Financial Holding Company-Affiliated VCs: Drought Solvers or Black Holes?

Emergence of Venture Capitals Affiliated with Financial Holding Companies
Serving as Funding Sources for Early-Stage Startups Facing Financial Difficulties
Concerns Over Funds Flowing to Holding Company and Bank-Affiliated VCs
"Contrary to Public Function Purpose and Risks Undermining Healthy Growth of VC Industry"

Recently, there has been a noticeable increase in cases where domestic financial holding companies establish or acquire venture capital (VC) firms that invest in early-stage companies. Financial holding companies, which hold vast amounts of cash, are strengthening their venture investments as a strategy to enhance their non-bank sectors and discover future growth engines. While KB, Shinhan, Hana, Woori, and NH have already secured VC subsidiaries that invest in early-stage companies, IBK is also preparing to establish a VC within this year.

VCs discover and invest in early-stage companies, and banks can link loans to these investments, enabling vertical integration. The entry of mega banks with enormous assets into the VC industry has a dual effect. On the positive side, it can serve as an emergency outlet for venture companies facing financial difficulties amid continued high interest rates. However, if bank funds, which should flow to various VCs, are concentrated only in their affiliated subsidiaries, the negative aspect of creating a 'tilted playing field' may be highlighted.

Financial Holding Companies Entering the Venture Capital Industry

Since KB Financial established a venture investment company (KB Investment) with a capital of 10 billion KRW in 1990, there had been no VC under financial holding companies for about 30 years except KB Investment. However, in the past five years, VCs under financial holding companies have been emerging one after another. Starting with Hana Ventures (Hana Financial) in 2018, followed by NH Venture Investment (NH Financial) and BNK Venture Investment (BNK Financial) in 2019, Shinhan Venture Investment (Shinhan Financial) in 2020, Hi Investment Partners (DGB Financial) in 2021, JB Investment (JB Financial) in 2022, and Woori Venture Partners (Woori Financial) in 2023.

The reason financial holding companies are entering the VC industry is to strengthen profitability by expanding their non-bank portfolios. The intention is to actively reap the rapidly growing VC industry's fruits through their subsidiaries, beyond the traditional 'interest business' based on loan-deposit margins. Banks have so far invested funds in external VCs to invest in early-stage companies, but they now reflect a will to maximize profits by directly managing investments and linking bank loans. Another goal is to build expertise in the VC sector, which is expected to grow further, and enhance their capabilities as investment banks (IB).

The performance is not bad. KB Investment's net profit in the first half of this year was 15.592 billion KRW, a 357% increase compared to the same period last year. Its assets under management exceed 2 trillion KRW. Woori Financial Group's Woori Venture Partners (formerly Daol Investment), acquired in March, recorded a net profit of 6.155 billion KRW in the first half, up 49% year-on-year. Shinhan Venture Investment and Hana Ventures posted net profits of 2.261 billion KRW and 2.292 billion KRW, respectively, in the first half of this year.

'Tilted Playing Field' Concerns in the VC Industry

The successive emergence of financial holding company-affiliated VCs has raised concerns in the VC industry that bank funds, which previously flowed evenly to various VCs, may now be concentrated only in financial holding company-affiliated VCs, creating a 'tilted playing field.' This criticism is akin to 'preferential treatment' where large corporations unilaterally support their subsidiaries.

In fact, examining the funds operated by financial holding company-affiliated VCs shows that most of the shares are composed of funds from the parent holding company, banks, and capital companies. An analysis of the first half business reports of Shinhan, KB, and Hana Financial shows that they invested a total of about 500 billion KRW in affiliated VCs.

Shinhan Venture Investment received approximately 202.277 billion KRW in investments from Shinhan Financial Group and Shinhan Bank through nine funds. These include Shinhan-Neo Market-Frontier Investment Association No. 2 with 36.5 billion KRW (42.7%), Shinhan Venture Tomorrow Investment Association No. 1 with 35.4 billion KRW (39.62%), Shinhan-Neoplux Energy New Industry Investment Association with 21.5 billion KRW (31.66%), and New Wave No. 6 Investment Association with 13.5 billion KRW (30%).

KB Investment received a total of 218.7 billion KRW in investments from KB Financial Group, Kookmin Bank, and KB Capital through 13 funds. These include KB Global Platform Fund with 50.8 billion KRW (22.73%), KB Digital Innovation Venture Investment Association with 34.2 billion KRW (25.74%), KB Smart Scale-up Fund with 41 billion KRW (25%), KB Founders Club 2022 Fund with 19.5 billion KRW (66.67%), KB New Deal Innovation Fund with 17.1 billion KRW (20%), and KB Intellectual Property Investment Association No. 2 with 16.3 billion KRW (37.5%).

Hana Financial Group invested a total of 66.819 billion KRW in three funds held by Hana Ventures. These include approximately 25.4 billion KRW (46.2%) in Hana Innovation Ventures Scale-up Fund, 25.4 billion KRW (57.4%) in Hana Non-face-to-face Digital Innovation Fund, and 16.2 billion KRW (44.5%) in Gyeonggi Hana Support Fund No. 2. An IB industry official explained, "In the case of blind funds raised by VCs, it is necessary to combine government fund-of-funds with private capital to form the fund, and being under a financial holding company makes it relatively easier to create funds."

The VC industry has mixed feelings of expectation and concern about the aggressive expansion of financial holding company-affiliated VCs. Yoon Geon-su, chairman of the Korea Venture Capital Association, said, "The market entry of financial holding company-affiliated VCs is positive in terms of expanding the overall VC market size, but if bank funds are concentrated only in their affiliated VCs, it could create a tilted playing field."

Banks are regulated industries with public functions that cannot be ignored. The same applies to financial holding company-affiliated VCs. However, if banks with large-scale capital concentrate venture capital only in their subsidiaries, it not only contradicts their public function but can also harm the healthy growth of the VC industry. Chairman Yoon said, "From an investment perspective, banks have traditionally found it most advantageous to distribute venture investments across multiple VCs, and they have done so. This approach allows them to receive diverse deal information from general partners (GPs) and circulate funds throughout the industry." He added, "Some financial companies concentrating funds only in their subsidiaries are abandoning their public function and may suffer from reduced competitiveness in information acquisition." A VC industry insider familiar with the field said, "There are a few banks that concentrate funds only in their subsidiary VCs. Using customers' money to support only their subsidiaries is unreasonable and runs counter to ESG investment principles."

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