[Teheran-ro] 'One-Strike Out': The Pros and Cons of PEF Regulation

"Innovation in the capital market can only be sustained on a foundation of trust."
Trust in the financial system, which Larry Fink, Chairman of BlackRock, has consistently emphasized in his annual letters, has become a central issue for Korea's capital market as the new year approaches. Over the past 20 years, the Institutional Private Equity Fund (PEF) market has experienced quantitative expansion, but now faces a critical test of qualitative improvement and accountability.
The 'Capital Market Infrastructure Efficiency Plan' recently announced by the financial authorities serves as a strong warning to the PEF industry, which has positioned itself as the vanguard of venture capital. At the heart of this plan is the introduction of the 'one-strike out' system, which immediately expels firms from the market for serious legal violations.
According to the Financial Services Commission (FSC), the domestic PEF market has grown into a massive sector, with committed capital reaching 153.6 trillion won and 1,137 funds as of the end of 2024. While the market has reached a global scale in appearance, it has been plagued by persistent controversies over poor internal controls and short-termism that undermines corporate value.
By raising the eligibility requirements for major shareholders of General Partners (GPs) to the same level as general financial institutions, and mandating the appointment of a Compliance Officer for medium and large GPs managing over 500 billion won, the government has declared its intention to strictly manage PEFs as regulated financial institutions with public responsibility, rather than as an exclusive league.
With this new policy, the authorities have put forward the establishment of a robust supervisory system that meets global standards. However, global standards are not just about tougher sanctions. Only when clear criteria, phased disciplinary measures, and communication with market participants are combined does an advanced regulatory framework emerge.
In this context, there are concerns that strict rules like the 'one-strike out' system being introduced to the PEF market could become excessive regulations that stifle the market’s dynamism.
PEFs are a key infrastructure supporting Korea’s economic restructuring and the discovery of new growth engines. While it is necessary to strictly punish certain violations, it is also important to avoid creating an atmosphere of fear that dampens overall investment sentiment.
Ultimately, regulation should not be a 'knife' that chokes the market, but a 'compass' that points it in the right direction. Only when market participants clearly understand the boundaries of regulation and can continue capital allocation and investment activities within that framework can the capital market achieve healthy growth.
As the new measures are set to take effect after legislative procedures in the first half of next year, the market is closely watching to see whether this will mark a turning point for qualitative advancement in Korea’s capital market, or simply become another regulatory trap.
elikim@fnnews.com Reporter