[Jongtu-sa Upgrade] ② Thrown Down the Gauntlet... Securities Industry Faces Dilemma: "Nowhere to Invest"

"The direction is correct. But there is nowhere to put the funds to work."

It has now been a month since the financial authorities announced institutional reforms aimed at enhancing the corporate finance capabilities of comprehensive financial investment business entities (so-called 'Jongtu-sa'), yet the dilemma in the securities industry remains unresolved. With limited domestic investment opportunities, market participants lament that it is extremely difficult to increase the share of venture capital to 25% by 2028 while drastically reducing the share of real estate investment?which has long been a 'core profit driver'?to 10%. Some even worry that making these ratios mandatory could lead to distortions that run counter to the authorities' intentions, resulting in investments made simply to meet quotas.

According to financial authorities on May 8, as of the second half of last year, the share of venture capital relative to the funds raised through promissory notes by the four Jongtu-sa licensed to issue such notes (Mirae Asset, Korea Investment, NH, and KB Securities) was estimated to be only 11% to 27%. Across all ten Jongtu-sa, venture capital accounted for just 2.23% of total assets.

Last month, the financial authorities announced reforms requiring Jongtu-sa to increase the share of venture capital investments within their promissory note and integrated investment account (IMA) assets to 25% by 2028. At the same time,the authoritiesmandated that the share of real estate investments be reduced from the current 30% to 10% by 2028.

This measure is intended to revive the original purpose of the Jongtu-sa system?invigorating corporate finance. However, both inside and outside securities firms preparing to apply for IMA and promissory note licenses in the third quarter, there are ongoing complaints as they search for new profit drivers. An executive at a major securities firm, speaking on condition of anonymity, said, "Operational departments are considering and reviewing various options, but to be honest, where in Korea can we find enough places to invest? It feels like the risk is being shifted entirely onto the securities firms."

Hwang Se-woon, Senior Research Fellow at the Korea Capital Market Institute, commented, "For securities firms, this inevitably creates a burden. The government is boldly calling for an increase in venture capital supply, but from the perspective of securities firms, which must bear the losses, it is not easy to take action." Yoon Jae-sung, Senior Research Fellow at NICE Investors Service, noted, "For existing promissory note issuers with high real estate exposure, there may be some burden in terms of rebalancing."

The scope of venture capital includes funding for small and medium-sized enterprises, debt securities rated A or below, primary collateralized bond obligations (P-CBOs), venture capital (VC), and high-yield funds. However, given the limited availability of stable domestic investment opportunities?unlike overseas markets?there are concerns that firms may end up merely trying to meet the mandatory ratios. Another securities firm official also expressed doubt, saying, "I wonder if we can really do that much. The system itself is good, and supplying venture capital is good too. But how many investment opportunities are there, really? Our industry is still heavily focused on real estate," trailing off at the end.

Risk management is also a key issue. Without robust internal credit assessment models for small and medium-sized enterprises, there is a risk that a quota-driven approach could lead to a decline in investment quality. Korea Ratings recently released a report highlighting that the risk management capabilities of individual securities firms will be crucial in this context. As a result, there is speculation that most securities firms will focus only on safe investments such as stable corporate bonds or pre-IPO opportunities that offer quick returns.

An industry insider, speaking anonymously, said, "I understand the intention to uphold the spirit of the system, but with a lack of suitable investment opportunities, I am not sure things will develop as the authorities hope. Making the venture capital investment ratio mandatory could actually distort the market." Hwang added, "The direction is correct," but also noted, "It is difficult to expect clear and immediate changes as the government desires. Rather than rapid and visible changes, it is more likely that gradual changes will occur over time."

Some are also questioning the continuity of the system as the June presidential election approaches. Amendments to laws, enforcement decrees, and regulations are required within the year, but there are concerns about increased uncertainty with the launch of a new administration. The mandatory venture capital supply and real estate investment limits that the securities industry is grappling with also require amendments to the enforcement decree. However, regarding this, Hwang said, "Regardless of whether the administration is conservative or progressive, expectations regarding the role of securities firms are unlikely to change significantly. The likelihood that this round of reforms will be greatly affected by political orientation is low."