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Alternative investments

Korea to tighten grip on brokerages’ alternative investments

Nov 20, 2020 (Gmt+09:00)

South Korean brokerage firms' alternative investments worth over $50 billion will come under tight control, after reckless investment in overseas real estate left them with about $7 billion in unsold assets, according to financial regulatory sources on Nov. 20.

The regulatory Financial Supervisory Service (FSS) and the Korea Financial Investment Association (KFIA), a lobby group for the country’s securities firms, sat down together to prepare guidelines on brokerage firms’ alternative investments. They recently wrapped up the discussions.

“They will cover the whole process of alternative investing, including the decision-making process inside brokerage companies, evaluation and post-deal management,” one of the regulatory sources told The Korea Economic Daily.

The guidelines, soon to be unveiled by the KFIA, will be announced as self-regulatory rules. But given the top regulator’s involvement, the brokerage houses will likely feel obliged to follow them.

The upcoming requirements will include separating deal sourcing and due diligence-conducting teams, on the conclusion that these overlapping businesses at domestic brokerage firms led to failure in spotting risky investments.

Brokerage companies will also be required to step up protection for both institutional and retail investors in their sell-down assets. 

Under the guidelines, the regulatory body will call for the introduction of objective criteria and systems used for asset valuation, but has not detailed a required valuation method as of yet, the sources said.

Retail investors protest outside the FSS headquarters in Seoul over investment funds' heavy losses

South Korean brokerage firms, led by top players with over 4 trillion won ($3.6 billion) in equity capital, have aggressively expanded alternative investments into real estate, aircraft financing and infrastructure.

They have scooped up $20 billion worth of overseas real estate deals over the past three years, of which about $7 billion has not been sold down to domestic investors, according to FSS data last month.

In an analysis report on capital market risk issued in May, the FSS said Korean brokerage firms’ alternative investments reached 57 trillion won ($51 billion), including overseas assets of around 20 trillion won.

The brokerages' aggressive overseas investments heated up competition between them — in particular, in France’s real estate market, and pushed up their prices. Korean pension funds turned cool on those sell-down assets, saying they were overvalued.

Additionally, their sale of overseas investment funds meant heavy losses for investors.

KB Securities Co. has been in a legal battle with a domestic asset manager over an Australian real investment fund, seeking damages from the investment. KB has sold the fund.
 
Shinhan Financial Investment’s sale of German derivative-linked securities, which pooled 530 billion won from South Korean investors, also failed to repay the investors.

In May, Mirae Asset Global Investments Co. decided to cancel a $5.8 billion acquisition of 15 US luxury hotels, in what would have become the largest cross-border property deal by a Korean company. 

Write to Hyeong-Ju Oh at ohj@hankyung.com

Yeonhee Kim edited this article.

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