Private equity inflows are on decline

Cash inflows into private equity funds decreased this year amid a misselling fiasco that spooked investors last year, industry data showed Sunday.

According to the Korea Financial Investment Association (Kofia), private equity funds under management came to 411.25 trillion won ($354 billion) as of Thursday, compared with 412.4 trillion won at the end of last year. Last year, private equity attracted 79 trillion won of investment, with the average cash inflow reaching 6.6 trillion won per month. In December alone, 6.77 trillion won was funneled into private equity.

But the pace of cash inflows slowed this month as investors shunned the risky but high-return generating investment tool.

Korea’s financial regulator is planning to punish the heads of two commercial lenders for their improper sales of derivative-linked products this month, according to industry sources.

In October, the Financial Supervisory Service (FSS) said about 20 percent, or 3,954 cases, examined may violate laws or internal rules on the selling of derivatives, but further investigation is needed into the two leading lenders - Woori Bank and KEB Hana Bank.

Some financial firms were suspected of failing to offer enough information to investors or of violating internal rules that protect elderly customers when they sold the derivatives, according to the FSS.

Since mid-August, the FSS has been probing Woori Bank, KEB Hana Bank, brokerage firms and asset managers that sold the derivative products linked to foreign interest rates.

In late November, the FSS said the two banks should compensate losses up to 80 percent for the misselling of derivatives linked to interest rates.

The derivatives are structured to track the performance of constant maturity swaps - swaps that allow the purchaser to fix the duration of received flows on a swap of government bonds of the United States or Britain or the yield of Germany’s 10-year state bonds.

The products turned into losers as bond yields in the United States, Britain and Germany unexpectedly sunk amid speculation that central banks in major economies may aggressively slash their interest rates.

Meanwhile, local banks are planning to file a lawsuit against Lime Asset Management, which amassed money via banks for such improper products.

The company faced suspicions that it had engaged in trading irregularities to bolster fund yields. In late October, Lime Asset Management was forced to freeze withdrawals from funds worth nearly 850 billion won because it failed to liquidate assets to meet redemption requests by clients.

Yonhap