INVESTMENT OPPORTUNITIES IN KOREA
PRIVATE EQUITY & VENTURE CAPITAL KOREA, Where Success Knows No Limits INVESTMENT OPPORTUNITIES IN KOREA
PRIVATE EQUITY & VENTURE CAPITAL
Contents
04 Korea at a glance Economic indicators
06 Status and prospects of Korean PEF market Status of the Korean PEF market Growth of the Korean PE market Fund cycle PEF regulation reform Korean LPs
16 Status and prospects of Korean venture capital market Korean venture companies Korean venture capital companies Korean venture capital funds VC funding resources VC investment performance Exit Prospects for the Korean VC market KOREA AT A GLANCE 01 KOREA AT A GLANCE 05
Economic indicators Economic indicators Classification 2007 2008 2009 2010 2011 2012 2013 GDP (USD billion) 1,122.7 1,001.7 902.3 1,094.3 1,202.7 1,222.4 1,304.3 Real GDP growth rate (%) 5.1 2.3 0.2 6.0 2.9 1.8 3.0 Exports (USD billion) 371.5 422.0 363.5 466.4 555.2 547.9 559.6 Imports (USD billion) 356.8 435.3 323.1 425.2 524.4 519.6 515.4 Balance of trade (USD billion) 14.6 -13.3 40.4 41.2 30.8 28.3 44.0 Unemployment rate (%) 3.2 3.2 3.6 3.7 3.4 3.2 3.1 Consumer price index (%) 2.5 4.7 2.8 3.0 4.0 2.2 1.3 Rate of 3-year government bond 5.2 5.3 4.0 3.7 3.34 2.82 2.86 Foreign exchange reserves (USD billion) 262.0 201.0 270.0 292.0 306.4 327.0 346.5
* Source: Statistics Korea, The Bank of Korea (2013)
Korea has been among the fastest growing OECD countries in the past decade, its growth characterized by exports and large companies. However, considering the strong competition with emerging economies, like China, in low- and medium-end markets, and with advanced economies in high-end markets, the Korean government is rolling out a series of initiatives to pursue new drivers of growth, i.e. encouraging SMEs and promoting venture businesses.
Looking at the financial investment opportunities in Korea, especially the private equity and venture capital investment arena, and in order to ensure its competitiveness with emerging economies, which are building walls to regulate the financial industry, investment professionals in Korea are looking to expand their interests beyond the home market and seek international collaboration with global players. This brochure gives an overview of Korea’s finance industry and outlines the changes and initiatives expected to improve its opportunities. STATUS AND PROSPECTS OF KOREAN PEF MARKET 02 STATUS AND PROSPECTS OF KOREAN PEF MARKET 07
Current status of PEF investment Status of the Korean PEF •It has been 10 years since the introduction of private equity funds (PEFs) in Korea, and the market private equity (PE) market has since rapidly expanded in size and significance. As of the end of 2014, registered domestic PEFs numbered 277 and total committed capital reached KRW 48.9 trillion (USD 43.5 billion). The average annual growth rate of the PEF industry since 2004, when PEFs were first introduced in Korea, is 29%, which is considered high. •After the global financial crisis, alternative investments by pension funds and institutional investors have been a primary source of revitalizing economies and corporate restructuring. In today’s depressed mergers and acquisitions (M&A) market, where large corporations are reluctant to engage in deals due to risk concerns, PEFs have become integral players in driving major deals. Their importance is underscored by their being party to virtually all recent big M&A deals. •In this and other ways, the tenth anniversary of the introduction of PEFs to Korea represents an important marker in their evolution. It is only now that the liquidation of the first wave of Korean PEFs, which generally have a 10-year term, is taking place and offering a means of exit for investors. This is a strong sign of the PE market’s maturation in Korea, as the PE firms that have served as catalysts for corporate restructuring and the main growth capital provider are now being assessed for their virtuous contribution to the market and economy.
