Private Equity Fund (PEF)

A private equity fund (PEF) raises capital from a small group of professional investors, invests directly in companies, and follows a strategy aimed at high risk and high returns.

It generally requires a high minimum investment, and across a long horizon of roughly 5 to 10 years, it takes an active role in managing the portfolio company to build its value.

Private equity funds rely on a variety of strategies, including buyouts, growth capital, and mezzanine financing, each applied according to the characteristics of the company and the market environment.

A buyout fund acquires management control of a target company and then works to raise the company's value before selling it.

It makes active use of borrowed funds to scale up the investment, and it builds corporate value and generates returns through operational improvements, restructuring, and strategic change.

It generally operates on a medium- to long-term horizon of 3 to 7 years and pursues high risk and high returns.

This type invests in companies with strong growth potential in order to support their expansion.

The targets are generally fast-growing, promising companies, and the capital supports their expansion, new product development, and entry into new markets.

It typically uses a relatively low level of leverage and structures the investment to limit risk.

A mezzanine fund invests in instruments that fall between stocks and bonds.

It generally provides capital to companies seeking high returns, and by combining fixed-interest bonds with equity participation, it can offer investors a high rate of return while also carrying greater risk.

This type invests in early-stage companies that show promise.

It mainly directs capital into startups or businesses in their early founding stages, helping the company grow.

Because venture capital pursues high risk and high returns, it can produce very high returns when a company succeeds, but the risk of loss is also large if the company fails.

This strategy involves buying non-performing loans, restructuring them, and then selling them.

It acquires the non-performing loans of companies in financial difficulty, restores the company through debt rescheduling or restructuring, and then resells it to generate returns.

This type carries substantial risk, but it can create an opportunity to earn returns by drawing on the value of the recovered company.

The operational process of a private equity fund starts with raising capital from investors.

At this point, the fund enters into agreements with investors and puts a legal structure in place to secure the capital.

It then identifies potential target companies and sharpens its investment strategy.

Once the fund has been formed, the private equity fund searches for suitable target companies.

At this point, it analyzes various industries and companies and selects those that fit the fund's investment strategy.

It generally chooses its investment targets by weighing each company's growth potential against its risk.

Having selected an investment target, the private equity fund carries out detailed due diligence on the company.

Through this review, it analyzes the company's financial condition, management structure, and market environment, and assesses the company's value.

During this process, it identifies legal, financial, and commercial risks and develops strategies to address them.

When the due diligence and valuation are complete, the fund proceeds with the actual acquisition of equity or injection of capital.

In this step, the private equity fund acquires the company's shares or invests capital directly in order to take part in the company's management.

After the investment is made, the fund undertakes activities to enhance the company's value.

This can take many forms, such as management improvement, restructuring, entry into new businesses, and cost reduction.

The private equity fund takes an active role in management and applies a range of strategies to raise the company's value.

After a set period, a private equity fund raises the value of the company it has invested in and then recovers its investment through a sale.

In this step, returns are delivered to investors through methods such as an IPO (listing), a strategic sale, or a secondary buyout.

Once the sale is complete, the fund's operations wind down, and the returns realized at this point are distributed to the investors.

Regulation of private equity funds is governed mainly by the ‘Financial Investment Services and Capital Markets Act,’ and the key regulatory matters are as follows.

① Regulation of Collective Investment Schemes

Establishment, operation, and management are regulated under Part 5 (Collective Investment Schemes) of the Financial Investment Services and Capital Markets Act.

The fund's management company must safeguard investors' assets and provide accurate information about the fund.

② Obligations of the Fund Management Company

Part 2 (Financial Investment Business Entities) of the Financial Investment Services and Capital Markets Act sets out the obligations and conduct rules for fund management companies, and the fund manager must take responsibility for the fund's operation.

It also includes rules governing the sale of collective investment securities.

③ Public Offering of Collective Investment Securities

Part 3 (Issuance and Distribution of Securities) of the Financial Investment Services and Capital Markets Act regulates the public offering of collective investment securities.

It defines the procedures and requirements that apply when a fund raises capital by issuing securities through a public offering.