[What Is a Venture Investment BDC] ① 'Venture Investment Fund' Now Tradable by Retail Investors in the Stock Market

Raising Capital via IPO to Invest in Unlisted Ventures
Retail Investors Can Freely Trade BDCs Like ETFs
Increased Private Investment in Venture Firms Facing 'Capital Drought'
A Link for Joint Growth of Venture and Capital Markets

Editor's Note
The 'Business Development Company (BDC)' is one of President Lee Jaemyung's top campaign pledges. It was proposed as part of a policy to foster venture businesses. The bill to introduce BDCs, a type of listed venture investment fund, is rapidly gaining momentum in the National Assembly. Over the course of three articles, we will analyze the exact concept and background of the still unfamiliar BDC, its impact on investors, the venture industry, and the capital market, as well as directions for the positive development of BDCs.

BDC was one of President Lee Jaemyung's top pledges during his candidacy. At the end of last month, the Capital Markets Act amendment containing BDC provisions passed the National Assembly's Political Affairs Committee Subcommittee 1 with bipartisan agreement. It has been six years since discussions on introducing BDCs began, led by the National Assembly and the government.

The introduction of BDCs within this year is now a matter of timing, not possibility. With the introduction of BDCs, which are listed venture investment funds, retail investors will be able to easily make indirect investments in unlisted ventures and startups, which were previously difficult to access. Venture companies, in turn, will have more opportunities to attract investment.

BDC: A Public Fund Investing Over Half of Its Assets in Ventures

A BDC is a collective investment vehicle (fund) that raises investor capital through an initial public offering (IPO) and is listed on the stock market. It is required to invest at least 50% of its assets in ventures and unlisted companies, and must maintain a minimum duration of five years. Entities handling BDCs must be asset management companies, securities firms, or venture capital (VC) firms with a certain level of capital, operational staff, and a system to prevent conflicts of interest. Investments can be made through various methods, including purchasing new shares via paid-in capital increases of unlisted companies, block deals of existing shares, and acquiring mezzanine bonds such as convertible bonds (CB) and bonds with warrants (BW).

For retail investors, the biggest attraction is the ability to freely trade BDCs on the exchange, much like exchange-traded funds (ETFs), thereby indirectly investing in unlisted venture companies. In the past, there have been success stories in the unlisted market, such as 'Baedal Minjok' or 'Toss', where company valuations soared more than 100-fold in a matter of years. However, for retail investors to buy unlisted venture shares, they had to use peer-to-peer trading sites like '38 Communication' or specialized platforms such as 'Securities Plus Unlisted' and 'Seoul Exchange Unlisted'. There was also a lack of information about unlisted companies, leading to frequent investment losses. By buying and selling institutionalized BDCs, retail investors can reduce such risks.

Venture Investment Market to Expand with Retirement Pensions and Pension Funds

The BDC system was first established in the United States. It was introduced through the Small Business Investment Incentive Act of 1980. After the 2008 global financial crisis, BDCs in the US experienced rapid growth. As banks drastically reduced corporate lending, the total amount of capital available for venture investment shrank. As an alternative, BDCs became more active, and private funds naturally flowed into venture companies via the stock market. According to the Small Business Investor Alliance (SBIA), as of the end of last year, there were 50 public BDC funds in the US, similar to Korea’s BDCs, with assets under management totaling $159 billion (220 trillion won).

In Korea, venture companies are highly dependent on policy funds. As of the end of 2023, the share of public funds in the UK, where the venture capital market is similar in size to Korea's, was only 5.9%, while in Korea it was as high as 27%. Moreover, during the Yoon Sukyeol administration, research and development (R&D) funding was drastically reduced, further worsening the 'capital drought' for ventures. In an industrial structure already heavily reliant on large corporations, numerous companies responsible for 'innovation' have faced funding shortages, resulting in stagnant growth.

Reflecting these circumstances, President Lee Jaemyung included a variety of policies to foster ventures and startups as his top campaign pledge. These included expanding the budget for the Korea Fund of Funds and increasing investments in venture funds by pension funds and pension fund investment pools, all aimed at using policy funds to help VC fund managers such as venture capital and new technology business finance companies expand their assets under management. In contrast, BDCs, by allowing indirect venture investment by retirement pensions, create a new channel for private capital to flow into ventures. As private venture investment increases, the venture sector can escape the 'capital drought' resulting from excessive reliance on policy funds. Lee Sangheon, an analyst at iM Securities, analyzed, "If the BDC system is introduced, it will attract private capital to venture investment, which currently relies on policy finance, and this will further vitalize the venture investment market."