PEF commitment and number of PEFs
250 45.2 50 No. of PEF Committed capital (Unit: KRW trillion) 40.7 45 37 200 40 29.3 35 150 24.6 30 277 18.5 25 237 100 13.5 226 20 181 15 8.3 148 50 110 10 76 44 5 0 0 2007 2008 2009 2010 2011 2012 2013 2014
* Source: Financial Supervisory Service (FSS), as of December 2014
* Currency conversion based on March 12, 2015 rate. 08 PRIVATE EQUITY & VENTURE CAPITAL
Growth factor: Pension fund’s alternative investment Growth of the Korean Within the domestic PEF market, the main limited partners (LPs) are pension funds, mutual aid PE market associations, banks, insurance companies, and other forms of capital. Among these, national pension funds play the biggest role. In 2013, the accumulated investment in PEFs of Korea’s National Pension Service totaled KRW 11.1 trillion, 21% of all PEF investment in Korea. However, allocations for alternative investment including PEF are considered low (10.1%) in comparison to those of the United States (25%), Switzerland (28%) and Canada (20%). Korea’s National Pension Service is the 4th largest pension fund in the world, but PEF investments account for only 2.5% of the total assets under management.
Alternative investments of Korea's national pension fund (Unit: %, KRW trillion)
10.1% (36.3bn) 9.1% (29.8bn) 8.1% (24.1bn) 6.5 % (17.5bn) 4.9% 3.6% (11.9bn) (8.0bn)
2008 2009 2010 2011 2012 2013
Ratio of PEF investment of Korea's national pension fund (Unit: %, KRW trillion)
10.3 9.1 8.0
5.7
3.8 3.1 1.7 0.7 0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013
* Source: FSS (2013)
•The National Pension Service contributed a total of KRW 1.075 trillion to PEFs and venture capital in 2013, which could be seen as an effort to foster domestic PEFs as a public fund. However, compared to the scale of pension funds and alternative investment in other countries, the Korean PEF market still has a lot of room to grow. 02 STATUS AND PROSPECTS OF KOREAN PEF MARKET 09
Growth potential: PE penetration ratios To measure the maturity of the PEF market in Korea, we can compare PE penetration ratios by country (ratio of PE against GDP). The graph below shows that the PE penetration ratios of Israel and the United States, the leading countries of PE, have been 1.62% and 1.01%, respectively, in the past two years (2012 - 2013), while the PE penetration ratio of Korea stayed at a mere 0.27%.
PE penetration ratios by country PE investment / GDP (%)
2.00 1.80 1.74 2012 2013 1.62 1.60 1.40
1.20 1.07 1.01 1.04 1.00 0.89 0.80 0.60 0.40 0.240.28 0.20 0.21 0.200.18 0.20 0.12 0.09 0.06 0.09 0.09 0.08 0.06 0.09 0.07 0.05 0.04 0.04 0.04 0.03 0.01 0.01 0.00 Israel United United South India Brazil SSA* Poland China South Japan Turkey Russia MENA** States Kingdom Korea Africa
* Source: EMPEA, as of September 2014; * Sub-Saharan Africa; **Middle East & North Africa
Of course, Korea’s PEF market is not expected to become as big as that of Israel or the United States. However, considering recent deregulations in the PEF and M&A market, this comparison of PE Penetration Ratios indicates significant growth potential in the Korean PEF market.
PE fundraising Fund cycle Funds for PE in Korea have been steadily increasing each year. In 2013, KRW 7.4 trillion was added to the total capital commitment, becoming the 2nd largest commitment since the introduction of PEF (the largest being KRW 9.7 trillion in 2012). To overcome low interest rates and the slump in the stock market, large institutional investors are shifting their interest toward the PEF market rather than just endorsing conventional investment tools like stock and fixed income. This development has been evident in the past 10 years.
Yearly added funds (committed capital)
Region 2007 2008 2009 2010 2011 2012 2013 Korea (USD billion) 2.6 5.2 5.7 6.8 6.0 9.0 6.9 World (USD billion) 668 680 306 275 266 249 -
* Source: FSS (2013), Preqin 10 PRIVATE EQUITY & VENTURE CAPITAL
The annual inflow of PEF investment is quite steady. However, each fund has yet to grow in size. In 2013, 114 of the 237 registered PEFs had committed capital of less than KRW 100 billion; 76 companies have commitments of KRW 100 - 300 billion; and 47 companies have commitments of more than KRW 300 billion.
