The Ministry of SMEs and Startups (Minister Oh Young-joo, hereinafter referred to as the Ministry of SMEs and Startups) announced on the 7th that it has revised the 'Impairment Loss Guidelines', which serve as the basis for calculating management fees for mother fund sub-funds, and that it will be applied starting with the 2024 mother fund sub-fund accounting audits.
This is a follow-up measure to the 'Advanced Venture Investment Market Leap Forward Plan' announced in October 2024, and is a market-friendly reform of the mother fund and self-fund management system to enable venture capital to continue making challenging investments.
The main revisions are as follows:
First, if an investment company's management improvement is expected, management fee reductions can be deferred under auditor review. This will support the stable operation of the parent fund's sub-fund by preventing management fees from being reduced due to temporary capital impairments at the investment company.
Second, companies in business for less than five years will be exempt from the management fee reduction rule due to deteriorating financial statements. This is designed to take into account the characteristics of early-stage companies, which often struggle to generate sales, and is expected to contribute to revitalizing early-stage investment, which has recently shown signs of slowdown.
Third, if the investment is recovered after management fees have been reduced due to capital impairment or other factors, the reduced management fees will be paid retroactively. This is intended to ensure that management fees are paid based on the market's recognized corporate value rather than the company's financial statements.
Fourth, the requirement for "significant follow-up investment" for management fees to be recovered will be relaxed. Previously, only equity investments were permitted, but convertible bonds (CBs) and conditional equity acquisition agreements (SAFEs) will now be broadly recognized. In addition to the existing equity ratio requirement (3%), a new investment amount requirement (KRW 3 billion) will be established.
Minister of SMEs and Startups Oh Young-joo stated, “This revised impairment loss guideline was prepared to fully support venture capitalists so that they can faithfully fulfill their original role as risk investors even during difficult times due to internal and external uncertainties.”
He added, "In particular, as economic uncertainty increases and people prefer stable investments, investment in start-up companies, which are future growth engines, is shrinking." He added, "We expect that this revision of the guidelines will enable venture capitalists to invest more actively in start-up companies."
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