Venture Investment Fund BDC Traded Like Stocks: What Will Be the Impact on KOSDAQ [Weekend Money]

Korean-style BDC to be Introduced Next Month
Investing in Unlisted Venture and Innovative Companies
Providing Stable Capital to High-quality Small and Mid-cap Firms

With the introduction of the Korean-style BDC (Business Development Company), some analysts say it could become a new driver of gains for the domestic stock market.

According to Shinhan Investment Corp., the Korean-style BDC is a listed public fund that invests in unlisted venture and innovative companies. It is designed to allow individual investors to participate indirectly in unlisted investments by trading listed shares.

Discussion on the Korean-style BDC began when it was selected in 2019 as a financial industry innovation policy task by the Financial Services Commission. In May 2022, the Financial Services Commission even submitted a Capital Markets Act amendment bill to the National Assembly to introduce the Korean-style BDC, but the plan was scrapped at the time as the Lime incident sparked concerns over investor protection.

However, with the launch of the current administration, the introduction of BDCs picked up speed as part of measures to revitalize venture investment, and the bill passed the plenary session of the National Assembly roughly three and a half years after it was first submitted. The system is scheduled to take effect on March 17 next year.

Shinhan Investment Corp. expects the Korean-style BDC to have a positive impact on the domestic stock market. The government's policy to foster venture and innovative companies could become a catalyst for expanding the scale of domestic listed companies, it said.

A comparison between the global top market-cap companies in 2005 and those today shows that 10 out of the current top 16 by market capitalization are generally classified as venture or startup companies. Backed by the United States' strong foundation for innovation, these firms started out as venture and innovative companies and grew into big tech leaders that now drive the global equity market.

Korea is also seeing notable advances by ventures and startups. Among the top 16 companies by market capitalization, NAVER and Celltrion are included, and broadening the scope slightly brings Kakao and Alteogen into the group. While Korea still remains highly dependent on traditional large conglomerate affiliates, it has already experienced the successful growth of bio and platform companies that originated as ventures and startups.

Kang Jinhyuk, senior researcher at Shinhan Investment Corp., said, "Against this backdrop, the Korean-style BDC will strengthen the foundation for innovation and help bring high-quality capital into the stock market," adding, "Along with venture and innovative companies, relatively stable institutional funds will flow into small and mid-cap KOSDAQ-listed firms, leading to improved liquidity."

However, Kang does not believe the introduction of the Korean-style BDC will produce only optimistic outcomes. He warned, "If uncoordinated capital is deployed simultaneously through various channels, it could lead to excess liquidity in the venture market," and added, "This could trigger value inflation not only for high-quality venture companies but also for poorly performing ones." He went on to say that "stronger delisting rules and other measures for qualitative control of the KOSDAQ market are needed."