[Edaily Marketin Hur Jieun Reporter Ji Young] “Small and medium-sized private equity funds (PEFs) must give up investing in mid-sized companies and larger firms. Regulations are eliminating opportunities to build a track record, leading to a vicious cycle where they are excluded from future investment projects.”

Although the domestic private equity fund (PEF) market has grown to an all-time high in terms of scale, a growing sense of crisis is spreading within the industry that “if things continue this way, small and medium-sized PEFs will be the first to disappear.” This is because, following the Homeplus crisis, politicians and the government have accelerated efforts to tighten regulations on private equity funds, making it increasingly likely that small and medium-sized general partners (GPs)—who have relatively limited fundraising and management experience—will be forced to shoulder both funding shortages and regulatory costs simultaneously.

According to the Financial Supervisory Service on the 24th, committed capital for domestic institutional-only PEFs reached a record high of 167.5 trillion won at the end of last year. The number of PEFs under management stood at 1,195, and the number of GPs at 455, representing year-over-year increases of 5.1% and 4.1%, respectively.

However, funds were concentrated among large firms. Forty-five large GPs, each with committed capital of 1 trillion won or more, accounted for 68.7% of the total committed capital. While the share of large GPs has been rising annually from 60.4% in 2022, 410 small and medium-sized GPs must compete for the remaining 31.3% of funds.

The industry is concerned that tighter regulations could further exacerbate this polarization. Currently, various legislative proposals are under discussion, ranging from including private equity funds in the scope of business groups subject to disclosure under the Fair Trade Act, to drastically reducing the limit on leveraged buyouts (LBOs) from 400% to 200% of net assets, as well as requiring the disclosure of GP and executive compensation and mandating asset valuations by external agencies.

While large firms can spread accounting, legal, and compliance costs across multiple funds, small and medium-sized firms must bear the full burden of these costs through management fees generated by just one or two funds. The competitive position of small and medium-sized firms is also becoming increasingly constrained during the fund-raising stage. As large institutional investors, such as pension funds, favor firms that manage large amounts of capital, there is a growing consensus that the ladder for small and medium-sized asset managers to grow into large firms is weakening.

An even bigger problem is that foreign private equity firms, which are free from regulatory constraints, could fill the void left by domestic capital. In fact, there is a growing trend where global private equity funds are sweeping up major, high-value deals in the domestic mergers and acquisitions (M&A) market. Foreign capital has easily snapped up high-profile management control sales that have drawn market attention, including Texas Pacific Group (TPG)’s acquisition of Lotte Rental, Blackstone’s acquisition of Futronic, Carlyle’s acquisition of Cheongho Group, Kohlberg Kravis Roberts (KKR)’s acquisition of SK E-Tronics, and EQT Partners’ acquisition of KJ Environment.

An investment banking industry official stated, “If regulations continue to be added, smaller asset management firms are likely to be pushed out of the market first.”