Private equity to be more tightly regulated with new law

Investors hurt by private equity funds including those managed by Lime Asset Management and Optimus Asset Management hold protest in front of the Blue House on Jan. 21. [YONHAP]

Private equity funds will have to submit sales reports to the financial regulator every three months instead of six, and their total number of investors will be the subject of heightened scrutiny.

The moves are to prevent a repeat of the scandals at Lime Asset Management and Optimus Asset Management, where numerous retail investors suffered major losses as some funds prohibited withdrawals.

According to the Financial Services Commission (FSC) on Tuesday, the revised Financial Investment Services and Capital Markets Act, which calls for tighter regulation of private equity funds, was approved during the government’s cabinet meeting.

Under current rules, funds have to report every six months, though those managing less than 10 billion won can report annually. Under the new rules, all funds have to report every three months.

The new rules will be applied starting at the end of June.

Private equity funds will have to include information about their exposure to derivative products. This will be applied starting April.

The newly revised legislation will also apply strict rules against multi-level investment strategies designed to get around the rules limiting the total number of investors.

Under the current rule, private equity funds must have fewer than 50 investors. Any child fund owning more than 10 percent of the parent fund must disclose the number of investors.

If that investment is less than 10 percent, the number of investors in the child fund are not added to the total number of investors in the mother fund. As such, some fund operators created multiple child funds investing less than 10 percent, which significantly increased the number of investors without being regulated.

Under the new revised regulation, if child funds together own more than 30 percent of a fund, all sub-investors are included in the total.

The revised legislation also prohibits fund operators investing in the bonds of a company in exchange for the company’s agreement to buy into the fund.

Those that violate this regulation could face a fine up to 50 million won.

The amendment is a follow up to the improvement measures for private equity funds that the FSC announced in April last year after investors lost big with Lime and Optimus, which despite being registered as private equity funds operated much like public funds in attracting investors.

Both were considered as a Ponzi schemes, especially Optimus. Not only did it deceive its investors on its investment plans, but also the asset management company’s CEO used the investment collected through its funds for personal expenses.

Some people invested their entire life savings as well as pension payouts.

The losses are estimated to be 1.6 trillion won for Lime and 1 trillion won for Optimus.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]