Q1 New Venture Investment Amount Down 60% YoY... "CVC Regulation Must Be Minimized"

Fed Federation Advocates Easing Restrictions on General Holding Company CVC Activities
Cases of Fund Formation Failure Due to CVC Regulations
No CVC Regulations in Major Overseas Countries

There has been a call to ease regulations that limit the proportion of external funds to a maximum of 40% when general holding companies establish corporate venture capital (CVC) funds.

The Federation of Korean Industries (FKI) announced on the 13th that new venture investment in the first quarter of this year amounted to 881.5 billion KRW, a sharp decline of 60.3% compared to the same period last year (2.2214 trillion KRW). The cumulative investment amount last year also decreased by 11.9% year-on-year to 6.764 trillion KRW, clearly indicating a tightening in the venture market's investment environment.

Although the Fair Trade Act has been amended and implemented, CVCs affiliated with general holding companies are subject to relatively more regulations compared to CVCs of non-holding company groups. The most representative regulation pointed out by the CVC industry is the restriction that external funds can only make up 40% of the funds raised by CVCs. Recently, there was a case where a holding company-affiliated CVC planned to establish a fund with a 50:50 equity contribution with an external investor and considered co-managing (Co-GP) the fund, but the plan was canceled due to this regulation. Additionally, the proportion of CVC funds that can be invested in overseas venture companies is limited to a maximum of 20% of the fund size, which restricts the consideration of various investment plans.

Overseas, there are no special regulations on the establishment methods and fund formation of general holding company CVCs, allowing companies to autonomously choose their structure. For example, Legend Capital (CVC), a subsidiary of China's Legend Holdings, formed the 'RMB Fund II' in 2011, which included investments from the holding company Legend Holdings as well as various external institutions such as the National Council for Social Security Fund (equivalent to Korea's National Pension Service) and Xi'an Shangu Power (an energy company).

Recently, the Financial Services Commission revised the Financial Investment Business Regulations to allow asset management companies to co-manage venture investment associations under the Venture Investment Act together with startup investment companies. This permits two companies classified differently in the financial industry to jointly operate venture funds, aiming to revitalize investments in the recently contracted venture industry. Despite these financial regulatory relaxations, general holding company CVCs find it difficult to benefit. The industry norm for co-managing venture investment associations is for the managing entities to contribute 50% each, but general holding company CVCs can only have external investors contribute up to 40%, making it difficult to enjoy the benefits of regulatory easing.

Choo Kwang-ho, head of the Economic and Industrial Headquarters at the FKI, said, "While it is welcome that general holding companies are now allowed to hold CVCs, imposing restrictions on the establishment and operation of CVCs could undermine the effectiveness of the system," adding, "Regulations related to CVCs should be minimized to encourage corporate investment and promote the activation of the venture ecosystem, thereby securing new growth engines for companies and fostering win-win innovation between large corporations and venture companies."

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