[PE Now] Domestic PEF Fees Still Half Those of Foreign Firms... The Background of 'Reverse Discrimination'

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The controversy over "reverse discrimination" between domestic and foreign asset management firms is resurfacing in the Korean private equity fund (PEF) industry. Amid a persistent gap in management fee rates, domestic managers are expressing growing dissatisfaction as regulatory burdens increase, including mandatory disclosure of key personnel compensation and expanded reporting requirements.

According to the investment banking (IB) industry as of April 27, domestic asset management firms believe that they are starting from a fundamentally different position compared to their foreign counterparts. First, there is the issue of management fees. Management fees for domestic PEFs funded by local institutions are generally around 1%. This means that after a fund is formed, the level of management fees that domestic general partners (GPs) can reliably secure is approximately 1% of the fund size.

In contrast, it is said that foreign asset managers often receive fees of around 2% from domestic institutions. While it is rare for domestic managers to receive management fees above 1.5%, among foreign managers, even 1.5% is considered low. In particular, foreign firms frequently raise capital through rolling commitments rather than competitive bidding, which means they face less price competition.

The industry believes that this structure has been entrenched since the early days of the domestic PEF market, making it difficult to change. At the market’s inception, foreign managers attracted local institutional money by leveraging global track records and high returns, while domestic GPs lacked comparable performance and thus found it difficult to demand higher fees. Additionally, since domestic managers themselves lacked strong differentiating factors, a practice of highlighting low fees as a competitive edge became entrenched.

A CEO of a mid-sized domestic PEF manager said, "Although management fees do not carry very high weight in the evaluation criteria for commitment contests, the lack of clear guidelines often leads managers to enter a chicken game among themselves. Starting with lower costs due to insufficient track records compared to foreign firms, and as competition among domestic managers intensified, the industry was unable to bring fee levels up to global standards."

The conservative audit stance of supervisory bodies overseeing limited partners (LPs) such as pension funds and mutual aid associations is also cited as a background reason for downward fee pressure. One domestic PEF manager said, "From the beginning, government agencies supervising pension funds and mutual aid associations lacked a deep understanding of the industry, so even slightly higher management fees were criticized as excessive. As a result, LPs have become even more conservative in their own judgment."

The dissatisfaction among domestic managers is not limited to fee rates. Many also point out that the very method of fee collection differs. Domestic blind funds typically collect management fees based on committed capital in the early stages, but after a certain period, they shift to fees based on invested capital. As a result, if investment execution is delayed, the fee base can shrink rapidly.

In contrast, foreign managers often distribute their fees over four to five years based on committed capital, citing global head office policies. This means they have less incentive to rush investments due to time constraints compared to domestic GPs.

Recently, the regulatory environment has further intensified such dissatisfaction. Financial authorities are pushing for stricter PEF regulations, including the disclosure of GP compensation, restrictions on leverage, and expanded reporting obligations. Domestic PEFs dedicated to local institutions worry that this is not merely a matter of regulatory strength, but could further exacerbate reverse discrimination against them. While domestically registered GPs bear the full burden of disclosure, reporting, and supervision, foreign managers, which only establish funds locally while keeping their GPs overseas, may fall into regulatory blind spots.

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The market structure, in which pension funds and mutual aid associations persist with "beauty contests"-open competitive fundraising processes-also puts domestic managers at a disadvantage. In a beauty contest, the investor sets certain criteria and issues an announcement, to which managers submit proposals; designated managers are then selected through document and interview review. This differs from the practice of major overseas LPs, who negotiate and make commitments with individual managers.

A former Chief Investment Officer (CIO) of a domestic pension fund and mutual aid association said, "Overseas, there are many GPs with strong track records in specific areas such as defense, so even if their management fees are higher, there is no shortage of managers that investors want to contract with individually. In contrast, in Korea, the beauty contest system is so entrenched that even if someone wants to discover and invest in a 'hidden gem,' concerns about favoritism during post-investment audits force them to operate conservatively."

However, there are also calls within the industry for domestic GPs to enhance their competitiveness. An IB industry official said, "It’s a chicken-and-egg problem, but ultimately, domestic GPs must raise their competitiveness to survive. At the same time, for fair competition without reverse discrimination, the burdens of regulation, disclosure, and supervision must be distributed more evenly among all players operating in the same market."

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