The Financial Supervisory Service has launched an investigation into MBK Partners, which issued bonds for Homeplus, before the company’s corporate rehabilitation procedures were applied for, but the authorities' inspection work is expected to be challenging. This is because MBK Partners is outside the regulatory oversight of financial authorities, unlike regular securities firms or asset management companies.
The financial authorities are applying relaxed regulations to private equity funds (PEFs) that individual investors do not access, respecting their operational autonomy. This is also the first time the FSS has initiated an inspection of MBK Partners.
However, as the Homeplus situation escalated, with individual investors who invested in commercial paper issued by Homeplus facing the risk of losing billions of won, the financial authorities stepped in unusually.
According to the financial authorities on the 21st, the FSS began its inspection of MBK Partners on the 19th. However, compared to securities firms or asset management companies that can systematically secure data, the inspection environment is harsh. Securing data is expected to be difficult right away.
To operate, regular securities firms or asset management companies must meet physical equipment requirements such as IT systems as defined by the Capital Markets Act. However, PEFs like MBK Partners are not subject to this regulation. They can start a business with a capital of 100 million won and only two professional investment personnel.
Because of this, it cannot be guaranteed that MBK Partners documented the process of deciding on Homeplus’ rehabilitation, nor can it be ensured whether such records were preserved. Verification must begin from this record at the MBK Partners office.
The same goes for company emails. While typical financial firms use their own systems, PEFs have different portals for each employee to access their emails. Even if an email exists, it can be said there isn't one.
An official from the FSS explained, “In the case of securities firms, there is a process to request materials when authorities inspect, but there isn’t one for PEFs,” adding, “It’s like a local convenience store.” The director seemed to take this situation into account when he urged at a press conference on the 19th regarding current issues, saying, “If MBK Partners has sincerity, they should actively cooperate with the inspection and investigation.”
The significant easing of regulations on PEFs occurred after the Lime and Optimus fund incident in 2019 that triggered a redemption halt of over 1 trillion won. Both funds were private equity funds, and it was revealed late that many individual investors with insufficient financial knowledge had invested.
In response, the Financial Services Commission divided private equity funds into ▲ regular private equity funds and ▲ PEFs. In the past, anyone, whether individual investors, professional investors, or institutional investors, could invest in private equity funds, but from 2021, only professional investors or those investing 300 million won or more could invest in regular private equity funds, while only institutions could invest in PEFs. As a result, regulations on PEFs were relaxed. This measure aimed to preserve the institutional intent of private equity funds, which differ from public offering funds.
Regular private equity funds must submit monthly business reports, but PEFs are exempt from such obligations. Fund reports must also be submitted quarterly for regular private equity funds, while PEFs only need to submit them semi-annually. Moreover, in the past, PEFs could use a maximum of 10% leverage while managing, but the limit has now been expanded to a maximum of 400%.
Due to these characteristics of PEFs, the FSS was not inclined to intervene at the beginning of the Homeplus situation. Until earlier this month, the authorities' position was that “it is not desirable to monitor the activities of PEFs closely.”
However, as suspicions of fraudulent bond issuance intensified, the situation reversed. MBK Partners applied for corporate rehabilitation on the 4th, the next business day after realizing that Homeplus' credit rating had dropped from A3 to A3- on the 28th of last month, indicating that there would be problems in short-term funding.
However, on the 25th of last month, just before the credit rating dropped, Homeplus issued 82 billion won worth of asset-backed short-term bonds (ABSTB) based on credit card payments. If they issued bonds while planning to lower their credit rating or seek rehabilitation, it could be considered fraudulent.
In connection with this, Kim Ki-beom, CEO of Korea Ratings, who downgraded Homeplus' credit rating, attended the National Assembly's Political Affairs Committee meeting on the 18th and said, “It would have been predictable internally at Homeplus to downgrade the credit rating.”
Credit rating agencies usually provide advance notice of a rating adjustment to the company and request supplementary materials regarding plans to improve the financial situation before making changes. Kim noted that he had requested supplementary materials from Homeplus.
The purpose of the FSS inspection is to determine whether MBK Partners recognized the fraudulent bond issuance of Homeplus and whether it led to losses for individual investors. Specifically, the FSS plans to investigate the timing of the decline in Homeplus' credit rating and the timing of the corporate rehabilitation application, suspicions of unfair trading during the issuance and sale process of short-term bonds, and whether there was an infringement of public pension interests during the transfer process of redeemable convertible preferred stock (RCPS).
According to Article 249-14 of the Capital Markets Act, if a PEF violates legal obligations, it may face imprisonment of up to one year or fines of up to 30 million won, or an administrative fine of up to 100 million won. However, an official from the FSS noted, “The cards available to take action against PEFs are limited,” adding, “The path to sanctions is unlikely to be easy.”