent fund.

However, once the amendment is implemented, if multiple sub-funds invest 30% or more in a parent fund, the number of investors in those sub-funds will all be combined into the parent fund’s investor count. However, cases where temporary surplus funds arise during management for efficient use and can be immediately withdrawn when necessary will be excluded.

This regulation applies to private equity funds established or set up after the amendment takes effect. For private equity funds established before, if new investments in affiliated funds occur after the amendment’s enforcement, the investor count calculation for the invested private equity fund will apply the new rules.

Additionally, mutual cross and circular investments among affiliated funds and the use of other company funds for this purpose are prohibited as unsound business practices. Also, coercing fund subscription conditioned on fund capital investment, known as "kkokgi," and using other funds to evade the prohibition on single-investor fund establishment are banned as unsound business practices. Violations may result in fines up to 50 million KRW and sanctions against the management company and its executives.

Supervision of private equity fund managers will also be strengthened. Currently, managers report the status of private equity funds, including derivative trading and borrowing, to supervisory authorities every six months (one year for funds under 10 billion KRW), but this will be shortened to quarterly reporting.

A Financial Services Commission official said, "This amendment will be enforced immediately upon its promulgation on the 16th of this month, and the amendment process is underway to require disclosure of fund structure, status of investment target assets, liquidity risk, and self-dealing status to comprehensively understand private equity fund operational risks."

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