[Turning Point for Private Equity Funds]③Private Equity Funds Must Begin a Grand Transformation

Excessive Regulation Is Harmful...
Market Cleansing Through Self-Regulation by Investors
Management Firms Should Focus on Creating Fundamental Corporate Value, Not Short-Term Gains
Upcoming Industrial Restructuring...
Japanese Regional PEF Models Worth Reviewing
"PEFs Must Also Embrace the Meaning of Autonomy and Responsibility"

Editor's NoteIt has been 20 years since buyout private equity funds (PEFs) were first introduced in Korea. Now that the PEF industry has come of age, a sense of crisis is spreading. Criticism of PEFs has intensified following the Homeplus incident, and amendments to the Commercial Act and the Capital Markets Act, which emphasize the principle of equality, are also narrowing the scope of PEF activities. In this three-part series, we examine the present and future of Korea's PEF industry at this critical turning point.

The Korean PEF market is being called upon to undergo a fundamental transformation. Once central to corporate restructuring and industrial reorganization, the sector's credibility has recently been shaken by controversies such as the MBK Partners Homeplus case. The combination of stricter regulations, capital market uncertainty, shrinking investment capacity, and polarization among management firms has made the question of "how to change" the most urgent issue. There are calls for both the industry and policymakers to jointly pursue a "grand transformation" of investment philosophies and the overall regulatory framework.

No More Blanket 'One-Size-Fits-All' Regulation

The recently discussed amendments to the Capital Markets Act would require institution-only PEFs to meet disclosure obligations on par with public funds. However, the unique strengths of PEFs lie in their ability to make swift decisions and carry out flexible restructuring. Applying blanket disclosure requirements to all PEFs, regardless of whether they target public investors or general investors, is being criticized as a result of misunderstanding the industry and the market.

Asset regulations for banks and insurance companies are also a burden for the industry. Since the beginning of the year, commercial banks have reduced lending and fund investments to manage risk-weighted assets (RWA), as fund investments are assigned high risk weights. Since the launch of the new administration, policy funds mobilized through the banking sector have absorbed bank capital, inevitably reducing the funds available for private PEFs. There is some relief that the Financial Services Commission belatedly announced plans last month to improve financial regulations, including adjustments to RWA weights.

Ultimately, there are calls to shift toward self-regulation at the limited partner (LP) level. The idea is to filter out short-term profit-seeking funds during the general partner (GP) selection process and encourage a focus on funds with clear value-up strategies. A representative from a PEF management firm explained, "GPs are already rigorously adhering to LP standards," and added, "Rather than restricting by law, encouraging appropriate self-regulation by LPs can provide a more effective market cleansing function than simple regulation."

Change in Investment Philosophy... Region- and Niche-Based PEFs

Until now, many Korean PEFs have focused on maximizing leverage to pursue high dividends in a short period. There are increasing calls to strengthen the management participation model to restore their original competitiveness. The argument is that PEFs should go beyond simply supplying capital and instead establish and implement value creation plans (VCPs), directly linking execution to fund performance. This means that while GPs and LPs share performance, PEFs must also ensure the fundamental improvement of portfolio companies, establishing themselves as true management partners.

Expanding deal sourcing is another challenge to be addressed. There is a need to go beyond simply acquiring non-core assets from conglomerates ("carve-outs") and expand into areas such as local small- and medium-sized enterprises (SMEs), family business succession M&As, and investments in niche industries. In particular, with major Korean companies expected to make large-scale investments in the US in response to US tariff pressures, there are calls for PEFs to take on some of the restructuring of small partner companies.

The Japanese model, where regional financial institutions collaborate to lead industrial restructuring, is cited as a useful reference for Korea. Regional private equity funds can contribute not only to innovation among SMEs and mid-sized companies but also to job retention and revitalization of local economies. In Japan, "search funds" that play this role have been conducting M&As for several years. These search funds typically have no fixed maturity, and the fund manager who leads the M&A becomes the CEO and manages the company over the long term. Yamaguchi Financial Group, based in Yamaguchi Prefecture, and Nomura Group, Japan's largest financial group, are among those operating such search funds.

Policy and Industry Must Transform Together

PEFs have been a key tool for corporate turnaround and industrial restructuring whenever the Korean economy has faced a crisis. For PEFs to continue fulfilling this role, both policymakers and the industry must change their mindset. Authorities should reduce unnecessary regulations and support the spread of LP-centered self-assessment systems, while the industry must restore trust through responsible management participation models.

Lee Namwoo, chairman of the Corporate Governance Forum, explained, "Cases such as the excessive management premium set in the Lotte Rental deal have often led to a decline in trust in the industry, especially among foreign PEFs," and added, "Alongside institutional reforms, PEFs themselves must demonstrate a sense of responsibility."

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