[Edaily Marketin JI YEONG-EUI Reporter] “If the limit on leveraged buyouts is reduced, small and medium-sized private equity funds (PEFs) that have been using leverage to increase deal sizes will be completely out of the game. While I understand the intent behind the regulation, it feels like small and medium-sized firms are being punished more severely than the large firms that caused the Homeplus crisis.”

Over the past decade, the domestic private equity fund (PEF) market—exclusively for institutional investors—has shown remarkable growth, but small and medium-sized asset management firms are being pushed to the brink of crisis. This is because, amid a continuing trend where funds from institutional investors—such as pension funds and mutual aid associations—are concentrated on established large asset management firms, the regulatory tightening pushed by politicians is likely to further increase the operational burdens on these firms. Critics point out that even the same regulations can place a heavier burden on small, growing asset management firms.

According to the Financial Supervisory Service and the investment banking (IB) industry on the 24th, the total committed capital of domestic private equity funds (PEFs) dedicated to institutional investors stood at 167.5 trillion won at the end of last year, a 9% increase from the previous year. The number of PEFs under management rose to 1,195, and the number of general partners (GPs) increased to 455, representing increases of 5.1% and 4.1%, respectively. On the surface, the market appears to be continuing its growth trend.

The problem is that investment capital is increasingly concentrated among large firms. While there are only 45 large GPs—each with committed capital of 1 trillion won or more—accounting for just 9.9% of the total, they manage 68.7% of the total committed capital. The share of large GPs has risen annually, from 60.4% in 2022 to 64.6% in 2023 and 66.2% in 2024. A total of 410 firms—including 163 medium-sized GPs and 247 small GPs—are currently competing for the remaining 31.3% of the funds.

Although the government is providing large-scale policy funding through the National Growth Fund, assessments suggest there are limits to its ability to resolve the funding shortages faced by small and medium-sized asset management firms as a whole. The policy-oriented sub-funds of the National Growth Fund selected this year by the Korea Development Bank (KDB) and Korea Growth Finance, among others, have a target formation amount of 5.5 trillion won. Of this, 2.08 trillion won comes from policy investments provided by the government and KDB, while the remaining amount must be raised by the selected asset managers from private limited partners (LPs).

A clear disparity is evident in the allocation sizes by league. According to the selection plan for the second round of asset managers under the National Growth Fund’s “Public Participation” category, small-league funds receive approximately 40 billion won per fund, while medium-league funds receive up to 80 billion won and large-league funds receive 120 billion won. This means that the policy funding available to small firms is only one-third of that available to large firms.

The threshold for securing policy funds was also extremely high. In the first round, 81 firms applied but only 11 were selected (a competition ratio of 7.4 to 1), and in the second round, only 7 out of 65 firms were chosen (a competition ratio of 9.3 to 1). Although separate “Small and Challenger” leagues were established, even asset managers who managed to squeeze through the needle’s eye and qualify for investment still face the challenge of securing private matching funds within the specified timeframe.

In addition, the National Growth Fund imposes clear “primary investment requirements” for each league, such as AI and semiconductors, scale-up, regional companies, and mergers and acquisitions (M&A). This is why some argue that it is difficult for small and mid-sized buyout managers—whose investment strategies do not align with the policy objectives—to fully replace general blind funds.

The capital structure for other institutional investors (LPs) is similar. Even if separate investment tracks are created for mid-cap or small-to-medium-sized AIFMs, the amount of capital allocated per AIFM will inevitably be smaller compared to that of large blind funds.

Under this structure, it inevitably takes time for small and mid-sized managers to grow their fund sizes. They need a “growth ladder”—starting with a small fund to build a track record and then forming a larger fund in the next fundraising round—but securing capital at the intermediate stages is not easy.

The Same Regulatory Burden… But Heavier for Small and Medium-Sized Private Equity Funds

As funding sources dry up due to a concentration of capital in large firms, the measures to tighten regulations on private equity funds (PEFs) currently being pushed by lawmakers are placing additional pressure on small and medium-sized firms. A bill is currently pending in the National Assembly that centers on expanding GPs’ reporting obligations, mandating external asset valuation and accounting audits, and strengthening oversight of custodians. If the bill passes, small and medium-sized GPs will have to incur significant additional costs for accounting and legal advice, external evaluations, and the establishment of reporting systems.

The problem is that these costs are largely “fixed costs” that arise based on the number of funds or the volume of business rather than the size of assets under management (AUM). Unlike large firms that can spread these costs across multiple funds, small GPs must cover all of these expenses within their meager management fees. This is why some are suggesting that, regardless of the necessity of regulation, the disparity in cost burdens based on a firm’s size must be carefully considered.

The requirement to appoint a compliance officer—which applies to GPs with assets under management (AUM) of 500 billion won or more—is also cited as another barrier hindering the growth of mid-sized firms. Even small GPs that are not currently subject to this requirement will face additional costs—such as hiring dedicated staff and establishing internal control systems—the moment their assets exceed 500 billion won.

A bill to lower the leverage limit from the current 400% to 200% also carries a high risk of further widening the gap in deal-execution capabilities. While large GPs can bridge funding gaps through additional equity investments or co-investments, small and medium-sized GPs have no choice but to scale back investment sizes or postpone bolt-on investments in existing portfolio companies. This could deepen a vicious cycle in which funding shortages lead to deteriorating performance, which in turn results in difficulties securing capital for subsequent investment rounds.

An official in the private equity fund (PEF) industry stated, “It is problematic to ignore the practical differences between domestic and overseas fund managers as well as the actual nature of regulations and instead impose uniform restrictions solely on domestic fund managers.” The official added, “Unless the intention is to eliminate small and medium-sized firms while leaving only large firms, reporting and external verification obligations should be applied differentially based on a GP’s asset under management and the fund’s risk profile.”