Overview of PEF Market in South Korea

Ever since the regulatory framework for PEFs in the ROK was put in place, their number has been steadily growing. In an attempt to streamline registration & investment requirements for setting up PEFs in South Korea, the local legislators are now trying to amend existing laws & introduce changes that have long been overdue. 

Legal Form

PEFs in the ROK have a special legal form & possess the following characteristics:

• governed by FSCMA’s provisions & South Korea’s commercial legislation; 

• combine corporate & LLC characteristics & have a special legal personality status.

Obtaining a license of a PEF manager in the ROK implies bearing unlimited liability with regard to PEFs’ obligations. Due to their limited members status, PEF managers’ liability is limited by the sum they’ve contributed to PEFs. 

South Korea: Setting up a PEF

Creating PEFs in the ROK requires their members to agree on their charter & register them in the country’s commercial register.

PEFs’ charter contain this information:

• purpose;
• name;
• site;
• sum contributed by each participant & method of contribution (cash or otherwise);
• timespan (no more than fifteen years);
• reasons for dissolution;
• participants’ names & ID numbers.

After a PEF is set up, its manager must report establishing a PEF in the Republic of Korea to the local regulator (the FFS). The said report may contain the following information:

• site;
• date of creation ;
• purpose;
• name;
• timespan;
• reasons for dissolution;
• information about an investment company;
• information on limited members;
• information on managers;
• investors’ liabilities;
• amounts contributed by investors;
• investment-related policy;
• investment goal & strategy.

Setting up PEFs in the ROK: Requirements

Setting up PEFs requires hiring custodians that have a registered office in the ROK & hold a license of a trust company in the ROK. PEF managers must keep PEF records & can retain services of South Korean administrators (though they aren’t required to).

Investors’ Liability

Normally, investments in PEFs are divided between their members. Their liability depends on the sum they’ve contributed to PEFs.

Special Requirements

Restrictions on PEFs’ investment activities are quite numerous & include:

• debt financing & provision of guarantees for any 3rd party liabilities;
• investing in South Korean IPCs (only allowed if PEFs hold a fifty per cent stake in such companies).

PEFs & IPCs are only allowed to invest in target companies in South Korea if 

• they acquire ten per cent or more of their capital. 
• their capital acquisition amounts to less than ten percent & they appoint one or more directors; 
• they invest at least fifty per cent of their capital through IPCs.

PEFs aren’t permitted to invest in South Korean dummy companies.

Establishing PEFs in the ROK requires keeping in mind that transferring managers’ interests to 3rd parties is only possible after getting approval of all PEFs’ participants. Transferring interests of limited members to 3rd parties is only possible after getting the approval of a PEF manager.

Main Regulators

Regulating PEFs & their managers in the ROK is vested in the FSS. It can also carry out audits of PEFs & their assets.

Applying for a license of a PEF manager in the ROK requires submitting the following documents:

• report on setting up a PEF in the ROK;
• report on changes in AoA;
• semi-yearly reports on PEFs’ financial status;
• report on investing in a target company in the ROK (submitted within two weeks of such an investment).

Conclusion

Ever since they were first established, PEFs have been the main objects of M&A deals in the ROK. It is projected that South Korean PEF market will be continuing to grow & that the main investors in PEFs will be pension funds.