Commitment by scale
Size of fund Commitment (KRW billion) Number of PEFs Large More than 300 47 (20%) Medium 100 – 300 76 (32%) Small Less than 100 114 (48%) Total 237 (100%)
* Source: FSS (2013)
The number of small and medium PEFs is high because there was more demand for small and medium project-based PEFs managed by newer managing GPs rather than for blind PEFs managed by well-established and reputable GPs.
Domestic PEFs can be broadly categorized into two groups: independent PEFs and financial PEFs. While banks, securities companies, and finance companies were the more active PEF managers in the beginning, the growth of PEFs in number and size has made independent PEFs the leading player in the PEF market.
Major domestic GPs
Commitment Ranking General Partner (GP) Number of PEFs (KRW billion) 01 Korea Development Bank 6.010 14 02 MBK Partners 5.901 16 03 Hahn & Company Korea 2.033 3 04 Macquarie Korea Opportunities Management Limited (MKOM) 2.003 3 05 Mirae Asset Financial Group 1.876 5 06 Vogo Investment Group 1.803 6 07 UAMCO Ltd. 1.605 5 08 IMM Private Equity 1.518 10 09 STIC Investments 1.456 5 10 Industrial Bank of Korea 1.303 12 11 Shinhan Private Equity 1.183 2 12 Q Capital Partners 1.155 8 13 KTB Investment & Securities 1.084 6 14 EQ Partners 1.062 4 15 SkyLake Incuvest 1.018 9
* Source: FSS, as of December, 2014 02 STATUS AND PROSPECTS OF KOREAN PEF MARKET 11
Investment The most common investment strategies in private equity are generally: leveraged buyouts, venture capital, mezzanine capital, and distressed investments. Because Korean PEFs were introduced to induce buyouts, most major Korean PE investment strategies are geared toward buyouts in M&A. After the introduction of PEFs, the amount of M&A deals was highest in 2013 while the ratio of PEFs from the total amount of M&A deals increased rapidly to 11%. It was only 1.3% in 2011.
Value-Up Due to the domestic regulatory environment that limits the leverage level of PEFs, returns on the fund have been relatively limited. In addition, the holding periods of investee companies for Korean PEFs are estimated to be shorter than those for global PEFs. The holding periods of Korean PEFs are 2 - 3 years while those of overseas PEFs are usually 5 - 10 years. As returns on funds have not been as high as investors expected, there is a need to “value up,” or drive earnings growth through more active fund management.
Exits Many portfolio exits are expected to converge this year due to the upcoming maturity terms of earlier-established PEFs. In 2012, it was difficult to divest holding assets due to the recession caused by the global financial crisis (only KRW 2.1 trillion); however, the total amount of exit increased by 57% in 2013 (KRW 3.7 trillion). This is because many PEFs, which formed during the earlier stage of the system (2005 - 2008), dissolved due to an increase in fund expirations.
Annual PEF liquidation and exits
Year 2004 – 2010 2011 2012 2013 Total No. of PEF liquidated 14 10 15 34 73 Exits (KRW trillion) 2.7 3.8 2.1 3.7 12.3
* Source: FSS (2013) 12 PRIVATE EQUITY & VENTURE CAPITAL
Due to the excessiveness and complexity of regulations, the growth and contribution of Korean PEF PEFs to the general capital market had been limited compared to other developed countries. regulation Thus, the government presented a plan to reorganize the PEF system which would minimize reform PEF limitations and vitalize the PEF market. In September of 2014, the final amendments to the Financial Investment Services and Capital Markets Act (FSCMA) were submitted and they are now pending. These amendments are anticipated to create favorable conditions for domestic PEFs to be able to operate and grow more freely.
PEF contribution (2012)
USA UK Korea Hedge fund / GDP (net assets) 8.83% 11.8% 0.09% PEF / GDP (new investment) 0.72% 1.22% 0.47%
* Source: FSS, TheCityUK
The major details of this plan can be summarized as relaxing inter-group investment restrictions, amending the minimum investment limit, adopting a public fund of funds, lessening management restrictions, and diversifying allowed fund types.
