South Korea’s Financial Supervisory Service (FSS) has taken preemptive steps to address rising risks in overseas private credit funds.
The timing of this move is no coincidence. It comes directly after two major global private credit funds showed clear signs of liquidity stress. In early March, Blackstone's BCRED fund processed a record volume of redemption requests, while in February, Blue Owl's OBDC II fund halted its regular redemptions altogether, switching to a model of selling assets to return cash to investors. These events sent a powerful signal that the 'liquidity promise' of these popular retail products was being severely tested.
This global issue is particularly relevant for Korea because of the explosive growth in local demand. Retail investor assets in these funds have surged more than fourfold in just two years, from about 115 billion KRW to nearly 480 billion KRW. This rapid influx of retail money into complex, illiquid assets creates a vulnerability, especially if many investors rush to withdraw their funds at the same time.
The FSS's response targets the root causes of this vulnerability. First, it addresses the fundamental mismatch between illiquid assets (loans to private companies that can't be sold easily) and liquid liabilities (the fund's promise to return investor money on a quarterly basis). Second, with default rates on private loans starting to creep up, there are growing concerns that the risks are understated. Third, a lack of transparency—a problem long highlighted by the IMF and FSB, and exacerbated by the recent reversal of SEC disclosure rules in the U.S.—makes it difficult for Korean distributors and investors to get timely, accurate information.
Ultimately, the FSS's meeting with securities firms was a proactive measure to build guardrails. By demanding stronger information systems, robust liquidity management, and concrete 'contingency plans,' the regulator aims to protect investors and ensure financial stability before a potential liquidity crunch materializes.
- Glossary
- Private Credit: Loans made by non-bank financial institutions to companies, which are not traded on public markets.
- Semi-liquid Fund: A type of fund that offers limited, periodic opportunities for investors to redeem their shares, such as quarterly, unlike mutual funds which offer daily liquidity.
- Redemption Gate: A temporary restriction or suspension a fund imposes on investor withdrawals, typically during times of market stress or high redemption demand.