[Edaily Marketin Hur Jieun Reporter] In the wake of the Homeplus crisis, political pressure on private equity fund (PEF) managers is intensifying. Over the past year alone, 11 bills regulating private equity funds have been introduced in the National Assembly. While both the ruling and opposition parties are branding private equity funds as “evil” and unleashing a barrage of legislation, concerns are also emerging that focusing regulatory efforts solely on domestic private equity funds could distort the market ecosystem.

According to the National Assembly’s Bill Information System on the 18th, 11 bills directly or indirectly regulating private equity funds have been proposed to the National Assembly over the past year. Among these, eight key amendments to the Capital Markets Act focus on reducing leverage buyout (LBO) limits, requiring the disclosure of executive and employee compensation, and mandating prior notification to labor unions. When combined with other regulatory bills—such as those mandating asset valuation or amending other laws—there are now about 10 such bills pending in the National Assembly.

Leverage Limits Cut in Half, Plus Compensation and Asset Valuation Requirements… A Tightening Regulatory Net

A detailed look at the proposed bills reveals a comprehensive set of stringent regulations covering the entire process of private equity fund management. First and foremost, the bills targeting investment structures and leverage limits are expected to have the greatest impact. The amendment to the Capital Markets Act, proposed by Representatives Shin Jang-sik, Park Hong-bae, and Kim Hyun-jung, among others, primarily aims to reduce the LBO limit from the current 400% of net assets to 200% and restrict the use of the target company’s assets as collateral. The intent is to fundamentally block so-called “hit-and-run leverage investments,” in which the majority of the acquisition price is financed through loans secured by the target company’s assets, thereby causing financial distress for the company.

Additionally, the bill proposes restricting the exercise of voting rights for the target company’s shares for two years following the acquisition and mandating that any conflicts of interest arising from related-party transactions conducted through special-purpose companies (SPCs) be reported to the Financial Services Commission. and a provision requiring private equity funds to provide advance notice to employee representatives or labor unions of the target company—within two weeks of acquiring management control as the largest shareholder—regarding their objectives for participating in management, as well as plans for workforce adjustments and employment retention that may affect employment.

There are also a number of proposals put forward under the banner of enhancing transparency and internal controls. Representative Min Byung-deok’s bill includes private equity funds and SPCs among the entities subject to review for designation as corporate groups subject to disclosure under the Fair Trade Act, thereby mandating the disclosure of the status of affiliates, ownership structures, and details of related-party transactions—which had previously been shrouded in secrecy.

Representative Han Jeong-ae’s bill shifts the reporting obligation from funds with unclear legal entities to general partners (GPs), who bear actual management responsibility, and mandates transparent disclosure of not only the method for calculating GP compensation but also the performance-based compensation details of key executives and employees.

Representative Yoo Dong-soo’s bill introduced strong penalty provisions allowing financial authorities to revoke a GP’s registration ex officio in the event of a violation or failure to comply with these reporting obligations. It also mandated that large GPs with assets under management (AUM) of 500 billion won or more appoint a compliance officer and included eligibility requirements for major shareholders—such as MBK Partners Chairman Kim Byung-ju—that require scrutiny of their financial status and social credibility.

Recently, there has been a trend of regulations rapidly expanding into the areas of fund management, asset management, and acquisition procedures. Representative Han Min-soo’s bill removes the special exemptions from asset valuation and trustee supervision that previously applied to institutional-only private equity funds, mandating that they, like public offering funds, have the value of their held assets regularly assessed by external professional institutions. This signifies the introduction of external verification—at the level of FSS guidelines—for asset valuation, which had previously been conducted on a voluntary basis.

“A Clumsy Imitation of the European Model”… Offshore Funds Escape the Knife’s Edge

Experts analyze that the regulatory package currently being pushed by the National Assembly is modeled after overseas examples, such as the European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD). However, given that the European AIFMD applies the same regulations to offshore private equity funds, the prevailing view is that this constitutes a half-hearted benchmarking effort that fails to consider the governance structure and fund-raising environment of the domestic market.

The bills pending in the National Assembly all target domestic institutional-only private equity funds registered with the Financial Services Commission. Global private equity funds that raise capital overseas and enter the market through offshore special purpose companies (SPCs) are not subject to general partner (GP) registration under the Domestic Capital Markets Act; therefore, no matter how stringent the legislation may be, they remain completely outside its scope.

Consequently, there is inevitable concern that the bills introduced to prevent a recurrence of the MBK incident will impose no restrictions whatsoever on foreign private equity funds backed by overseas capital. This amounts to a protectionist outcome that merely ties the hands of domestic asset management firms reliant on domestic funds, such as pension funds and mutual aid associations.

Industry experts unanimously agree that, rather than a one-size-fits-all regulatory approach, the focus should shift to “targeted regulation” that aligns with global standards and strengthens the self-regulatory functions of institutional investors (LPs). The U.S. Securities and Exchange Commission (SEC) also pushed to strengthen fee and performance disclosure requirements for private equity firms in 2023, but in June 2024, a U.S. federal court invalidated the regulation, ruling that it constituted an “excessive encroachment of authority by government authorities.” Since private equity funds operate within the realm of private contracts among sophisticated professional investors, the U.S. model—in which LPs, such as pension funds, autonomously ensure transparency through individual negotiations and guidelines—is seen as the path to preserving the dynamism of the capital market.

An official in the investment banking industry emphasized, “Legislative overreach driven by political posturing could paralyze the capital reallocation function of domestic private equity funds and lead to the adverse effect of market contraction,” adding, “While we must focus on establishing precise internal control mechanisms to prevent moral hazard, it is urgent to design an advanced regulatory framework that bridges the regulatory gap between domestic and foreign capital.”