Private Equity Funds to Be Split into Institutional and Retail Versions from October... Investors Expanded to 100 People

[Asia Economy Reporter Ji-hwan Park] Financial authorities will reorganize the classification system for private equity funds starting this October into 'general private equity funds,' which allow participation by general investors, and 'institution-only private equity funds,' which raise funds exclusively from institutions. The limit on the number of private equity fund investors will be expanded from the current 49 to 100.

On the 23rd, the Financial Services Commission announced a legislative notice for amendments to subordinate regulations (enforcement decree and supervisory regulations) under the Capital Markets Act reflecting these changes. The amendments mainly focus on restructuring the private equity fund system and strengthening regulations to protect investors.

According to the amendments, private equity funds will be classified by investor scope into general private equity funds and institution-only private equity funds. General private equity funds allow participation by general and individual investors, whereas institution-only private equity funds will be limited to institutional investors and equivalent entities.

Previously, private equity funds were divided into 'management participation type (PEF)' and 'professional investment type (hedge funds)' based on their management objectives, with dual regulatory frameworks applied. Going forward, the same operational regulations will apply to both general private equity funds and institution-only private equity funds. Leverage through monetary borrowing up to 400% of net assets will be permitted, and loans will also be allowed.

Additionally, if the proportion of non-marketable assets without a market price exceeds 50%, the fund cannot be set up as an open-ended private equity fund allowing frequent redemptions. Obligations to record significant matters in collective investment amounts and to prepare a key product description document have been established.

Under the current Capital Markets Act, only management participation type private equity funds have a 15-year lifespan limit, but the amendments reflect that hedge funds can now also engage in management participation. For all private equity funds, a new obligation has been introduced to dispose of the relevant shares to a third party within 15 years from the point of management participation through the fund (such as investing 10% or more of shares or exercising de facto control by appointing executives).

Protections for general investors participating in general private equity funds will also be strengthened. A sales company oversight function for private equity fund sales and management will be introduced. When soliciting or selling private equity funds, a key product description document must be provided, and if private equity funds are sold to general investors, the sales company must conduct post-sale checks to ensure that management activities comply with the description. Custodian institutions such as banks will be given monitoring duties, including the authority to request corrections if they receive unreasonable management instructions from fund managers. Custodians must verify compliance of management instructions with laws, regulations, and product descriptions and demand corrections for unreasonable instructions. Furthermore, the obligation for asset reconciliation, comparing and verifying collective investment assets held and managed by custodians against asset details by fund, will be codified. An evaluation and management obligation for leverage risk levels will also be introduced for PBS securities firms providing credit extensions to private equity funds.

A deregistration system for the swift removal of poorly managed fund operators will be introduced. This aims to establish a pathway to promptly expel such operators without going through the inspection and disciplinary committee stages. The deregistration system for poor operators will be implemented, and re-entry into deregistered businesses will be restricted for a certain period (five years).

The number of private equity fund investors will be expanded from the current limit of 49 to up to 100. However, the number of general investors investing in private equity funds will remain at 49 or fewer due to public offering regulations. The Financial Services Commission expects that investment opportunities for professional investors in general private equity funds will expand, and fund formation by private equity managers will become easier.

The Financial Services Commission stated, "We have decided to prohibit as unsound business practices any management activities violating the key product description document and the receipt of brokerage fees during monetary lending processes involving the fund's own money."

Authorities' order and inspection rights over general partners (GPs) of private equity funds have also been established. A mandatory change registration system has been introduced to enable continuous supervision of GPs. Changes to initial registration details must be reported within two weeks, and financial statements must be submitted once a year.

The legislative notice period will last 40 days until August 2. A Financial Services Commission official said, "The Financial Supervisory Service and associations will guide the industry on the amendments through compliance education, and the Financial Supervisory Service will promptly revise and announce reporting forms to support the industry's practical preparations without disruption."

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