Regulation of PEF in South Korea

Adopted back in 2004, UIT regulations were meant to be an adaptation of the Law on Indirect Investment Asset Management Business. Five years later, the FSCMA was drafted whose sole purpose was to regulate the creation & management of PEFs in the Republic of Korea. Since then, the mutual fund market has grown significantly & now the total number of registered PEFs stands at five hundred eighty three. Small funds whose liabilities don’t exceed one hundred billion have also increased in number, while SPFs account for over seventy percent of all FSC-registered mutual funds.

Republic of Korea: Registering a PEF

Mutual funds’ organizational & legal form is similar to that of LLCs. Hence, establishing a PEF in the Republic of Korea requires having no less than 1 general partner (whose liability will be unlimited) & 1 member (whose liability will be limited). Almost all general partners perform managing functions.

General partners can be:

• investors that have a ‘professional’ status;
• legal entities or individuals that have invested no less than three hundred million.

Since PEFs can be classified as PPFs, there may be no more than forty nine participants in them. An application to register an IP fund in the Republic of Korea must be submitted within 14 days from the registration date.

Obtaining the Status of General Partner

After the introduction of a mutual fund regulation regime, licensing criteria for general partners were non-existent. Later on, amendments were made to the FSCMA whereby legal entities were required to comply with some requirements (i.e. meeting the criteria for becoming a general partner in the Republic of Korea). Ensuring compliance with them requires meeting the following criteria:

• having a capital of no less than one hundred million;
• directors’ compliance with Article 5 of the CGA;
• hiring at least 2 fund managers;
• developing in-house compliance policies meant for identification & management of a conflict of interests;
• ensuring fiscal soundness & public trust.

Establishment of PEFs in the Republic of Korea

PEFs in the Republic of Korea can only purchase certain classes of assets. Criteria under which they can take part in managing their portfolio companies & assets thereof are set forth below:

• more than ten percent of a target company’s’ voting stocks must be purchased (both outstanding & issued ones);
• if less than ten percent of of stocks are bought (both outstanding & issued ones), their purchase must ensure effective management & control of a target company’s material resources;
• only bonds linked to equity can be purchased;
• to reduce risks, transactions with derivative financial instruments may be conducted;
• securities issued for implementation of infrastructural projects can be bought; 
• investments can be made in securities issued by SPCs.

Please note that the below restrictions are applicable to the registration of mutual funds in the Republic of Korea & manner in which they can manage assets for investment purposes:

1. mutual funds must keep securities & refrain from disposing them within 6 months;
2. foreign funds making direct investments may not purchase foreign companies’ shares if thirty percent of assets owned by them or their subsidiaries is in the Republic of Korea;
3. arrears are allowed if:
   1. it’s unavoidable due to the payment of compensation to members that have withdrawn;
   2. funds for operating expenses are temporarily in short supply;
   3. funds to be spent on investments in target companies are temporarily in short supply.