Following the Mother Fund, 'Recovery Resources' Also Decrease

Next Year's Recovery Funds Estimated at 600 Billion Won Range, '1 Trillion' Broken
VCs Facing Exit Roadblocks, Alert to Adjustments in Investment Projects

[Asia Economy Reporter Kwangho Lee] It has been confirmed that the ‘recovery funds’ have also significantly decreased alongside a 40% reduction in the Korea Venture Investment Corp.’s (KVIC) mother fund budget for next year compared to this year. This is expected to weaken the argument that recovery funds can be utilized even if the mother fund size shrinks.

According to the venture capital (VC) industry on the 7th, the recovery funds for next year’s mother fund are estimated to be at the 600 billion KRW level. Unlike previous years, the recovery funds are likely to be drastically reduced from the trillion KRW scale to the several hundred billion KRW scale.

A venture capital CEO said, “We submitted the recovery plan for next year at the request of the LP, Korea Venture Investment Corp.,” adding, “We conservatively estimated it due to the worsening market conditions.” He further stated, “The problem is that as time passes, the valuation of invested companies may decrease even more,” and “If the returns are lower than the existing plan, the size of the mother fund’s recovery funds will inevitably shrink.”

The mother fund conducts investment projects every year using new budgets and recovery funds. Even if the mother fund budget decreases, if the recovery funds are sufficient, the investment projects are practically unaffected. In fact, although the mother fund budget was cut from 720 billion KRW in 2021 to 520 billion KRW this year, the investment scale actually increased because recovery funds were reinvested.

According to Korea Venture Investment Corp., the recovery amount through sub-funds invested by the mother fund has increased every year. ▲2017: 1.5114 trillion KRW ▲2018: 2.1713 trillion KRW ▲2019: 1.8181 trillion KRW ▲2020: 2.5704 trillion KRW ▲2021: 4.5559 trillion KRW. The average annual recovery amount over the past five years is about 2.5254 trillion KRW. However, since next year’s recovery funds are at a different level than previous years, there are concerns that it may affect investment projects.

Regarding this, a Korea Venture Investment Corp. official said, “Even if the expected recovery funds from venture capital are at the several hundred billion KRW level, it is considered separate from what will be reflected in next year’s investment projects.”

Venture capital raises funds by securing multiple limited partners (LPs). It is common to form sub-funds centered on the mother fund, which is the representative policy fund in Korea. The general partner (GP) invests in various companies through the sub-funds and, when the fund matures, distributes the principal and profits received in the past.

In recent years, abundant liquidity has led many sub-funds to achieve high returns. Korea Venture Investment Corp. also achieved considerable profits and created a virtuous cycle by reinvesting recovery funds back into the mother fund. However, as market conditions deteriorated, the valuations of companies invested in by GPs plummeted, making it difficult to expect exits (investment recoveries).

A senior fund manager-level investment officer said, “We want to maximize sub-fund returns and confidently distribute profits to LPs, but even major portfolios that expected multiples of tens of times are collapsing,” lamenting, “It has become common for investments to be halved or quartered compared to the original principal.”

He added, “The IPO market is frozen, so there will be very few exit cases,” and “Even if companies manage to go public with difficulty, the returns will not be as high as before.”