Government Pushes for 'Productive Finance'... Corporate CVCs to Gain Prominence

CVCs Face Fewer Fund Maturity Constraints, Enabling Long-Term Investment in Innovative Sectors
"U.S. Giants Like Google and Microsoft Foster Promising Startups Through CVCs"
Fair Trade Commission Signals Regulatory Revisions for Holding Company

As the Lee Jaemyung administration puts 'productive finance' at the forefront of its agenda, there is growing speculation that the presence of corporate venture capital (CVC) could become significantly more prominent in the venture investment sector next year. With the Financial Services Commission presenting 'promoting capital supply' as a key task under its productive finance policy, and the Fair Trade Commission also beginning to revise regulations on CVCs operated by general holding companies, the market is watching closely to see whether CVCs will emerge as a 'core funding source' rather than just 'supplementary participants' in the venture investment market.

According to the investment banking (IB) industry on January 2, expectations are rising that the relaxation of domestic regulations on CVCs owned by general holding companies will spur large conglomerates to increase their early-stage investments in startups next year.

A CVC is a type of venture capital (VC) established by large corporations to invest in promising startups and ventures. While traditional VCs primarily raise funds from external limited partners (LPs) with the main goal of financial returns, CVCs mainly utilize funds from their parent companies or affiliates, simultaneously pursuing strategic objectives such as securing innovative technologies and entering new business areas.

"Korean CVC Investment Has Limited Effect on Venture Capital Inflows"

Originally, due to the principle of separating finance and industry in Korea, general holding companies were not allowed to own VCs, which led these holding companies to establish CVCs overseas. While overseas CVCs could avoid regulation under the Fair Trade Act, they were not eligible for domestic venture investment tax benefits. It was only after the amendment of the Fair Trade Act at the end of 2021 that holding companies were allowed to own CVCs. However, with strict regulations such as a 40% cap on external funding, a borrowing limit of 200% of equity capital, and a 20% cap on investments in overseas companies relative to total assets, critics have argued that these rules have not been sufficient to encourage the inflow of private capital into the venture investment market.

According to Startup Alliance, domestic CVC investment last year amounted to 1.9697 trillion won, accounting for 32% of total startup investment. Unlike the global and U.S. markets, where CVC investment has shown gradual recovery, domestic CVC investment continued its decline, falling 9% year-on-year.

Startup Alliance noted, "Since the legal amendment, there have not been many cases where independent CVCs outside the holding company system have converted to general holding company CVCs, mainly because various regulations have become a burden for companies." The organization added, "Since it is already possible to establish and operate independent CVCs outside the general holding company system, a review of the effectiveness of investment restrictions on general holding company CVCs is necessary."

Kim Hyunyeol, a researcher at the Korea Institute of Finance, also stated at a seminar earlier this month, "CVCs can discover startups with the technologies and business models needed by their parent companies and drive business innovation," adding, "Because CVCs are more suitable for scale-up stage investments rather than seed stage, from the perspective of securing strategic synergies, regulatory easing is necessary."

"U.S. CVCs Are Core Players in Venture Investment...Employ Flexible Exit Strategies"

In contrast, CVCs have already become core players in the venture investment ecosystem overseas. In the United States in particular, there are no separate licensing or investment limit regulations for CVCs; instead, risks are managed through transaction-level reviews focused on competition and national security. Since VCs are excluded from financial regulation, even financial institutions, including bank holding companies, can operate CVCs.

According to a recent report by the Korea Capital Market Institute titled "Analysis of the U.S. CVC System and Operation Status," the total value of deals involving U.S. CVCs in 2021 (deal value and total funds raised in participating investment rounds) reached $174.9 billion (about 253 trillion won), a 5.9-fold increase compared to 2014. Even last year, after a period of adjustment in 2022-2023, the figure remained high at $107.5 billion (about 156 trillion won).

Han Areum, Senior Research Fellow at the Korea Capital Market Institute, stated, "CVCs face relatively fewer constraints regarding short-term returns or fund maturity, allowing them to employ flexible exit strategies." She added, "Because they can continue to invest in high long-term value sectors even during economic downturns, CVCs have played a buffering role in maintaining market liquidity, even as the VC market has contracted due to rising interest rates and valuation adjustments."

Researcher Kim emphasized, "Global companies such as Google, Microsoft (MS), and BMW have discovered and nurtured promising startups like Uber, Airbnb, and Blue Bottle through their CVC operations." He added, "CVC investments are highly likely to develop into a pathway for mergers and acquisitions (M&A). In Korea, 66% of M&A transactions were preceded by CVC-related investments, and in 22% of cases, the parent company directly acquired the startup after CVC investment."

CVCs Emerge as 'Growth-Stage Investors' Focused on AI and Large Rounds

In response to these issues, the Fair Trade Commission announced on December 19 that it would improve the CVC system for general holding companies to revitalize venture investment as part of its 'Key Work Plan.' The proposed measures include raising the cap on external funding per fund to 50% and increasing the proportion of overseas investments relative to total assets to 30%.

However, some experts point out that additional 'governance' improvements for CVCs are also necessary. One researcher commented, "The U.S. CVC system, operation methods, and governance structure should be referenced when designing the domestic CVC model in the future."

He added, "U.S. CVCs cite clear alignment with corporate strategy, professional talent, and a certain level of independent decision-making structure as key success factors." He further noted that since CVC operations are evaluated using complex performance metrics, domestic CVCs should be designed not simply for profit, but as strategic organizations that drive innovation in large corporations.