Private Equity Fund System Reform from October... Strengthening Protection for General Investors

[Asia Economy Reporter Ji Yeon-jin] The private equity fund system will undergo significant changes starting this October. Private equity funds will be divided into those exclusively for institutional investors and those for general investors, with enhanced investor protection for general private equity funds.

The Financial Services Commission announced on the 3rd that, with the amendment to the Capital Markets Act promulgated last April coming into effect on October 21, it has distributed the "Private Equity Fund System Reform Explanation Materials" to guide the financial investment industry and capital markets.

Private equity funds, which collect money from a small number of investors (49 or fewer) to invest in stocks, bonds, etc., were previously classified into professional investment type and management participation type. However, due to the increased damage to general investors caused by redemption delays in private equity funds such as the Lime incident, private equity funds managed by asset management companies and other financial investment businesses will now be divided into "general private equity funds" and "institution-exclusive private equity funds."

General private equity funds, like the current professional investment type private equity funds, target professional investors and general investors who can invest 300 million KRW or more.

In the case of general investors, if more than 50% of the total assets are invested in non-marketable assets for which market prices cannot be calculated, the fund will be established as a redemption-prohibited type. The key product description must include basic fund information, collective investment vehicle details (investment strategy and target assets, investment structure and final underlying assets, etc.), investment risks, and redemption information. Additionally, quarterly asset management reports must be prepared and delivered, and fund operation risks must be mandatorily recorded.

General private equity funds targeting investors with total assets exceeding 50 billion KRW must also undergo external audits of collective investment assets by accounting firms. In cases of redemption delays or maturity extensions, resolutions must be passed at the general meeting of investors, and investors must be notified.

Sales agents of general private equity funds must pre-verify whether the investment risks, target assets, investment policies, and strategies stated in the key product description prepared by the asset manager comply with regulations, and must provide the key product description to all investors before soliciting or selling investments.

Furthermore, sales agents must retrospectively verify whether fund operations conform to the key product description based on the asset management reports prepared and provided quarterly by the asset manager. If inappropriate management activities are discovered, they must report to the Financial Supervisory Authority and notify investors.

Custodians holding the investment assets of private equity funds must also verify whether fund operations comply with laws, collective investment agreements, or key product descriptions, and check the appropriateness of asset management reports.

Regulations on other private equity funds will be relaxed. Borrowing restrictions previously applied to management participation type private equity funds will be abolished, allowing all funds to borrow up to 400%. Loans will be permitted for all funds except for personal loans, and voting rights restrictions will be removed. Obligations related to management participation equity investments, such as investing more than 50% of fund assets in equity, acquiring more than 10% of voting stocks, and holding them for more than six months, will also be deleted.

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