Private Equity Fund System 'Refined'... Strengthening Protection for Individual Investors and Easing Management Regulations

[Asia Economy Reporter Ji Yeon-jin] The private equity fund system is being reformed. While measures to protect general investors have been significantly strengthened, operational regulations have been relaxed.

The Financial Services Commission announced on the 24th that the amendment to the Capital Markets Act, which includes improvements to the private equity fund system, was passed at the National Assembly plenary session.

The classification criteria for private equity funds will change from the fund's operational purpose to the scope of investors. Previously, private equity funds were divided into professional investment type and management participation type based on operational purpose, but with this amendment, they will be classified into general private equity funds and institution-only private equity funds, and investor protection measures for general private equity funds, which individuals can participate in, have been significantly strengthened.

General private equity funds operated by professional private equity management companies, which are financial investment businesses, allow investments from individuals with at least 300 million KRW and professional investors.

Private equity fund sales and management companies must provide a key product description containing investment strategies, target assets, and investment risks when soliciting or selling investments. If private equity funds are sold to general investors, the sales company must conduct post-sale checks to ensure that fund management activities comply with the description.

Additionally, custodians such as banks and Prime Brokerage Service (PBS) securities firms will monitor compliance with laws, regulations, and descriptions regarding fund operation instructions, and if there are unreasonable operation instructions, they must request corrections.

External audits will also be mandatory for private equity funds with assets exceeding 50 billion KRW.

However, the private equity fund operation system will be unified. Obligations such as acquiring more than 10% of voting shares and holding shares for more than six months, which applied to the previous management participation type, will be abolished, and there will be no regulations on diversified investments. Regulations preventing large corporations from expanding control through private equity funds will apply to both general and institutional private equity funds. The number of private equity fund investors will increase from the current limit of 49 to up to 100, but the number of general investors investing in private equity funds will be limited to 49 or fewer according to public offering regulations.

A deregistration system for the swift removal of poorly managed operators will be introduced, creating a pathway for poorly managed operators who fail to meet capital or personnel requirements for a certain period to be swiftly removed without inspections or disciplinary hearings. The financial authorities will also gain supervisory and inspection authority over General Partners (GPs).

The Financial Services Commission stated, "With the establishment of an investor protection system involving sales companies and custodians throughout the sales and operation of general private equity funds for general investors, it is expected that investors will make sound investment decisions and that market-driven risk management regarding fund establishment and operation will become possible."

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