[The Mirage of North America] Stalled by Regulations and Limits... The Spinning Wheels of "Global Capital Raising"

KOFIC report proposes strategic fund and guarantee overhaul
Industry calls for fundamental fixes, including abolition of the 50% rule

Yonhap News

The report titled "A Study on Support Measures for the Advancement of Korean Films into the North American Market and the Revitalization of Co-Production" by the Korean Film Council identifies improvement of capital-raising infrastructure as the key task for the success of global projects. To overcome the tightened domestic investment environment, it proposes creating a fund dedicated to global projects (investment) and substantially overhauling the public guarantee (loan) system.

It is difficult to see this as a policy that would actually move market capital. Financial investors such as pension funds and banks are shunning high-risk content investments, and the current Venture Investment Act, which governs government-led parent funds, requires that even overseas expansion projects must satisfy the condition that "at least 50% of participants are small and medium-sized enterprises." Because of this regulation, which is out of touch with the reality of joint projects involving hundreds of billions of won, it is virtually impossible to make use of such funds.

The report proposes introducing a less regulated growth finance approach in place of the parent fund to create a more flexible "Global Film Strategy Fund," and attracting private capital by increasing the proportion of losses that the government assumes first. However, even if the system is changed, it cannot avoid more fundamental limitations. There is virtually no pool of specialized asset management firms with the experience to evaluate and execute highly complex global investments.

While the creation of equity-type funds is facing difficulties, the lending environment is also out of sync. In the Hollywood independent film sector, it is common practice to use "private completion bonds" that guarantee the completion of a project and, on that basis, to obtain unsecured loans from banks to cover insufficient production costs through a technique known as "gap financing."

The report clearly acknowledges that it is difficult to apply such lending techniques in Korea's private financial market. As an alternative, it proposes adding a global-dedicated track to existing public policies such as the "Cultural Industry Completion Guarantee" and the "Content Export Guarantee." However, the effectiveness of these systems is also questionable.

To obtain a loan under the current completion guarantee, a "content sales contract" must be submitted as a precondition. It is virtually impossible to have such a contract in the initial planning and production stage, when funding for making the film is most desperately needed. In practice, it is nothing more than a pie in the sky.

The guarantee limit is another obstacle. The limit for the content export guarantee is only around 1 billion won, which is far too small to cover North American co-production projects that require massive budgets. Even if the gap is narrowed by improving intellectual property (IP) valuation models, any measure that lacks fundamental reinforcement of capital and credit is nothing more than empty talk.

Ultimately, the realistic solution lies in abolishing outdated regulations and redefining the role of public capital. A production company official, identified as Mr. C, pointed out, "Before putting up a new fund signboard, the top priority should be to revise exceptional clauses that are out of touch with reality, such as the '50% small and medium-sized enterprise rule' in the current Venture Investment Act." He went on to emphasize, "Like in advanced overseas film industries, there is an urgent need for a fundamental system shift in which the public sector matches a certain percentage of production costs through funds, thereby providing solid credit enhancement."