Guide to accessing Korean capital

Korea is an increasingly attractive destination for fundraising by global GPs. Offshore funds registered with the Financial Supervisory Service of Korea (FSS) marketing to Korean investors soared from 49 in 2010 to 401 in 2021, most of which are private funds investing in alternative assets. Several large institutional investors will increase their allocations to alternative assets: the National Pension Service’s allocation will rise from 13.7% in 2022 to 15% in 2027, while Korea Investment Corporation’s allocation will go up from 17.5% in 2021 to 25% in 2025. 

But as Korean fundraising becomes more competitive, global GPs face several challenges. Chief among these is understanding regulation. During the pandemic, the prolonged fund registration process caused a few global GPs to give up their marketing efforts in Korea. Here are the main regulatory requirements that apply to offshore funds in Korea:

1. Fund registration for offshore funds in Korea 
GPs must register their funds with the FSS before marketing and offering to Korean investors. This is mostly straightforward, but the biggest concern for global GPs is the lengthy approval process. Since the FSS currently reviews and approves registration applications on a strict first-come, first-served basis, prompt preparation and submission of application documents is crucial to expediting registration. Although there is no clear statutory definition or regulatory guidance as to what constitutes marketing activity, it is generally understood to mean an offer or investment solicitation made to a prospective investor to invest in the fund. Common market practice is ensuring that the fund is registered prior to the targeted closing date for acceptance of a first Korean investor(s). This can be justified on the assumption that the fund marketing has been conducted just before the subscription of the first Korean investor(s).

Generally, activities that do not mention a specific fund product or strategy, such as customary relationship management activities, investment strategies, capacities and track records, are permitted. In contrast, activities that introduce a specific fund product through material such as a teaser, pitch book, or subscription documents, are risk-based activities. GPs should take precautions to reduce the regulatory risks associated with pre-marketing, such as including disclaimers stating that the materials are not intended for marketing a specific fund product, providing fund documents only in draft form, and keeping records of communication with prospective LPs. 

GPs should also note that the fund registration requirement could apply to investment vehicles that are not typically regulated as “funds” in other jurisdictions, such as co-investment/continuation vehicles and SMAs established as a fund of one, depending on their structures and terms.

2. Local distributor engagement
Offshore funds in Korea must engage a locally licensed investment broker as the fund’s distributor or placement agent to conduct any marketing activities to Korean investors. However, GPs of offshore funds are not required to engage a local investment broker if the fund is marketed to a Korean feeder fund. 

3. Korean feeder funds
A Korean feeder fund (K-Feeder) is a collective investment scheme, mostly in the form of an investment trust, established by a locally licensed asset management company (AMC) for investing in an offshore fund. Although there are no publicly available official statistics, we believe that more than half of Korean investors (including institutional investors) prefer to invest in offshore funds via K-Feeders instead of investing directly. 

For some institutional investors, the use of K-Feeders could be driven by the need to outsource administrative tasks involved, such as filling out subdocs and handling Know Your Customer/Anti-Money Laundering matters, foreign exchange filings, as well as currency hedging. Note that most Korean investors, including those investing through K-Feeders, are subject to a prior report filing obligation if their investment in an offshore fund amounts to 10% or more of the aggregate investments of all investors in the fund. This could take as long as four to six business days from submission. To avoid any possible default on their capital contribution obligations, Korean investors will seek offshore GPs’ assistance to promptly provide information and documents required for the filing.

4. Note feeder structure
Certain Korean insurance companies tend to prefer investing via a note feeder structure that issues a mixture of debt securities (usually in the form of notes or loan instruments) and equity securities in the form of LP interests. This is because insurance companies are required to set aside an amount of capital calculated based on the risk characteristics of each asset they own. It is understood that investing via a note feeder, compared with investing directly into an offshore fund, could lower the required capital. 

If GPs recognize a potential interest in a note feeder structure for their funds, they first need to check if there is enough demand from insurance company investors to justify the effort and expense required, and what specific terms are required by the investors (e.g. a certain credit rating). Also, since it is likely that the note feeder must be registered with the FSS, it is crucial for funds to conduct market testing. 

5. Reverse inquiry exemption
If a Korean investor proactively initiates a request for information on an offshore fund and subscribes to the fund with no investment solicitation or marketing activities from the offshore fund side, fund registration and local distributor engagement are not required. 

However, this is a gray area especially when pre-marketing activities are involved. Since any error on the reverse inquiry exemption applicability carries criminal penalties for the GP, this exemption should be relied on sparingly with respect to a very limited number of investors. GPs must keep records of all communications with the relevant investor from first contact up to the actual subscription as evidence of no solicitation. 

Would it be helpful for GPs to establish a branch or subsidiary in Korea to raise capital? It depends. Doing so can show your commitment to the Korean market, and most Korean investors tend to factor in local accessibility of global GPs when deciding to invest in an offshore fund. However, GPs still have to engage a local investment broker to conduct marketing activities for your fund, and the role of your personnel residing in Korea must be limited to supporting local investment brokers. Therefore, GPs should conduct a careful cost-benefit analysis before establishing a business presence in Korea.

About
Bae, Kim & Lee LLC was founded in 1980 and is one of the premier law firms in South Korea. The Seoul-based BKL provides market-leading legal services in funds and asset management, corporate/M&A, capital markets, finance, dispute resolution, antitrust, tax, IP, employment, real estate, TMT, maritime, and insurance. With over 700 attorneys and offices in Seoul, Beijing, Hong Kong, Shanghai, Hanoi, Ho Chi Minh City, and Yangon, the firm advises a broad range of clients, including Korean conglomerates, government organizations, and international financial institutions.

This article originally appeared in Fundraising from Korea: A guide to raising capital. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Bae, Kim & Lee LLC providing the information in this content accept no liability for any decisions taken in relation to the above.