Financial Supervisory Service Governor Lee Chan-jin signaled an intention to tighten regulations on private equity funds' leveraged buyouts (LBOs). An LBO is a method of taking on debt secured by the target corporations' asset or future cash flow, which MBK Partners used when acquiring Homeplus Co.
At the National Policy Committee's audit on Oct. 21 at the National Assembly in Yeouido, Seoul, Lee said, "Regarding private equity funds using the LBO method, I have continuously pointed out since 2015 whether it meets ESG standards for institutional investors to provide funds."
Kim Nam-geun, a lawmaker from the Democratic Party of Korea, noted that there are many cases in which MBK weakens the acquired corporations and called for stronger regulation of the LBO method.
Kim said, "The fact that MBK acquired Homeplus Co., virtually ran it into the ground, and is trying to enter liquidation proceedings is becoming a major social problem," adding, "By acquiring corporations and making them borrow through collateral under the LBO method, private equity funds are maximizing short-term profits."
He said, "Regulation is necessary for LBOs, but institutional investors such as the National Pension Service and banks are not saying a word because of penalty claims, even though they have stewardship code obligations."
He continued, "The Capital Markets Act should be revised so that institutional investors like the National Pension Service receive prior reports on private equity funds' investment plans," and added, "There needs to be institutional intervention so that financial authorities, upon receiving reports, can issue suspensions or corrective orders regarding excessive collateral provision."
Regarding Kim Nam-geun's call to strengthen the supervisory framework over private equity funds' LBO-style M&A, Lee said he agreed on the need for regulation.
Lee said, "Providing funds to private equity funds using the LBO method is a very serious problem," adding, "From the standpoint of financial supervision, we view it as serious."
He added, "It is a very serious problem for institutional investors to provide funds to LBO-style private equity funds," and "From the FSS standpoint as well, we are taking this very seriously and are now pushing preparations to significantly strengthen the management and supervision framework for private equity funds."