The South Korean government plans to create a strategic sovereign wealth fund worth 20 trillion won (approximately $15 billion) by utilizing shares from public institutions such as the Korea Development Bank, Export-Import Bank, and Industrial Bank of Korea. The fund aims to invest directly in national strategic industries, including artificial intelligence (AI), semiconductors, robotics, and defense, while also serving as an 'anchor investor' to attract foreign sovereign funds to invest domestically.
On July 31, the government announced the 'Korean-style Strategic Sovereign Fund Implementation Plan' during a meeting of the Emergency Economic Headquarters, which also included discussions on economic relations and special management of living costs. The plan includes the establishment of a strategic investment account within the Korea Investment Corporation (KIC), with investments expected to begin next year.
While the existing KIC operates as a 'savings-type sovereign fund' that invests overseas based on foreign exchange reserves, the new account will focus on enhancing the competitiveness and potential growth rates of domestic strategic industries. It will maintain a strict separation from the existing account that manages foreign exchange reserves in terms of funding and investment decision-making.
Public Institution Shares to Fund Initial Capital
The initial capital will be sourced from approximately 16 trillion won in public institution shares held by the government, along with about 4 trillion won in shares received in lieu of inheritance and gift taxes. The government plans to contribute these shares to KIC while retaining management rights over the public institutions, using the dividends generated from these shares as investment resources.
However, the sovereign fund will not be able to deploy 20 trillion won in cash immediately upon launch. Min Kyung-seol, head of the Ministry of Economy and Finance's Innovation Growth Office, stated, "We are not planning to sell public institution shares right away for investment purposes. We expect the initial cash resources to be around 600 billion won."
Shares received in lieu of inheritance and gift taxes may be sold if necessary. The total fund size is set at 20 trillion won plus additional resources, considering the potential increase in the valuation of public institution shares and future government contributions.
Long-term Direct Investments to Share Growth Benefits
The fund will target investments in sectors such as AI, semiconductors, robotics, defense, biotechnology, energy, materials, components, equipment, nuclear power, aerospace, quantum technology, content, software, and security. It will also include investments in critical industrial infrastructure like AI data centers and energy clusters, as well as foreign supply chain companies that complement domestic industry value chains.
The fund will focus on direct equity investments rather than loans or guarantees, with no set maturity or liquidation date. If the invested companies experience long-term growth, the fund will retain its equity to share the benefits of increased corporate value with the government and the public. The fund will exercise voting rights based on its equity stake and may engage in corporate management when necessary.
Min stated regarding management participation, "We have not yet established specific criteria, but we are fundamentally considering a stewardship code level of involvement. We will develop a detailed system to fulfill the role of a strategic investor."
Filling Gaps in Policy Fund Investments and Attracting Foreign Capital
While the sovereign fund may overlap with existing policy funds like the National Growth Fund and the Fund of Funds in terms of investment targets, it differs in investment duration and approach. The National Growth Fund has a strong policy focus and combines loans with indirect investments, whereas the strategic sovereign fund emphasizes profitability through direct equity investments and ultra-long-term holdings.
The fund will also pursue 'relay investments' by acquiring shares of high-growth companies when existing policy funds reach maturity, aiming to fill the gap left when promising company shares are sold to foreign capital or when policy financing support is halted.
Additionally, the fund will facilitate joint investments with foreign sovereign funds and global asset management firms. With growing interest from foreign investors in the government's semiconductor, physical AI, and AI data center mega-projects, KIC aims to participate as a trusted domestic partner to attract follow-up investments.
Min noted, "We continue to receive inquiries about domestic investments, including the three mega-projects, and it is essential to emphasize the role of the strategic sovereign fund in joint investments and network building with foreign sovereign funds."
Benchmarking Temasek; Target Returns and Financial Reinvestment Criteria to be Determined
The operational model will primarily reference Singapore's Temasek. Similar to Temasek, the fund will invest directly in strategic industry companies without establishing a separate institution, utilizing KIC's existing global investment experience and network.
Specific target returns have not yet been set. Ko Kwang-hee, director of strategic economic policy at the Ministry of Economy and Finance, stated, "In overseas cases, typical strategic investments yield around 8-10% annually, while alternative investments can achieve double-digit returns. We will establish target returns as detailed investment principles are developed after the fund is operational."
The government has decided to limit the assets and operational profits of the strategic investment account to reinvestment, government dividends, and national treasury recovery. However, the specific allocation ratio between reinvestment and financial recovery will be determined later, and the government plans to pursue tax exemption benefits for operational profits.
Individual investment decisions will be made independently by the KIC board and its investment committee. The government will only provide broad strategic direction for industry investments through an operational committee and will not interfere in routine investment decisions. The number of private members on the operational committee will be increased from six to nine, and new executives and staff dedicated to the strategic investment account will be hired.
The government plans to propose amendments to the Korea Investment Corporation Act next month, aiming for passage in the National Assembly by the end of the year. Following legal amendments, regulatory adjustments, and the establishment of investment and risk management systems, the strategic sovereign fund is expected to be operational by next year.
* This article has been translated by AI.
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