AI (Artificial Intelligence), batteries, renewable energy, aerospace, new materials, small magnetic resonance reactors (SMRs), quantum computing, content/movies, traditional cultural heritage…
We have many industries and heritages to be proud of, even in the midst of superpowers. Moreover, despite the fact that large corporations, conglomerates, and large foreign companies dominate the market, numerous startups are founded to challenge themselves in each field.
However, it is unfortunate that these companies are forced to rely on ‘non-profit subsidy projects’ without being evaluated at their fair value in the market. Furthermore, the vulnerability of domestic startups and the research and development environment has been exposed as the Yoon Seok-yeol administration suddenly reduced the budget by talking about an ‘R&D cartel.’
In the early presidential election, it is fortunate that all presidential candidates are interested in artificial intelligence, cutting-edge new industries, and startups. However, they are still emphasizing only the role of the state, such as investing 100 trillion won and supporting 200 trillion won. Now, we must move beyond the era where the state grows industries with only the budget. Private capital, especially the investment behavior of individual investors with pride, must meet policy.
As a structural alternative for this transition, I welcome the introduction of the ‘BDC (Business Growth Collective Investment Corporation)’ by Lee Jae-myung, the Democratic Party of Korea candidate. I expect that other candidates will not oppose this policy even if they do not fully understand it.
We must expedite the introduction of corporate growth investment vehicles (BDCs)
BDC is closer to a listed investment company. It can become a 'policy platform within the stock market' in itself.
The starting point of our country's startups is well-established in terms of institutional environment, such as TIPS, and this system is receiving attention worldwide as a public-private cooperation model. However, the problem is that the financial environment for securing competitiveness and growth of startups starting this way is not properly established.
Most of the unicorns in Korea, such as Carrot Market, Toss, Zigbang, Kurly, Bithumb, and Dunamu, are distribution platforms targeting the domestic market. The reason why notable technology companies are not visible is because there is a lack of patient capital to invest in the uncertain future of technology companies. Domestic private equity funds also invest only in companies with a lot of real estate assets such as golf courses or ownerless distribution conglomerates such as Homeplus rather than technology companies when hunting for companies.
The market cap of KONEX, which has been attracting attention as a listing channel for domestic small and medium-sized venture companies and startups, is less than 2 trillion won. The amount invested by SoftBank Vision Fund in OpenAI alone is over 2.5 trillion won. It is said that they plan to invest more than that in the future.
The martial law declaration on December 3 last year halted many things, but it even halted the introduction of the BDC system that had passed the National Assembly subcommittee in late November.
The introduction of the Korean corporate growth collective investment vehicle (BDC) system, which is a hybrid of the US BDC (Business Development Company) and the UK VCT (Venture Capital Trust) system, is a system that is expected by not only the startup ecosystem but also many investor ecosystems. Simply put, it is a structure that collects investment funds from general investors in the stock market as an initial investment company, invests in startups or technology companies, and then distributes profits.
The corporate growth collective investment organization is established and established with a minimum of KRW 50 billion per fund, and raises funds through public offerings or general investors. 40% is invested in venture companies, etc., and 10% or more can be invested in safe assets. Loans are also available to companies that have invested less than twice the amount of assets held.
Jonathan Bock, head of Blackstone BDC in the US, who visited the Korean event in 2023, said, “Due to the recent long-term slump in bank syndicated loans, demand for direct lending through BDCs has continued to increase,” and explained, “US BDCs have high growth potential, as they can supply venture capital worth up to 4 trillion dollars (about 5,000 trillion won) centered on direct lending.”
Jonathan Digges, CIO of Octopus Investments, said VCTs had a major impact on expanding the UK's venture ecosystem as well as driving the country's economic growth.
He said, “Among the companies that have received investment from VCTs so far, about 1,000 companies are experiencing high growth, and the UK has created economic effects such as creating more than 70,000 jobs and increasing tax revenue by 70 million pounds through VCTs,” and “VCTs have had strong tax support,” and recommended that Korea introduce the system as well.
Expected effects of introducing a corporate growth collective investment vehicle (BDC) where citizens can invest in ventures together and receive dividends
BDC can indirectly institutionalize the listing requirements for venture capitals currently operated as private companies.
BDC focuses on future strategic industries such as defense industry, healthcare, energy transition, aerospace, new material development, media content production, quantum computing, digitalization (DX), and artificial intelligence (AX), and can focus the public's attention on these fields. Through dividends in these fields, it can establish a system in which future industries can provide dividends to current general public investors.
In addition, along with tax benefits for investors, BDCs can quickly establish a close, all-round cooperative network system with venture capitalists, science and technology holding companies, accelerators, etc., thereby increasing investment stability.
In particular, if we add the nature of financial support from private equity funds that focus only on capital investment and neglect or that aim only at corporate control and M&A, we will be able to rapidly expand investment resources. From the government's perspective, we can move away from the system of supporting early-stage private companies with national finances, and have the private sector directly discover, invest, and lend, and leave the evaluation of these to the market, and also openly provide concentrated support to companies that fit the national long-term policy direction.
The US has listed about 50 BDCs, including Ares Capital, Main Street Capital, and Hercules Capital. They have been 'market-based policy tools' that provide funds not only to small and medium-sized companies but also to technology startups, and have continuously attracted the attention of individual investors due to their high dividend yields and stable management. They are rumored to be 'dividend hotspots', and the inflow of funds is rapidly increasing.
Concerns and institutional supplements must also be prepared in advance.
It will not be easy for all systems to operate exactly as intended. It is also difficult to reach a social consensus on money and interests. It is true that there were many concerns about BDC from the time it was introduced. However, the Korean startup ecosystem already has a way to solve these problems.
In terms of risk management for unlisted investments, Korea already has a variety of startup accelerators that have operated acceleration programs that have selected, screened, and supported tens of thousands of startups. BDCs should be launched with a structure that necessarily collaborates with these accelerators.
In addition, investment in unlisted companies raises concerns about accounting transparency and internal control, but since the portfolio management systems established by the investment industry and the accelerator industry are already in operation, it will be possible to establish a permanent disclosure system through these. The Venture Investment Information System (VICS) of the Ministry of SMEs and Startups, the fact sheet linked to this VICS, quota book, and shareholders can serve as the management system.
To increase the reliability of this system, the current BDC system's venture investment ratio of 40% should be actively expanded to 60%.
Like the Vision Fund, it's time for us to have a pride fund.
Industry does not grow with technology alone. Our country does not have accumulated trust capital and patient capital.
BDC can be a true 'pride fund' that connects the future of proud industries and individual investors. Korea has already created TIPS, the world's best public-private partnership startup support system, by benchmarking the US, Israel, and Europe.
Now, we must move beyond the era of 'how to spend taxes' to the era of 'where and how to gather capital to prepare for the future.' Every year, hundreds of VCs and accelerators are flocking to the selection of mother funds that use taxes as a source of funding, and BDCs must find ways to make this structure more open and expand its scale.
It can begin with listing structural devices containing policies on the stock market.
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