Growth Finance's First Defense Technology Innovation Fund, Competitive Bidding Among 5 VCs and Consortiums

First Investment Project, Competition Rate '5 to 1'
Management Company LOC·LOI Key
Final GP Selection Within This Month

[Asia Economy Reporter Kwangho Lee] Korea Growth Investment Corporation (Growth Investment) is set to actively launch the Defense Technology Innovation Fund (Defense Fund) contribution project aimed at expanding the domestic defense industry base. The Defense Technology Fund is a new mother fund of Growth Investment. As it is the first contribution project, attention is focused on the selection results of the general partner (GP).

The Defense Technology Innovation Fund is the first policy-type mother fund in the defense sector (totaling 60 billion KRW), established through contributions from a dedicated bank (Hana Bank) that manages integrated R&D funds from the Defense Acquisition Program Administration-affiliated agencies: the Agency for Defense Development, the Defense Technology Quality Institute, and the Agency for Defense Development. The mother fund will contribute 20 billion KRW annually over three years to create sub-funds totaling 120 billion KRW. Its purpose is to expand the defense industry base and promote technological innovation.

The fund will invest in companies in advanced scientific technology fields related to defense, such as AI (artificial intelligence) and aerospace, that wish to enter the defense sector, as well as small and medium-sized defense enterprises. It plans to actively encourage excellent private innovative companies to enter the defense industry and promote technological innovation among existing defense companies.

The first-year contribution project will allocate 20 billion KRW from the Defense Fund. Additionally, the Korea Development Bank will provide 4 billion KRW as supportive capital. A total of 24 billion KRW will be contributed to form a sub-fund of approximately 40 billion KRW within the year. One GP will be selected in this contribution project.

Growth Investment received capital contribution proposals from asset management companies that will form blind funds using the Defense Fund capital. The competition rate for this first contribution project was 5 to 1. Applicants included ▲ BNK Investment & Securities and Hyundai Technology Investment ▲ Orbit Partners ▲ WelltoSee Venture Investment ▲ Yuil Technology Investment ▲ Quad Asset Management and Gyeongnam Venture Investment. Most of these submitted Letters of Commitment (LOC) or Letters of Intent (LOI).

Notably, two applicants submitted proposals as co-general partners (Co-GP). The two alliances were a securities firm and venture capital (BNK Investment & Securities and Hyundai Technology Investment), and an asset management company and venture capital (Quad Asset Management and Gyeongnam Venture Investment).

This appears to reflect the recent difficulty in securing private funds. It is interpreted that they judged it more advantageous to jointly raise funds rather than operating alone as a limited partner (LP) salesperson. Co-GPs form and operate funds jointly, requiring close cooperation.

If selected as the Defense Fund GP, 60% of the total fund amount must be invested according to the main investment targets. The investment targets must be defense industry companies or companies in advanced scientific technology fields wishing to enter the defense industry. Defense industry companies are those designated as defense contractors under the Defense Industry Act. Companies wishing to enter must be partners of defense contractors with confirmation and delivery records from the defense contractors.

The amount the GP must bear is about 1% of the total committed amount. This means a minimum contribution of 400 million KRW based on the minimum fund size. However, the asset management company is not obligated to set aside priority loss reserves. The fund duration is 10 years, with a 4-year investment period. Performance fees are paid if the internal rate of return (IRR) exceeds the benchmark return of 6%.

An official from an asset management company that proposed a fund for this contribution project said, “It is known that an asset management company that submitted an LOI with the Military Mutual Aid Association is likely to be selected as the final GP in partnership with a large institutional investor.” He added, “However, even if selected as GP, forming the fund within the year will not be easy.”

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