South Korean conglomerates race to establish CVCs 

One after another, South Korea’s household name conglomerates are establishing corporate venture capital (CVC) firms under their holding companies. 

GS Group led the trend by launching the first such firm under its GS Holdings Corp. in February. 

Other conglomerates followed suit – namely Hyundai, Hyosung and LG. 

The bullish sentiment on corporate venture capital comes on the back of concerns over the lackluster global economy following the COVID-19 outbreak and the war on Ukraine. 

Analysts say more corporations are seeking new growth engines through external investments, to counter supply bottleneck of materials and diminishing consumer confidence around the globe.

FIRST MOVER ADVANTAGE 

GS Holdings and Hyundai Corporation have set up corporate venture capital firms called GS Venture and Prologue Ventures, respectively.

Both conglomerates are waiting for approval from the Financial Services Commission. 

GS declared the new financial firm’s establishment to the top financial watchdog in South Korea two months ago. The venture capital’s official approval is expected to come in the early half of this year. 

While the approval process typically takes about six months, industry insiders forecast the FSC to expedite the process in light of the recently revised Fair Trade Act. 

GS Venture is forecast to complete its first investment later this year. 

During last month’s shareholder meeting, Hyundai Corporation revised the goal of its business to include emerging tech and venture capital. It hired Director of NH Venture Investment Shin Kwan-ho as its new leader and relocated employees to the venture capital arm. 

Hyundai Corporation and Hyundai Corporation Holdings will respectively hold 82% and 18% stakes in Prologue Ventures. The share ratio is based on the buyers’ funding power. 

All eyes are on which businesses the newly established CVCs are interested in. The word on the street is that GS is looking to the biotech and climate change sectors while Hyundai is considering how to utilize waste materials.

The general goal of venture capital is financial gain. Corporate VC, which is a subset of venture capital, is more geared towards discovering growth engines and expanding business portfolios. 

CVC is the investment of corporate funds directly in external startups. By definition, corporate venturing refers to the practice of a larger firm taking an equity stake in a small but innovative or specialist firm.

“CVCs allow for easier discovery of promising startups and diversification of investment strategies,” an expert told The Korea Economic Daily. “The reason why US tech companies were able to consistently expand their ecosystem is because they were supported by solid CVC arms.”

LG, HYOSUNG FOLLOW SUIT

LG and Hyosung are also expediting the process of launching their own CVCs.

Hyosung Corp. plans to establish a corporate venture capital firm by the end of this year and is currently looking for its chief executive outside of the group. 

LG Corp., for its part, is expected to establish a domestic CVC sometime next week. 

The conglomerate has established a US corporate venture capital arm back in 2018. LG Technology Ventures is located inside the LG Silicon Valley Lab in California.

Unlike Hyosung, LG is not ruling out its existing executives as the potential leader of the new investment arm. 

Previously, holding companies in South Korea could not establish a financial firm due to domestic law that required the separation of industrial and financial capital. Late last year, however, the Fair Trade Act was revised to allow such a practice.

The change came on the back of consistent requests by the business circle, which criticized the law as outdated and a hindrance to Korea’s economic development. 

Overseas conglomerates, especially big tech companies in the United States, have been pursuing active investments through CVCs. 

US corporate venture capital firms made investments worth $37.4 billion while the figure for South Korea stood at mere $1.8 billion, according to 2020 data compiled by London-based investment research company Preqin.

There were 739 counts of corporate venture capital investments in the US, approximately 12 times more than in South Korea. 

“In the case of Google Ventures, which is wholly owned by Alphabet Inc., it invests in unconventionally innovative businesses to rake in profits,” an industry insider told The Korea Economic Daily. The venture capital arm of Alphabet rebranded its name to GV.

The industry insider added that companies should utilize corporate venture capital in order to diversify their strategic investments. 

Write to Jeong Min Nam at peux@hankyung.com
Jee Abbey Lee edited this article.