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Venture capital

S.Korea to back $18 bn domestic VC fund plan by 2025

Jan 04, 2021 (Gmt+09:00)

The South Korean government will inject 1 trillion won ($924 million) into homegrown venture capital funds this year, with a plan to launch three VC funds expected to raise up to 4 trillion won in aggregate.

This first injection is part of a five-year government plan announced recently, under which 20 trillion won ($18 billion) worth of homegrown VC funds will be set up jointly with asset managers by 2025 to invest in contactless, digital and environmentally friendly businesses.

Two state-run institutions – Korea Development Bank (KDB) and Korea Growth Investment Corp. – will take charge of the government investment to launch the funds. Asset managers will be responsible for drawing additional money from other investors to top up the funds.

Specifically, the 1 trillion won earmarked for this year will be funneled into three funds: a 2.2 trillion won corporate investment vehicle; a 600 billion won infrastructure vehicle; and a 200 billion won vehicle open to individual investors. They will raise the remaining 2 trillion to 3 trillion won from the private sector within the year.

Backed by the policy money, domestic VC funds have grown in size over the past few years. In 2020 alone, a total of 17 funds raised more than 100 billion won, respectively, compared to 14 in 2018. In aggregate, the 17 funds drew 3 trillion won, accounting for about 70% of the estimated 4 trillion won raised by Korean VC funds last year.

Their growing size is likely to encourage them to venture into late-stage deals, pre-IPO investments and secondary transactions dominated by global rivals.

Their active investment in broader stages of investments will likely push more Korean startups closer to the status of a unicorn, or a private company with an enterprise value of more than 1 trillion won. 

“Among the existing VC funds, over 30 funds have raised more than 100 billion won. The increasing number of large funds means the market landscape will change significantly this year,” said Korea Venture Capital Association Chairman Chung Sung In. 

Atinum Investment, known for concentrating on only one fund, raised 500 billion won last year, the biggest-ever fundraiser by a domestic VC fund. 

Other major Korean VC funds raised in 2020

Company name Fund size Fund name or strategy
Korea Investment Partners 350 billion won Korea Investment Bio Global Fund
LB Investment 310 billion won Next Unicorn Fund
Neoplux 120 billion won Secondary investments
Intervest 108 billion won Secondary investments
Hashed Ventures  120 billion won Blockchain, cryptocurrency startups

Since venture capital investments were introduced in South Korea in the 1980s, a total of 58 VC funds have raised more than 100 billion won, respectively. Among them, over 60%, or 37 funds, were launched between 2018 and 2020.

“Managing large funds requires more sophisticated strategies and specialized professionals,” said LB Investment CEO Park Ki-ho. “The increasing number of large funds in this market will further develop the venture capital industry.”

MONEY GAMES? 

This year, around 30 Korean VC funds with over 100 billion won in capital are expected to take part in the domestic VC investment market. Those large funds are expected to target companies in the scale-up phase, or those that have already completed their second round of funding. Scale-up investments require a minimum investment of tens of millions of dollars by a single fund. 

Further, they will likely expand into secondary transactions, or investing in companies in which primary investors are seeking to exit, and follow-on investments in the companies they have already invested in, as well as global deals.

Their growth, however, could intensify competition and push startup valuations higher.

“Despite the growth in fund size, the domestic startup market remains small. Global investments are difficult to make in the current pandemic situation,” said a VC firm CEO. “With markets overflowing with money, the limited number of targets will highly likely create valuation bubbles.”

He said VC funds will likely break away from the conventional club deals, in which a number of funds make joint investments in a target company.

Additionally, bigger funds may elbow out smaller funds in early stage investments, which require only 10 billion to 20 billion won, in pursuit of higher returns.

“A flood of large funds into this market could lead to money games in all stages of VC investments, not only in the early stages but also the late stages. That would devastate the investment ecosystem,” said another VC industry source.

Write to Jung-hwan Hwang at jung@hankyung.com

Yeonhee Kim edited this article.

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