Legal Reforms to Boost Korean Private Equity

The Korean private equity industry has witnessed strong growth in recent years, and incoming legal reforms could provide a major boon for both managers and investors 

The private equity industry in Korea has witnessed steady growth over the past 15 years, with AUM targeting the country reaching a record KRW 111tn in 2020 across 285 unique fund managers and 942 active funds, according to Preqin data. Though the industry is strictly regulated under the Private Equity Fund System (Capital Market Act) 2004, there are a number of structural factors behind this growth.  

First, the number of Korean investors allocating capital to private equity has increased significantly. Financial assets in Korea are accumulating rapidly due to demographic and economic changes. At the National Pension Service (NPS), for example, AUM has grown from KRW 200tn in 2007 to KRW 800tn in 2020, and is expected to reach KRW 1,200tn within the next decade.

Second, Korean LPs have become more sophisticated and experienced with private equity. The enactment of a few related laws and regulations in 2004 opened up the asset class to more institutional investors and encouraged greater participation within the industry.  

Third, corporates and their owners have begun to recognize private equity managers as partners. Indeed, the need for private capital extends across the whole size spectrum: smaller corporates that require growth capital, mid-sized companies with succession issues, and larger conglomerates looking to restructure and carve out their business portfolio to strengthen global competitiveness.  

Legal Reforms Will Drive Further Growth  
The passing of a reform bill for the Capital Market Act in March 2021, coming into effect in November 2021, will allow Korean managers to participate in the market more actively than before. The key point of the bill is that, if all investors in a fund are institutions, the manager can use different investment structures to meet the diverse capital needs of potential portfolio companies. This will allow Korean private equity managers to provide an extended pool of investment structures and terms to investors and target companies. Before the reform, only overseas managers were allowed to do this.

The reform will also have a positive impact on Korean institutional investors’ overseas investments. For many years, real estate and infrastructure in North America and Europe have been the main investment sectors for Korean institutions, but more recently attention has turned toward debt and equity investments in Asian markets. NPS, for example, recently set out to significantly strengthen its global team to facilitate offshore investment capabilities across equities and fixed income. Sovereign wealth fund Korea Investment Corporation is also attempting to grow its exposure in Asia, opening an office in Singapore in 2017 to focus on rapidly growing economies in South and Southeast Asia.  

Going forward, Korean managers will need to consider how they can provide access to opportunities for investors in those regions.

About STIC Investments
STIC Investments, Inc. (STIC) is one of the largest and most experienced private equity firms in Korea. Starting its operations as a venture capital firm in 1999, STIC is now a renowned private equity firm with a proven 20-year track record through multiple business cycles. STIC’s global investor base includes notable institutional investors from Korea, Southeast Asia, the Middle East, and Europe.