Fair Trade Commission pushing CVC reform... What exactly is CVC?

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The Fair Trade Commission has decided to ease restrictions on activities to promote investment through holding company CVCs (Corporate Venture Capital). This measure comes in response to the recent contraction in venture investment sentiment. Specifically, the limit on the proportion of external funds (currently 40%) will be raised to encourage joint investments by external investors or other CVCs. So, what exactly is a CVC, and what are these activity restrictions? Which regulations are being relaxed to stimulate venture investment?

A CVC literally refers to a venture capital firm funded by a large corporation. Unlike traditional venture capital (VC), which invests in startups to generate returns, a CVC invests to help build a growth foundation that benefits the parent company’s business portfolio. They focus investments on companies that could support the core business. Large corporations use VC activities to monitor promising startups and, if deemed necessary for the parent company’s business, proceed with mergers and acquisitions (M&A).

The Fair Trade Commission has been continuously easing regulations to promote CVC activation. In December 2021, an amendment to the Fair Trade Act provided a legal basis for holding companies to own CVCs. With this restriction lifted, since last year, holding company-affiliated CVCs with financial institution characteristics have been allowed as affiliates.

Before the amendment to the Fair Trade Act, indirect methods were used to establish CVCs by setting up affiliates or overseas subsidiaries outside the holding company. The amendment eliminated the need for such indirect methods. Consequently, large corporate-affiliated CVCs with ample capital have emerged.

Despite enabling large corporations to activate venture investment, venture investment sentiment remains weak. Venture investment decreased by 42%, from 7.6 trillion KRW in the first half of 2022 to 4.4 trillion KRW in the first half of this year. Fund formation also sharply declined by 47%, from 8.7 trillion KRW in the first half of 2022 to 4.6 trillion KRW. The investment freeze in the venture market is becoming evident.

Therefore, the Fair Trade Commission intends to further activate CVCs by lifting the ‘activity restriction regulations.’ Currently, external funds are limited to 40% in funds raised by holding company-affiliated CVCs. Recently, there was a case where a holding company-affiliated CVC planned to raise a fund with a 50:50 equity split with an external investor and jointly manage it, 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. The Fair Trade Commission has explained that it will also consider easing this 20% rule. An improvement plan will be announced soon to remove regulatory obstacles that companies experience on the ground and to further promote venture investment.

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