Seoul to tighten eligibility for institutions to bid for IPOs

South Korea will tighten its eligibility requirements for institutional investors to bid for initial public offerings, a move aimed at cooling the overheated IPO market.

The Korea Financial Investment Association (KFIA), a self-regulatory body for securities companies, on March 11 revised its rules on the qualifications for institutional investors that participate in the bookbuilding of domestic IPOs.

The revised rules will apply to investment companies that manage funds for a limited number of individuals, excluding brokerage companies and public fund management firms.

IPOs, for which applications are submitted from May 1, will be subject to the new regulations.

To bid for an IPO, an institution must have at least 5 billion won ($4 million) in assets under management at market value as well as at least two years of experience, or at least with 30 billion won ($24 million) in AUM.

The regulatory move comes on the heels of LG Energy Solution Ltd.'s glitzy IPO in January of this year. The world's No. 2 battery manufacturer drew a record 11,500 trillion won ($9.65 trillion) in bids from institutional investors, more than 10 times the size of the domestic fund market.

Industry watchers attributed the unprecedented amount of bids in part to small asset managers' big bets on the IPO only to raise their allotment chances amid a lack of regulations.

At the time, most of the institutional investors placed bids worth as much as 7 trillion won ($6 billion) for LG Energy shares, or the maximum amount earmarked for institutional investors in aggregate for the $11 billion offering.

In South Korea, the number of IPOs, in which small institutions submitted bids without having enough money on hand, had been on the rise to 35 in 2020 and 66 in 2021, versus 19 in 2019, according to the KFIA.

Between 2020 and 2021, such small investment firms with a handful of individual investors accounted for 78% of those institutional investors that laid big bets on IPOs beyond their financial capabilities.

The tightened rules are expected to throw cold water on the already cooling IPO market given rising interest rates and concerns about the fallout of the war in Ukraine.

"The IPO market's boom led to the creation of a large number of new investment companies last year. But under the new rules, most of them will not qualify to participate in bookbuilding from the second half of this year," said an investment industry official.

"The IPO market bubble will likely burst and money will flow into only a few hot IPOs."

Meanwhile, Kakao Mobility Corp. chose Credit Suisse, Morgan Stanley, Citigroup Global, Korea Investment & Securities Co. and Daishin Securities Co. as its IPO bookrunners, according to sources with knowledge of the matter on Monday.

Back in 2017, TPG Capital, Japan's Orix Corp. and Korea Investment Partnes invested a combined 500 billion won in Kakao Mobility on conditions that the country's largest taxi-hailing app would go public within five years.

Google and the Carlyle Group are also among its pre-IPO investors.

Write to Ye-Jin Jun at ace@hankyung.com
Yeonhee Kim edited this article.