Korea Growth Finance and the Financial Investment Association have proposed measures to alleviate the bottleneck in the recovery of venture capital and private equity (VC&PE) markets by expanding secondary investments.
During a policy seminar on activating the venture recovery market held at the Financial Investment Association's Bulls Hall on October 8, Kim Hee-jin, head of the Industrial Finance Team 3 at Korea Growth Finance, stated, "While the scale of new VC and PE fund formations in Korea has surged, the recovery market remains trapped in an IPO box. Various private-led liquidity tracks, such as secondary LP stakes and continuation funds, need to be activated."
Im Byeong-tae, head of the Securities Division 1 at the Financial Investment Association, added, "As the supply of venture capital from the securities industry expands, it has become urgent to establish a role in the recovery market. We plan to execute 1 trillion won in secondary investments over the next three years to act as a catalyst for the market."
Kim pointed out the supply-demand imbalance between the scale of new VC and PE fund formations and the recovery market, based on data analysis.
According to Kim, the scale of new VC fund formations in Korea increased from 2.6 trillion won in 2015 to 14.3 trillion won last year. Similarly, private equity funds grew from 10 trillion won to 30 trillion won during the same period, surpassing an annual new formation amount of 42 trillion won. However, the recovery market relies on IPOs and pre-IPO off-market sales for about 85%, while the amount raised through IPOs has stagnated or decreased over the past decade.
Kim noted, "The share of private LPs in VC funds, which was around 75% in 2022, has decreased to 65% in the first half of this year. If recoveries are delayed within the fund's maturity, the outflow of private capital may intensify."
He proposed secondary LP stakes, where investors sell their holdings to secure liquidity, and continuation funds, which transfer existing portfolios to new funds, as alternatives. While the global market for secondary capital stood at 443 trillion won at the end of last year, the share of domestic secondary funds remains at only 5-8% of newly formed funds.
Korea Growth Finance has executed secondary LP stake investments since 2018, accumulating over 110 billion won in investments and recovering about 90 billion won.
Im Byeong-tae then presented the detailed funding plans from the securities industry to activate the recovery market.
He explained, "The scale of venture capital supply through comprehensive financial investment firms' issuance notes, integrated investment accounts (IMA), and specialized securities firms for SMEs has expanded to 11.6 trillion won as of the second quarter of this year. It is now time to support the recovery market in line with the expanded capital supply."
According to the support plan released by the Financial Investment Association, the securities industry aims to pursue a total of 1 trillion won in secondary investments over the next three years. This will be combined with a 1 trillion won fund established by related institutions, such as the Korea Exchange, for a total operation scale of 2 trillion won.
The support track will be implemented through two main methods: individual investments by large comprehensive investment firms and joint funds by securities companies. Initially, nine large comprehensive investment firms that hold or are in the process of obtaining issuance notes and IMAs will invest about 700 billion won in stocks, convertible bonds (CB), warrants, and secondary fund contributions. Additionally, the top 15 securities firms by operating profit and the Financial Investment Association plan to establish a joint fund in the form of a master fund with a contribution of 300 billion won.
Im stated, "We will select a professional master fund manager through public bidding and allocate funds to stocks, LP stakes, and continuation funds. We aim to complete the selection of managers by the end of this year and begin substantial investments in early next year."
* This article has been translated by AI.
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