Reorganization of PEF system Four private fund types will be combined into two investment vehicles The current types of private funds – general private funds, hedge funds, and PEFs (the four types of which are in the table below) – will be combined into two types of PEFs: “Specialized Investment Type Private Collective Investment Vehicle” (hedge funds) and “Management Participation Type Private Collective Investment Vehicle” (PEFs). This improvement will simplify the types of funds and separate regulation for public funds from other funds. 02 STATUS AND PROSPECTS OF KOREAN PEF MARKET 13
Types of PEF in Korean law (present)
PEFs for corporate PEFs for corporate PEFs for overseas Type PEFs financial stability restructuring resource development Overseas Resource Industry Development Applicable law Capital Market Act Development Act Business Act 2004 (former Indirect 2010 2009 Time of adoption Investment Asset 2006 (Effective for 3 years) (Replacing CRC) Management Business Act) Corporate Investment restructuring in companies Participation in Companies selected Types of investment corporations (no specializing in management for restructuring participation in development of management) overseas resources Financial Services Commission (Consent of the Registration Financial Services Commission Ministry of Trade, Industry & Energy) Tax cuts, government Flexible in Investment Characteristics Buy-out purpose LP Commitment financing, existing Type period No. of registered 239 20 3 6 companies Total amount of capital KRW 42.2 trillion KRW 3.92 trillion KRW 60.1 billion KRW 2.3 trillion
* Source: FSS as of the end of September, 2014
Reasonable limits for PEF investors •The qualification of PEF investors will be limited to those with good financial standing, the minimum amount of investment being KRW 500 million; but a “publicly offered fund,” which is a fund of funds, will be established in order to absorb the demand of individual small-sized investors. •Deregulation for publicly offered funds 1. General fund of funds can be invested toward PEFs within 5% of its assets. 2. PE fund of funds should invest more than 40% of its assets to PEFs. 3. PE fund of funds must diversify its investment into more than 3 PEFs.
Allocation / Management of PEF funds and assets PEFs will be allowed to use multiple layers of SPCs in their investments and will be permitted to allocate up to 30% of their net assets in securities without any management participation purpose. Currently, PEFs are only allowed to use a single layer of SPC in their investment in a target company and can allocate only up to 5% of their assets in securities without a management participation purpose. This amendment will provide flexibility to PEFs’ interim management of un-invested funds, which may help relieve the current excess of dry powder. 14 PRIVATE EQUITY & VENTURE CAPITAL
The Current Pre-Registration System will change to a Post-Reporting System PEFs are currently required to register in advance; the amendments require that PEFs register with the Financial Supervisory Service (FSS) within two weeks of their establishment.
Sale & Advertising PEFs Previous requirements for investor investigations will be relaxed. The advertisement of PEFs is currently prohibited. The amendments will allow for partial advertisements and direct product management transactions.
Regulations on PEF management for groups specialized in financial services Even though a Financial Service Specialized Group is categorized as a large company, unreasonable regulations related to PEF management will be removed, such as the prohibition of voting rights toward an affiliated company, tight regulation of public release, forced disposal of the company the PEF had invested in after 5 years, etc.
Restrictions on transactions with related parties •Other than transactions involving certain exceptions (e.g., transaction on a securities exchange), PEFs may not engage in related party transactions. •PEFs may not acquire securities issued by (i) an affiliate of a GP or (ii) an affiliate of an LP that has de facto control over the PEF that exceeds a certain threshold amount (which will be determined by the Presidential Decree of the FSCMA). •(i) Investment in equities of related group companies will be limited to 10% → 5% of the total permitted equity investment of the total funds under management, (ii) 30% → 25% of each fund’s total asset.
