FSC to get stricter on private equity funds in wake of Homeplus collapse

Lee Eog-weon, chairman of the Financial Services Commission, speaks at a meeting at the Korea Exchange in Yeongdeungpo District, western Seoul, on Dec. 22. [YONHAP]

 
The Financial Services Commission (FSC) will tighten oversight of private equity funds by introducing tougher rules on excessive borrowing and misconduct, following mounting criticism that buyout firms prioritize short-term profits at the expense of financial stability.
 
The FSC on Monday unveiled the new institutional private equity reform plan at a meeting chaired by FSC Chairman Lee Eog‑weon at the Korea Exchange in western Seoul, saying it will introduce a strict “one strike” rule that could cancel a fund manager’s registration after a single major legal breach. 
 
The FSC will keep the borrowing cap for private equity funds at 400 percent of net assets to avoid undermining their competitiveness against foreign peers. However, funds that borrow at a rate of 200 percent or more must report to the commission, detailing the reasons, potential risks and management plans.
 
Regulators took up reforms after the high-profile corporate rehabilitation of Homeplus, which entered court-supervised restructuring in March.
 
Critics say MBK Partners, one of Asia’s largest private equity firms, used excessive debt in its 7.2 trillion won ($4.8 billion) acquisition of Homeplus in 2015, borrowing about 4 trillion won — including assumed loans — through a leveraged buyout structure that amounted to 160 percent of the fund’s net assets of 2.5 trillion won.
 
After the acquisition, MBK Partners sold off high-performing stores in succession to reduce debt and interest burdens. The move brought in short-term cash, but the loss of key locations in major commercial areas weakened the company’s competitiveness, and Homeplus eventually entered court-supervised restructuring.
 

A Homeplus store in Seoul on Dec. 8 [NEWS1]

 
In response, the FSC has studied systemic weaknesses and now plans to strengthen both the responsibility and oversight of private equity fund managers, known as general partners (GP), who execute investment strategy and operations.
 
Under the new one-strike system, a GP can lose its registration after a single serious violation of financial regulations, such as the misuse of undisclosed information on business plans and practices. The grounds for cancellation are currently limited to cases of false registration or repeated violations.
 
The reform package also sets new qualification requirements for major GP shareholders and bars entities with financial law violations in the past five years from participating in the private equity market. Registered GPs will also need to meet ongoing eligibility criteria and adopt internal control standards on par with regulated financial firms, and larger GPs must appoint compliance officers.
 
Reporting requirements will increase across the board. GPs must submit unified reports covering all funds they manage, and they will have to include key financial data of portfolio companies, such as assets, liabilities and liquidity.
 
Regulators will also introduce an “outsourcing operations guideline” for funds that will set standard investment principles and template contracts between GPs and limited partners (LPs). The guideline will first apply to policy lenders and public pension funds before being expanded to a broader market.
 

A Homeplus store in Seoul on Dec. 8 [NEWS1]

 
To cement the reforms, the FSC plans to submit amendments to the Financial Investment Services and Capital Markets Act before the end of the year.
 
Industry voices warn that overly strict rules might weaken the competitiveness of domestic private equity funds against foreign rivals.
 
“Private equity funds have faced criticism that they focus on short-term profit at the expense of long-term corporate value,” Lee said. “We will expand the oversight role of regulators, the market and investors alike.”
 
The FSC also said it will allow new electronic registration agencies for unlisted stocks to enter the market to boost startup funding. It will also monitor a pledge by five major investment banks — Korea Investment & Securities, Mirae Asset Securities, Kiwoom Securities, Hana Securities and Shinhan Securities — to inject 20.3 trillion won in venture capital over the next three years through a public-private consultative body.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY KIM WON [[email protected]]