The Financial Supervisory Service gave MBK Partners prior notice of a heavy penalty in connection with the "Homeplus incident." If the heavy penalty is finalized, it appears unlikely the firm can avoid business damage such as the return of investment from the National Pension Service.
According to the financial sector and financial authorities on the 23rd, the FSS gave MBK Partners prior notice on the 21st of a heavy penalty that includes "suspension from duty."
This is the first time a heavy penalty is being pursued against a general partner (GP) of an institution-only private equity fund. Under the Financial Investment Services and Capital Markets Act, the order of GP sanctions is "institutional caution–institutional warning–suspension from duty within six months–dismissal recommendation."
Earlier, in March, the FSS inspected MBK Partners and then conducted an additional probe in Aug., during which it detected suspected unsound business practices and violations of internal control obligations by MBK Partners.
In particular, the FSS is said to have focused on whether investors (LPs) including the National Pension Service were harmed when the redemption terms of redeemable convertible preferred shares (RCPS) were changed around the time Homeplus Co.'s credit rating was downgraded.
Once the FSS gives prior notice, a sanctions review committee is typically convened within a month. Heavy penalties of suspension from duty or higher are finalized after going through the Financial Services Commission (FSC).
Initially, the FSS put the sanction process on hold until the prosecution's investigation ended, but after Lee Chan-jin took office as FSS governor and fully reexamined matters related to Homeplus Co., it led to the derivation of this heavy penalty plan.
If a heavy penalty is finalized against MBK Partners, the firm is expected to take a hit to its business. This is because, if it receives a sanction of institutional warning or higher, the process of selecting an external manager can be suspended or canceled.
In materials submitted in Mar. to the office of Lee In-young of the Democratic Party of Korea, a member of the National Policy Committee of the National Assembly, the National Pension Service said, "If sanctions are imposed, the process of selecting an external manager can be suspended or canceled."
MBK Partners acquired control of Homeplus Co. in 2015 for 7.2 trillion won (including existing borrowing fund). In the process, it used a leveraged buyout (LBO), borrowing about 2.7 trillion won.
However, as the rapid growth of the e-commerce market coincided with regulations on big-box stores, worsening results led to a liquidity crisis. It applied for court receivership in Mar. It is currently proceeding with a pre-approval sale before the rehabilitation plan is authorized.
Regarding the change in RCPS terms, MBK Partners maintains that it did not infringe on the National Pension Service's interests. MBK Partners explained, "The terms of the preferred shares in which the National Pension Service invested were not changed, and we did not infringe on the National Pension Service's interests."
It added, "Korea Retail Investment (MBK Partners' special purpose company) changed the redemption terms of Homeplus Co.'s preferred shares to prevent a sudden credit rating downgrade of Homeplus Co. and to maintain Homeplus Co.'s corporate value."
MBK Partners also said, "As a GP, it was a natural duty and an operational judgment to protect the interests of all investors, including the National Pension Service," adding, "We will faithfully explain ourselves in the upcoming sanctions review and subsequent procedures."