The revisions to the PEF system will reform the factors that restricted the PEF market in each stage: Fund formation, investment, management, and exit. These amendments will help build a better foundation for all Korean PEFs to grow more in the future and to improve the dynamics and contribute to the vitalization of a real economy. 02 STATUS AND PROSPECTS OF KOREAN PEF MARKET 15
Offshore PE Funds – Fundraising in Korea •Under the FSCMA, all offshore funds marketed and sold to Korean investors are required to be registered with the FSS before it is offered to Korean investors unless such offers were made on a reverse inquiry basis or the interests of the offshore fund were offered to Korean investors through a Fund of Funds that invests in multiple offshore funds. •In other cases, individualized discretionary investment accounts managed by offshore fund managers are also offered to the Korean investors. •Offshore fund managers with investment discretion over a fund with Korean investors must acquire a cross-border discretionary investment manager (“CBDIM”) license from the FSS prior to marketing the investment account subject to limited exceptions. •The marketing of offshore funds to Korean investors must be conducted through a locally licensed distributor (i.e., a domestic financial institution that is licensed to market and sell fund products). In this regard, representatives of the offshore funds must not be engaged in direct marketing activities vis-à-vis Korean investors unless they possess a local fund distribution license.
Asset size of major Korean LPs Korean LPs Ranking Limited Partner (LP) Size (USD billion) 01 National Pension Service (NPS) 436 02 Korea Post (Office of Postal Service) 103 03 Korea Finance Corporation (KoFC) 70 04 Korea Investment Corporation (KIC) 65 05 The Korean Teachers’ Credit Union (KTCU) 23 06 The Korea Teachers Pension (TP) 15 07 The Military Mutual Aid Association (MMAA) 6.9 08 Public Officials Benefit Association (POBA) 6.2 09 Government Employees Pension Service (GEPS) 4.2 10 Growth Ladder Fund 1.8 11 The Police Mutual Aid Association 1.6 12 Construction Workers Mutual Aid Association (CWMA) 1.5 13 Korea Venture Investment Corp (KVIC) 1.4 * Source: ASK 2014
Asset size of Korean life insurance companies
Ranking Company Name AUM (KRW trillion) Ranking Company Name AUM (KRW trillion) 01 Samsung Life Insurance 184 06 MiraeAsset Life Insurance 20 02 Hanwha Life Insurance 78 07 Shinhan Life Insurance 18 03 Kyobo Life Insurance 70 08 Tong Yang Life Insurance 17 04 Nonghyup Life Insurance 45 09 Heungkuk Life Insurance 16 05 ING Life Insurancew 23 10 Allianz Life Insurance 14
* AUM = [Total Asset – Non-operating Asset], Source: Korea Life Insurance Association as of December, 2013 16
STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET 03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET 17
At the end of 2013, a total of 29,135 companies were classified as venture companies and 700 Korean companies, or 2.4% of the total, were sponsored by venture capital funds. By industry, 72% of venture the venture companies are from the manufacturing sector and 16% from IT software. And by companies age, 1-5-year-old companies represent 39.5%, while 5-10-year-old companies represent 26% and 10-20-year-old companies represent 26.1% of the total venture companies.
Venture Companies
29,135 28,193 26,148 24,645
18,893
15,401 14,015 12,218 9,732 7,702 7,967
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
* Source: Venture-In (2013)
Current Status of Venture Capital Companies Korean •At the end of 2013, 101 VC companies were registered and active. venture •In addition to the VC companies, 6 new technology financing companies and 8 limited liability capital companies (LLCs) were managing the KVF sponsored funds. companies •After the establishment of the 1986 Support for SME Establishment Act, a total of 249 VC companies registered while 148 delisted. From 2001, new registrations slowed. When the requirements for paid-in capital became less intensive in 2005 and 2009, new registrations rose. In 2013, the number of new registrations dropped to only 3. •Among the 101 VC companies that were actively managing in 2013, 51 (50.5%) companies had been operating for more than 10 years while 16 (15.8%) companies were less than 3 years old. 18 PRIVATE EQUITY & VENTURE CAPITAL
VCs by age (Unit: Companies, %) Years of Mgmt ~ 3 years 3 - 5 years 5 -10 years 10 -15 years At least 15 years Total Number of VCs 18 18 16 31 20 101 Percentage 15.8 17.8 15.9 30.7 19.8 100.0
* Source: KVCA (2013)
•Looking at the paid-in capital distribution by scale, there are 51 (50.5%) startup investment companies under KRW 10 billion and 12 (11.9%) startup investment companies over KRW 30 billion.
