[Real Asset Management] Should You Invest in Venture Capital Stocks Benefiting from New Government Policies?

Venture Investment Budget Reverses Course, Now on the Rise Again
VC Stocks Hit Record Highs in 2021 When Budget Doubled
Venture Promotion Policies and Interest Rate Cuts Seen as Positive Factors
Venture Capital Investment in "Big Tech" Sectors Like AI Worth Considering

With the presidential election approaching, political theme stocks are rampant in the stock market. There are frequent strange phenomena where stocks with even the slightest connection to presidential candidates hit their upper price limits. While political theme stocks often rise without any rational reason, this is also a time when investors need the wisdom to identify stocks that could benefit from future policy changes. Let us take a closer look at venture capital stocks, which are considered among those that could benefit from policy changes under the new administration.

Favorable Policy and Interest Rates... Venture Investment Market Expected to Revitalize

Venture capital firms primarily make money by purchasing shares in unlisted startups and venture companies, then selling those shares to other venture capital firms or recovering their investments through public listings (IPOs). Most of the time, they receive funds from government financial institutions that operate so-called "parent funds," such as Korea Venture Investment Corp. or Korea Growth Investment Corp. After that, they raise additional money from banks, insurance companies, and corporations to form funds and make investments.

Therefore, when the size of the parent fund increases, venture capital investment also becomes more active. Conversely, if the parent fund shrinks, venture investment capital inevitably decreases as well. During the Yoon Suk-yeol administration, an emphasis on fiscal soundness led to significant cuts in the budgets for research and development (R&D) as well as for startups and ventures. The parent fund investment amount, which nearly reached 4 trillion won in 2021, was almost halved in just three years. Naturally, the size of venture fund formation also dropped sharply, from 17.8 trillion won in 2021 to 10.5 trillion won in 2024.

From a macroeconomic perspective, startups and venture companies serve two major functions. First, they are the seeds for nurturing innovative industries such as artificial intelligence (AI), materials·components·equipment (so-called "Sobu-jang"), and bio. Second, they contribute to youth job creation. The reduction of the parent fund is cited as one of the reasons why the growth of innovative industries slowed and the youth employment situation continued to deteriorate under the Yoon Suk-yeol administration.

Therefore, in terms of fostering innovative industries and creating jobs, many expect the new administration to expand the parent fund, which would naturally increase the role of venture capital. On May 12, both the Democratic Party of Korea and the People Power Party officially kicked off their presidential campaigns, each including policies related to fostering ventures and startups among their top ten pledges. The Democratic Party of Korea's campaign, led by Lee Jaemyung, explicitly pledged to "make Korea one of the world’s top four venture powerhouses by fostering the venture investment market." Their specific promises included a substantial increase in the parent fund budget and venture·startup R&D budgets, as well as revitalizing the venture investment exit market through measures such as promoting mergers and acquisitions (M&A). The People Power Party's campaign, led by Kim Moonsu, emphasized "youth job creation," pledging to support startups and to establish an AI Youth Startup Village, among other initiatives.

Once the new administration is inaugurated, policies are expected to become more sophisticated. Kim Jinyoung, a research fellow at the Korea Capital Market Institute, emphasized at a recent National Assembly forum that "more than half of newly listed companies on KOSDAQ have received venture investment." He proposed expanding the budget for new parent fund investments, allowing retirement pensions to invest in venture funds, introducing Business Development Companies (BDC), and expanding tax support for venture investment.

Meanwhile, interest rate trends are also likely to become increasingly favorable for venture capital activity. As the saying goes, "When interest rates are low, stocks are good and bonds are bad." Essentially, the lower the interest rate, the more investment flows into high-risk assets. In fact, during the global "zero interest rate" era from 2020 to 2021, triggered by COVID-19, global venture investment surged from $398 billion to $792 billion?almost doubling. However, as talk of the endemic phase began and interest rates started to rise in 2022, venture investment amounts dropped sharply. Recently, however, the trend in interest rates has reversed. In September of last year, the United States cut its base rate for the first time in four and a half years, and Korea also began a rate-cutting cycle in October for the first time in three years and two months.

As a result, the combination of policy determination from the new government and the impact of interest rate cuts makes it highly likely that the market for unlisted startups and venture investment will become significantly more active. Of course, there may be a time lag before policy funds are released due to the time required for budget execution, and the pace of rate cuts could slow further due to the Trump administration's tariff policies in the United States. However, the trend toward revitalizing startup and venture investment appears to be an inevitable future.

Performance of KOSDAQ-Listed Venture Capital Firms Varies by Portfolio

Looking at the stock price trends of venture capital firms such as Atinum Investment and AJU IB Investment, both of which have been listed for over five years, a common pattern emerges: they peaked in April 2021. This was when the Moon Jae-in administration, which began in 2017, increased investments in startups and ventures for policy effects such as job creation, and when the global pandemic had created a zero-interest rate environment worldwide. It seems highly likely that similar conditions could be repeated under the new administration.

There are currently 19 venture capital firms listed on the Korea Exchange, all on the KOSDAQ market. These include DSC Investment, HB Investment, LB Investment, SBI Investment, SV Investment, TS Investment, Now IB, Daesung Private Equity, Lindeman Asia, Mirae Asset Venture Investment, Stonebridge Ventures, AJU IB Investment, Atinum Investment, Woori Technology Investment, Capstone Partners, Company K, Q Capital, Plutus, and SUNP (currently suspended from trading).

The method of investing in venture capital stocks is the same as with general stock investments. First, investors should check the Financial Supervisory Service's electronic disclosure system for business reports and review financial results such as revenue and net income trends, as well as the overall situation of the company. Next, it is advisable to research which companies the venture capital has invested in to get a comprehensive view of its investment portfolio.

For example, in March and April, the stock price of DSC Investment performed particularly well compared to other venture capital firms. This was because it was reported that FuriosaAI, a domestic AI semiconductor company in which DSC Investment had made a long-term investment, had received an acquisition proposal from Meta, the parent company of Facebook and Instagram. As a result, when FuriosaAI announced that it had declined Meta’s offer, the stock price subsequently fell.

With the new administration set to take office in June, it is highly likely that a series of concrete policies to foster "deep tech" fields such as AI will be announced. Supporting this, on May 12, both the Democratic Party of Korea and the People Power Party announced pledges related to fostering AI hardware and software. The Democratic Party of Korea promised to increase the proportion of the AI budget to levels above those of advanced countries, to usher in an era of 100 trillion won in private investment, to build an "AI highway" through the construction of AI data centers, and to foster national innovation hubs. The People Power Party pledged to create a 100 trillion won public-private joint fund with global companies to support AI unicorns, to assist in securing core AI technology infrastructure, and to establish a global state-of-the-art AI convergence center. Their pledges also included the creation of "AI Startup·Venture Growth Funds" led by domestic and foreign companies and the discovery of promising small and venture businesses in AI.

Going forward, a variety of deep tech policies are expected to be developed in detail, including those for renewable energy, bio, and advanced agriculture. Investors will need to carefully identify and select venture capital firms that have invested in deep tech companies.