A 30 billion won blind bridge development fund sold by Korea Investment & Securities Co. and managed by Korea Investment Real Asset Management has faced a "total loss" risk.
According to the investment banking (IB) industry on the 6th, Korea Investment Real Asset Management said on Dec. 22 that it conducted a fair value assessment of the fund, "Korea Investment Development Bridge Blind Private Investment Trust No. 1," for investors and amortized a significant portion of the invested asset. The fund's base price fell about 45.8% to 574.41 won from 1,059.78 won.
Among the three business sites held by the fund, the "Ulsan Bangoe-dong officetel development project," which received about 15 billion won in investment, took the biggest hit. In Feb. last year, the project triggered an event of default (EOD) due to the failure to extend the maturity with the senior lenders and nonpayment of principal and interest. After two rounds of public auctions both failed, Korea Investment Real Asset Management said it effectively deemed recovery of the investment to be difficult and would amortize 100% of the accrued interest and principal.
The situation is also tough at the other business sites. The "Busan U-dong residential-commercial complex development project," in which the fund invested about 10 billion won, came to a halt after the court in 2024 finalized a disposition denying approval of the project plan at the end of an administrative suit. The senior lending group is already reviewing a sale of the claims to a nonperforming loan (NPL) specialist.
The "Seoul Gangdong Station urban renewal-type redevelopment project," which drew roughly 5 billion won of fund money, also saw an EOD after interest payments were delayed due to rising construction costs and lease contract issues. However, Korea Investment Real Asset Management said that for the Gangdong business site, it is pushing to normalize the project with a goal of starting construction in the third quarter this year, and that considering the value of the land, it excluded this site from the current amortization.
The fund was created to supply capital at the bridge stage—short-term loans for land purchase costs and initial project expenses that occur before the main project financing (PF) in real estate development. As the development market warmed nationwide in 2022, when the real estate market hit its peak, Korea Investment & Securities Co. moved to form a blind fund to expand investments in bridge development projects. But as high interest rates, rising construction costs, and a downturn in the real estate cycle set in, the bridge loan business sites included in the fund turned sour one after another, effectively halving the fund's value.
A real estate development industry official said, "With the real estate PF market remaining tight, it is hard to expect sentiment to turn around quickly," and added, "In particular, given the characteristics of bridge loan funds that participate in junior tranches, if senior creditors push ahead with public auctions or the like, investors cannot rule out the possibility of additional losses."
Sold by Korea Investment & Securities Co. in Apr. 2022 and then managed by Korea Investment Management at the time, the fund was transferred to Korea Investment Real Asset Management. Of the total 30 billion won, 24 billion won (80%) was raised from 100 or fewer investors (49 or fewer retail investors), and the remaining 20% (6 billion won) was invested directly by Korea Investment Management at the time. The minimum investment for retail investors was 300 million won per person.
Some investors have raised suspicions of "inadequate sales," saying the company violated its duty to explain the project details at the time of sale. A fund investment prospectus that Korea Investment Management sent to clients then states under land acquisition conditions, "It is possible to secure (or contract) 95% or more of private land within the target site, with no issues affecting validity."
However, for the Busan U-dong residential-commercial complex development project, land acquisition had not been completed when the fund invested in 2022. Later, in an architectural review filed with Haeundae District in Feb. 2023, the project operator was rejected on the grounds that it had not obtained ownership of a road within the project site. The operator filed suit against Haeundae District, won at first instance, but lost on appeal filed by Haeundae District, leading to a project halt and an EOD.
Some investors also objected that the losses exceeded the projected loss rate presented in the fund investment prospectus at the time. Investor A said, "In the fund investment prospectus provided by the manager in 2022, it was specified that if the fund incurred a 50% loss, the maximum loss rate for clients would be 37.5%, but the current value has been cut in half," and added, "Since all business sites are facing EODs, losses of 100% of principal could occur."
In legal circles, if investors were not clearly notified at the time of sale about the possibility of a total loss of principal, there may be grounds for a violation of the duty to explain. Attorney Park Jong-tae of Law Firm Text said, "Under the Financial Consumer Protection Act, which took effect after its 2021 revision, financial companies have a duty to accurately notify consumers of product risks," and noted, "If it is a high-risk product that can result in a total loss but was not accurately explained as such, it constitutes a violation of the duty to explain and can be viewed as inadequate sales."
Officials at Korea Investment & Securities Co. and Korea Investment Real Asset Management said, "Given the nature of development projects, some business sites have not yet settled on a clear loss rate, so guidance to fund clients was provided based on the current asset value," and added, "All investments were carried out in line with guidelines and internal procedures."