South Korea’s financial regulator is set to take disciplinary action against private equity firm MBK Partners over its management of Homeplus, Korea’s second-largest hypermarket chain, according to reports.
The Financial Supervisory Service reportedly notified MBK in advance on Friday that it would impose disciplinary measures on the firm, including a suspension from duties.
The regulator has been looking into whether the terms of the redemption rights for the redeemable convertible preferred shares were revised in favor of Homeplus around the time of its credit rating downgrade, potentially undermining the interests of investors.
RCPS are a type of security that may be converted into common stock under certain conditions at the option of preferred shareholders, providing investors with a safeguard by offering greater flexibility for liquidation.
MBK and Homeplus are accused of amending the terms so that the redemption rights of the shares were transferred to Homeplus, reducing the likelihood that investors could recover their invested capital.
Under the Capital Markets Act, sanctions against a general partner escalate in the following order: institutional caution, institutional warning, suspension from duty for up to six months and dismissal recommendation.
A disciplinary review committee will finalize the level of sanction in a meeting on Dec. 18.
If MBK faces suspension from duty or a heavier sanction, further deliberation by the Financial Services Commission, Korea’s top policymaking body for financial regulation, will follow.
As there is no precedent for suspending a private equity firm that specializes in institution-driven funds, the FSC will need to clarify the scope of such penalization. One possible measure could be prohibiting the firm from accepting new capital commitments.
The latest development comes amid the FSS relaunching a full-scale inspection of MBK in August, signaling its resolution to hold the firm accountable for the Homeplus debacle.
Earlier this year, the regulator referred the fund manager's executives to the prosecution for allegedly concealing plans to file for court receivership while issuing short-term bonds tied to Homeplus.
If MBK faces sanctions heavier than suspension, institutional investors, including the National Pension Service, could bar MBK from receiving new capital contributions.
For instance, the NPS could exclude a fund manager that has received a sanction equivalent to an institutional warning or a stronger penalty due to a legal violation from the general partner selection process.
In response, MBK has asserted that the change to the redemption rights of the shares was appropriate and that it did not undermine the interests of investors.
“The change to the redemption terms was made to prevent a sudden credit rating downgrade of Homeplus and to maintain the company’s value,” the private equity firm said through a statement.
“It was the proper duty as a general partner to protect the interests of all investors, including the NPS, and a rightful judgment made in the course of fund management.”
silverstar@heraldcorp.com
