Asset Management Law Up for Revision
- Making room for private equity funds to attract small investors

The existing Asset Management Law does not allow the establishment of private equity funds that are active in advanced countries. The government seeks to revise this law to allow the establishment of private equity funds for the benefit of small investors who want to invest in those funds.

The Finance and Economy Ministry expects a number of benefits to come from the revision; It expects the PEF to attract idle funds into productive channels; It also hopes that investment would pick up investment activities by stimulating both the financial institutions and business firms. It also expects the PEF to perk up restructuring in the finance and corporate communities by providing necessary funds; and the government expects domestic investors to develop their asset management skills by learning from the revised asset management laws based on international standards and compete with foreign investors on the same conditions.

Under the revised law, professional investment companies will be allowed to set up and operate PEFs and each PEF will be allowed to have less than 30 individual investors as members. Securities firms, investment-consulting firms and other financial institutions are eligible to set up and operate PEFs.

PEFs will have two kinds of partners, limited and general. Limited partners will only be accountable for their investments and they include pension funds, company retirement funds, banks, insurance firms, and foundations. General partners will be responsible for liabilities resulting from fund management over their investments. They will be the owners of the funds and be responsible for their operations.

In the United States, they have professional fund management firms, which sometimes happen to be subsidiaries of financial companies. PEFs generally invest in non-listed companies, although more and more they make investments in listed firms. There are two kinds of PEFs, buyout and hedge funds. Buyout funds are professional M and A firms, while hedge funds invest in derivative funds and portfolios.

Smaller PEFs make investments less than 100 billion won, while larger ones invest more than 300 billion won. They limit investments within the range of from 10 to 15 percent of funds per investment.

The existing asset management law will be revised to allow funds to undertake M and As, participate in management, invest in social overhead capital projects and stocks. Investment portfolios will be prohibited from being sold within 6 months of investments. Investments in portfolio will be allowed within 5 percent of total assets of funds. The purpose is to regulate hedge funds for highly speculative investments.

The revision is aimed at easing the regulations on PEFs to spur investment activities. PEFs will not be required to hold shareholders and other investors meetings. However, they will be still required to register with the Financial Supervisory Commission. They will still be required to observe the Fair Trade Law. They will be required to hold on to their stock investment portfolios for 6 months from the time of investment. Their borrowing will be limited to 10 percent of their funds.

The revision of the law is intended to limit direct meddling by holding companies in the operations of PEFs in order to ensure their independent operation. Holding companies will be required to hold at least 30 percent stake in their affiliates and more than 50 percent in non-listed affiliates. There will be restrictions on the taking over of companies with affiliates.

PEFs will be prohibited from owning finance, insurance and general corporations at the same time. In a bid to prevent the expansion of large conglomerates by setting up affiliates through PEFs, the same regulations will apply to these PEFs as those being applied to private equity M & A funds.

Industrial funds will be allowed to own up to 10 percent of PEFs just as a simple investor if the stake goes over 10 percent, the PEF will be regarded as an industrial fund.   nw