FKCCI: Allowing Large Corporations' CVCs to Revitalize Venture Investment

[Asia Economy Reporter Changhwan Lee] On the 19th, the Federation of Korean Industries (FKI) argued that to activate venture investments by domestic general holding companies, the allowance of CVCs (Corporate Venture Capital) ownership and minimizing related regulations to maximize autonomy in establishment and operation are necessary.

CVC is a venture investment specialized company where the corporate entity is the major shareholder. Typically, it invests in venture companies by receiving funding from affiliates within the same group or external investors outside the group.

In Korea, strict separation of banking and commerce regulations prohibit general holding companies like SK and LG from owning CVCs. In contrast, overseas there are no regulations on CVC ownership by general holding companies, allowing companies to establish and operate CVCs in various ways according to their circumstances.

The role of CVCs in the global venture market is also increasing. The proportion of CVC participation in venture capital investments (based on the number of investment cases) rose from 19% in 2014 to 25% in 2019, an increase of 6 percentage points (p). The number of newly established CVCs each year also increased by 170% from 96 in 2014 to 259 in 2019.

According to FKI, the reason CVCs are gaining attention is that they enable mutual growth between large corporations and venture companies. Venture companies can receive management know-how and human networks from large corporations, while large corporations can gain opportunities for innovation through collaboration with venture companies.

For example, Google Ventures currently manages a fund worth $4.5 billion (5.3 trillion KRW) to invest in ventures. Since 2009, it has taken 25 venture companies public (IPO) and succeeded in about 125 mergers and acquisitions (M&A). Google has also acquired some venture companies to secure new growth engines.

Overseas, not only is CVC ownership by general holding companies allowed, but there are no regulations on establishment methods and fund formation, enabling companies to operate various types of CVCs and funds according to their situations.

Google Ventures (GV) is 100% owned by Alphabet Inc., the holding company. Alphabet solely invests in the $4.5 billion fund.

‘Bertelsmann Asia Investments’ is a CVC established by the German Bertelsmann Group for venture investments in the Asian region. Bertelsmann Investment (a subsidiary responsible for venture investments under Bertelsmann Europe Stock Partnership, the holding company) owns 100% of this company’s shares. The CVC is a ‘grandchild company’ of the holding company. When the CVC was established in 2008, the Bertelsmann Group invested fully in the fund.

Yoo Hwan-ik, Director of Corporate Policy at FKI, said, “Looking at overseas cases, there is no standardized structure for CVCs and funds, and companies autonomously choose structures according to their circumstances. Although the recent allowance of CVC ownership by general holding companies is welcome, imposing restrictions on the establishment and operation of CVCs may undermine the effectiveness of the system.”

He emphasized, “To induce corporate investment through CVCs and revitalize the venture ecosystem, regulations on the establishment and operation of CVCs should be minimized, as in foreign countries.”

This content was produced with the assistance of AI translation services.