Key Takeaways
- • Domestic private equity funds (PEFs) in South Korea are hesitant to invest in real assets such as AI data centers (AIDC) because they risk being designated as large corporate groups under the Fair Trade Act, according to the financial investment industry as reported by Maeil Business Newspaper.
- • Under Article 38(1) of the Enforcement Decree of the Fair Trade Act, the large-group exemption covers only PEF full-time groups (GP, PEFs, SPCs, investment target companies and financial insurers), not REITs, real estate funds or project financial investment companies (PFVs) used for real assets.
- • Designation thresholds cited are 5 trillion won in total assets for mandatory disclosure and 12 trillion won for mutual investment restrictions, meaning a single real-asset vehicle could pull an entire PEF group into regulation.
- • Foreign PEFs face no such restriction and are leading AIDC investment: KKR plans about 3.80 trillion won in SK Horizon, and Naver began raising 10 trillion won in AIDC funds with Canada's Brookfield.
- • Foreign buyers accounted for about 80% of domestic PEF acquisitions of companies above 500 billion won in the first half of the year, and five of six deals above 1 trillion won were foreign.
Summary
Domestic private equity funds in South Korea are reluctant to invest in real assets such as artificial intelligence data centers (AIDC), according to Maeil Business Newspaper, citing the financial investment industry as of October 28. The core obstacle is regulatory. Although the 2021 revision of the Capital Markets Act opened the door for PEFs to invest in real assets, the Enforcement Decree of the Fair Trade Act, which sets the exceptions for PEF-related large corporate group designation, has not kept pace with that deregulation.
According to the industry, domestic PEFs will not receive exemption from large corporate group designation if they hold real assets through vehicles such as REITs, real estate funds, or project financial investment companies (PFVs). Article 38(1) items 5 and 6 of the Enforcement Decree exclude only PEF full-time groups, comprising the general partner, PEFs, special purpose companies, investment target companies and financial insurers. Because real assets such as data centers are typically held through these investment vehicles, even a real-asset investment worth hundreds of billions of won could cause the entire group to be designated. Assets above 5 trillion won trigger designation as a disclosure-subject group, and above 12 trillion won trigger mutual investment restrictions.
Designation would impose a substantial burden on PEFs that regularly buy and sell portfolio companies. The management company's chief executive would be treated as the same person across the group, all portfolio companies would be grouped as affiliates, and internal transactions and changes in affiliates would have to be reported to the Fair Trade Commission, with private interests also subject to regulation.
Foreign PEFs operate without these constraints and are leading AIDC investment in Korea. KKR decided to invest about 3.80 trillion won in SK Horizon, the AIDC unit of SK Group, this year. Naver has also begun raising 10 trillion won in AIDC funds with Brookfield of Canada. The pattern extends to M&A: foreign investors accounted for about 80% of domestic companies valued above 500 billion won acquired by PEFs in the first half of the year, and five of the six transactions above 1 trillion won involved foreign buyers.
The article notes that domestic PEFs would need a real-asset vehicle to establish dedicated infrastructure funds. REITs hold a tax advantage, since they generally pay no corporate tax if they distribute more than 90% of distributable profits, and enjoy borrowing benefits over ordinary corporations. Using a general corporation instead would preserve the designation exemption but forfeit those benefits.
According to the industry, domestic PEFs will not receive exemption from large corporate group designation if they hold real assets through vehicles such as REITs, real estate funds, or project financial investment companies (PFVs). Article 38(1) items 5 and 6 of the Enforcement Decree exclude only PEF full-time groups, comprising the general partner, PEFs, special purpose companies, investment target companies and financial insurers. Because real assets such as data centers are typically held through these investment vehicles, even a real-asset investment worth hundreds of billions of won could cause the entire group to be designated. Assets above 5 trillion won trigger designation as a disclosure-subject group, and above 12 trillion won trigger mutual investment restrictions.
Designation would impose a substantial burden on PEFs that regularly buy and sell portfolio companies. The management company's chief executive would be treated as the same person across the group, all portfolio companies would be grouped as affiliates, and internal transactions and changes in affiliates would have to be reported to the Fair Trade Commission, with private interests also subject to regulation.
Foreign PEFs operate without these constraints and are leading AIDC investment in Korea. KKR decided to invest about 3.80 trillion won in SK Horizon, the AIDC unit of SK Group, this year. Naver has also begun raising 10 trillion won in AIDC funds with Brookfield of Canada. The pattern extends to M&A: foreign investors accounted for about 80% of domestic companies valued above 500 billion won acquired by PEFs in the first half of the year, and five of the six transactions above 1 trillion won involved foreign buyers.
The article notes that domestic PEFs would need a real-asset vehicle to establish dedicated infrastructure funds. REITs hold a tax advantage, since they generally pay no corporate tax if they distribute more than 90% of distributable profits, and enjoy borrowing benefits over ordinary corporations. Using a general corporation instead would preserve the designation exemption but forfeit those benefits.
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