[What Is Venture Investment BDC] ② Increased Startup Investment and Positive Cycle Expected in Venture Industry

Retail Investors Can Now Easily Invest in Ventures... Tradable Like Stocks
Startups to Overcome the 'Series B-C Funding Cliff'
Laying the Foundation for a 'New Growth Engine' by Diversifying the Capital Market
US BDCs Are Loan-Based, UK VCTs Are Equity-Based... The Key Is Designing the Korean Model

Editor's Note'Business Development Company' (BDC) is one of President Lee Jaemyung's top campaign pledges. It was proposed as part of a policy to foster ventures. The bill to introduce BDCs, which are a type of listed venture investment fund, is rapidly gaining traction in the National Assembly. This three-part series analyzes the exact concept and background of BDCs, their impact on investors, the venture industry, and the capital market, as well as directions for the positive development of BDCs.

As the long-awaited introduction of BDCs in the venture and startup industry is likely to take place within this year, expectations are rising among unlisted venture companies that have struggled with fundraising. Individual investors who previously had no suitable way to invest in promising unlisted ventures will also gain new investment opportunities, raising prospects for a virtuous cycle between innovative companies and the capital market.

BDC Benefits Investors, Startups, and the Capital Market Alike

The primary expected effect of introducing BDCs is the active inflow of private capital into the startup and venture sector. Deep-tech startups in fields such as artificial intelligence (AI) and biotech require large-scale investments at every growth stage due to the nature of their industries. However, domestic venture capital (VC) firms, which typically manage funds of only tens of billions of won per fund, have been limited to individual investments of around 1 to 2 billion won. Even though private equity funds (PEF) managed by asset management companies are larger than VCs, large-scale investments in startups have been extremely rare. This is mainly because they are operated for institutional investors or high-net-worth individuals, and there is strong pressure to ensure stable capital recovery.

Therefore, BDCs are expected to play a practical role in helping startups and venture companies overcome the "funding cliff" between the early (seed, pre-A) and later (pre-IPO, unicorn) stages. More than 500 accelerators (AC) and many VCs in Korea mainly invest in early-stage companies using policy funds. Most PEFs have focused on investing in pre-IPO or unicorn companies. While some large VCs operating sizable funds are active in Series B and C investments, from the startup's perspective, it has been relatively difficult to secure the necessary funding. The introduction of BDCs will open a channel for long-term funding to fill the Series B and C investment gap.

BDC also offers new investment opportunities for general investors. BDCs raise funds through public offerings and are listed on the stock market, investing more than half of their assets in ventures and unlisted companies. Any investor with a securities account can participate, and fund shares can be freely traded on the market like stocks or ETFs, ensuring high liquidity. Until now, retail investors have found it difficult to invest in startups. VC and PEF investments have only been accessible to high-net-worth individuals, and startup investments have only been possible through private transaction sites or unlisted trading platforms outside the institutional framework.

Another notable point is that various institutions such as asset management companies, VCs, and securities firms can participate as BDC operators. As management firms with different investment strategies and industry preferences competitively enter the market, a wider range of options for venture investment will become available. The variety of asset management products will increase, and the traditionally closed structure centered on venture funds is expected to partially open up. As indirect venture investment by the general public expands?through measures such as allowing retirement pensions to invest in ventures and expanding venture investment by pension funds and pension fund investment pools?investment choices will also increase.

Kim Seungwon, a lawmaker from the Democratic Party of Korea who proposed the amendment to the Capital Markets Act to introduce BDCs, stated, "Venture and innovative companies are the main drivers of future industries, but they have faced great difficulties in raising funds due to high interest rates and uncertain economic conditions." He added, "We hope to provide institutional support for the supply of risk capital and lay the foundation for activating a new growth engine for the economy."

US BDCs and UK VCTs: Sources of Long-Term Venture Capital

In the United States and Europe, BDCs have already been institutionalized and are operating actively. In the US, since their introduction in 1980, BDCs have grown into a key channel for investing in unlisted companies and lending to small and medium enterprises. They operate in the form of direct lending, securing high interest returns. US BDCs must invest at least 70% of their raised funds in unlisted and small and medium enterprises, and if they distribute more than 90% of their profits as dividends, they are exempt from corporate tax. Most operate based on floating-rate loans, which ensures income stability even during periods of rising interest rates. Leading public BDCs such as Ares Capital, FS KKR, Owl Rock, and Blackstone offer dividend yields of around 10%.

The UK's Venture Capital Trust (VCT) was also referenced in the process of establishing Korea's BDC system. VCTs, which are closed-end funds listed on the London Stock Exchange, focus on equity investments in unlisted small and innovative companies. Investors are offered various tax benefits, including income tax deductions and tax exemptions on dividend income. While US BDCs are loan-based, VCTs are equity-based. In addition, most European Union (EU) countries fulfill the role of supplying long-term capital through the European Long Term Investment Fund (ELTIF).

In the case of Korean BDCs, as key operating guidelines such as investment ratios, operating entities, and fundraising requirements have not yet been finalized, there is a call for system design tailored to the Korean capital market. A CEO of a mid-sized domestic VC commented, "There are high expectations in the industry as both the growth potential of startups and the opportunities for investors to exit are increasing. Individual investors also gain new investment opportunities," adding, "The challenge ahead is to refine the details before actual implementation to build trust across the entire venture investment market."