[Venture Capital Reset]③Unlocking Long-Term Capital Investment from Insurers and Banks

From Public and Short-Term to Private and Long-Term Investment
Consider Fund-of-Funds Venture Products and Long-Term Investment Tax Deductions
Incentives Needed to Attract Long-Term Capital, Such as Easing RWA Regulations

Editor's Note"There is more money, but less risk-taking." This is the paradox of the 'Korea Fund of Funds,' which has fueled the growth of Korea's startup and venture industry for the past 20 years. After enduring several years of a harsh investment winter, there are growing concerns that policy finance-driven venture capital has become overly focused on short-term performance management and loan-based operations. The Asia Business Daily examines the role and direction for improvement of venture capital, and over three installments, explores the conditions for a 'venture nurturing ecosystem' in which startups, venture capital firms, and limited partners grow together.

The domestic venture investment market now stands at a turning point, moving beyond quantitative growth toward qualitative advancement. In order to build a resilient venture capital ecosystem that remains strong even during downturns, there is a growing call to move away from short-term, policy finance-centered funding structures and urgently pursue a 'structural transformation' that maximizes the participation of long-term institutional investors such as pension funds and financial companies.

Limits of Long-Term Capital... The Need for 'Risk Diversification'

Experts point to the fundamental nature of capital as the main reason why long-term institutional investors-such as pension funds, mutual aid associations, retirement pension funds, and insurance companies-are not actively participating in venture investment. Since these institutions manage funds on behalf of subscribers and beneficiaries, it is difficult for them to directly invest in individual unlisted venture funds and tolerate high volatility. In the case of retirement pension funds in particular, unlike in Anglo-American countries, the investment structure places almost all responsibility on the employee, resulting in an even lower risk tolerance. This is seen as a major obstacle to the inflow of funds into ventures and startups.

To address this, some have proposed institutionalizing risk-diversified products such as 'publicly offered fund-of-funds venture funds.' The logic is that by bundling multiple venture funds into a single investment, it is possible to mitigate the risk of failure for individual funds and companies while still allocating a certain proportion of capital to venture investment. Hyunyeol Kim, a research fellow at the Korea Institute of Finance, commented, "If we limit the allocation to individual funds or require the inclusion of a certain number of funds to reduce return volatility, even retirement pension or insurance funds-which prefer principal and interest guarantees-could be attracted to participate."

Just as important as risk-diversified products is establishing a system of real incentives that encourages private capital to willingly take risks. Bold tax benefits can transform risk-averse capital in the market into aggressive venture capital. For example, providing not only tax deductions on investment amounts for investments held longer than 10 years but also exemptions on capital gains could significantly improve the perceived risk-return profile for private investors.

Bonsung Koo, senior research fellow at the Korea Institute of Finance, emphasized, "To ensure stable, long-term funding for fostering future core technologies, it is crucial to encourage private capital participation. In addition to tax support for investment amounts-taking into account opportunity costs of long-term investment, constraints on early-stage investment performance, and the heavy risk burden-additional 'intergenerational' benefits such as gift and inheritance tax reductions could be provided."

Regulatory Barriers Blocking Traditional Financial Sector Funding Must Be Lowered

Attracting traditional financial institutions such as insurers and banks as providers of venture capital is also a key pillar. According to the Korea Venture Capital Association (KVCA), as of November last year, financial institutions-including banks-accounted for 23.9% of new venture fund commitments, surpassing the Korea Fund of Funds (16.8%). However, compared to the hundreds of trillions of won in total assets managed by banks, the actual proportion allocated to ventures and startups remains minimal.

Overseas, regulations have been designed to leverage the long-term liability structures of insurance companies to strengthen their role in long-term investment in innovative sectors. France, Germany, and the United Kingdom have used regulatory incentives, while the United States and Japan have gradually expanded the risk limits for insurers' long-term and illiquid assets through market-driven approaches. This is why there is increasing analysis that domestic financial sector funds should be attracted in a similar way.

Currently, despite managing assets totaling 1,100 trillion won, the domestic insurance sector is widely seen as limited in its role as a supplier of long-term venture capital, due to a conservative investment stance under the new capital adequacy regime (K-ICS) and new accounting standards (IFRS17). In this regard, Jiweon Park, a research fellow at the Korea Institute of Finance, stated, "It is necessary to utilize the recently launched National Growth Fund as a parent or anchor fund and to improve systems and operational infrastructure so that insurers can easily access productive assets through such platforms. If, in addition to simply investing in individual funds, we provide package-type support that covers funding, growth, and exit market infrastructure at each growth stage, insurers can reduce uncertainty regarding investment targets and exit routes and participate in long-term venture capital."

Banks, too, could increase lending and equity investment in growth and scaling-up stage ventures and startups if the risk-weighted asset (RWA) regulations-key prudential indicators-were eased for equities and venture shares. In September last year, financial authorities raised the minimum RWA for mortgage loans from 15% to 20% to promote productive finance, but the RWA weight for corporate loans remains at 50-70%, more than three times higher than for mortgages. In addition, while the RWA for unlisted stocks was reduced from 400% to 250%, the existing standards for short-term investments of less than three years and venture capital investments were maintained.

Boosting Exit Expectations... Filling Funding Gaps at Each Stage

Some argue that incentives such as tax benefits alone are not enough to attract private capital. Fundamentally, the market must have confidence that "investment leads to exit" for private institutions to boldly enter the venture and startup space. Experts emphasize that creating an environment where startups can move beyond the early stage and scale up is the key challenge.

From a capital market perspective, there is a need for seamless funding support not only in the seed and Series A rounds but also in the growth stages that follow. Jahyun Koo, senior research fellow at the Korea Development Institute (KDI), explained, "Promising ventures often face funding gaps during growth stages such as Series C to F, and they frequently turn to exit markets (such as KOSDAQ) using technology-special listing systems to raise the R&D capital they need. This delays the point at which companies reach the revenue-generating stage and negatively impacts investor exits."

Furthermore, experts point to 'uniform regulation'-the application of the same standards to both startups and large players such as conglomerates-as a fundamental barrier to the supply of private sector liquidity in the venture investment market. In a system where established players with capital and infrastructure and early-stage entrants must clear the same regulatory hurdles, the momentum for innovation is inevitably lost. Therefore, there is an urgent need to introduce 'proportional regulation' that adjusts regulatory intensity according to a company's growth stage and market influence. Only with such institutional support in place can private investors have confidence in profit generation and supply large-scale scaling-up capital, creating a virtuous cycle in the ecosystem.

Koo stressed, "In the early stages, when market influence is limited, bold deregulation is needed to foster innovation, followed by a structural overhaul that gradually strengthens regulation in line with company growth in sales or employment."

This content was produced with the assistance of AI translation services.