VCs by Paid-in Capital (Unit: Companies, %, KRW billion) Paid-in Capital ~ 5 5 - 7 7 - 10 10 - 20 20 - 30 30 - 50 At least 50 Total Number of VCs 15 13 23 31 7 9 3 101 Percentage 14.8 12.9 22.8 30.7 6.9 8.9 3.0 100.0
* Source: KVCA (2013)
Fund formation & Investment Korean venture •In 2013, 49 new funds were established, recording a total of about KRW 1.5 trillion. The average capital size of newly established funds is about KRW 31 billion, while the average size of active funds funds is about KRW 24 billion. •Of the 49 new funds formed, 34 investment funds specialize in investing in small and medium enterprises and venture businesses, 11 in the cultural sector, 3 are patent related, and 1 is related to the bio-industry.
VC Funding (Unit: number, KRW billion) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 No. of New Funds 40 39 46 48 67 51 74 67 67 41 49 Amount New 709 645 945 862 1,128 976 1,421 1,590 2,286 773 1,537 Cum. No. of Funds 430 423 400 350 333 336 366 393 417 412 431 Amount Total 3,891 4,246 4,758 4,878 5,076 5,645 6,574 7,614 9,460 9,374 10,410
* Amount = committed capital, Source: KVCA (2013) 03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET 19
Amount of new funds for VCs Amount (KRW 100 mn)
25,000 Amount No. of funds 22,865
20,000
194 15,899 15,374 15,000 14,209 14,341 11,279 7,910 9,454 9,751 10,000 8,617 7,727 6,290 7,086 6,450 90 5,000 60 74 67 51 67 67 40 46 48 39 41 40 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
* Source: KVCA (2013)
•At the end of 2013, the total commitment for the 431 VC funds reached KRW 10.4 trillion while VC funding the principal investment resource for VC companies reached KRW 1.1 trillion. Total investment resources resources amounted to more than KRW 11 trillion. •Committed capital for VC funds consistently increased. Between 2009 and 2011, new commitment consistently recorded at least KRW 1 trillion every year. As of the end of 2013, committed capital for VC funds accounts for 90.1% of the total investment resources.
VC Funding Resources
Other 1.0 Foreigners 0.4 Personal 2.0 Pension funds / Mutual aid 9.2
VC 14.3 Government agencies 41.7
General corporate 14.8 Financial institutions 16.6 20 PRIVATE EQUITY & VENTURE CAPITAL
Annual VC investment resources (Unit: KRW billion) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Committed capital 3,891 4,246 4,758 4,878 5,076 5,645 6,574 7,614 9,460 9,349 10,407 Principal investment 2,195 1,987 1,750 1,703 1,883 1,471 1,309 1,147 1,177 1,169 1,142 Total 6,086 6,233 6,507 z6,581 6,959 7,116 7,883 8,761 10,637 10,518 11,549
(Unit: %, KRW trillion)
14,000 Committed capital Principal investment 12,000 1,142 10,000 1,177 1,169
8,000 1,147 1,309 1,471 6,000 1,883 1,750 1,703 1,987 10,407 2,195 9,460 9,349 4,000 7,614 5,645 6,574 5,076 4,246 4,758 4,878 2,000 3,891
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
* Source: KVCA (2013)
Top 10 venture capital funds (Unit: KRW billion, %)) Funds Raised Invested Amount Invested Ratio Dry Powder Ranking VC Investment Company (A) (B) (B/A, %) (A-B) Korean Investment Partners 01 682 464 68.0 218 (KIP) 02 LB Investments 585 367 62.7 218 03 STIC Investments 488 354 72.5 134 04 Atinum Investment 467 293 62.8 174 05 INTER VEST 398 277 69.6 121 06 Hanwha Investment 338 271 80.1 67 07 IMM Investment 309 208 67.3 101 08 KTB Network 306 115 37.5 191 09 Premier Partners 291 181 62.3 110 10 HB Investment 288 262 91.0 26 Total 4,152 2,792 67.2 1,360
* Source: KVCA (2014) 03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET 21
•Korea’s venture capital market has been on the rise in recent years. Total investment as of the VC investment end of 2013 was KRW 4.4 trillion, with 2,771 venture businesses receiving such investment. performance •New investment performance in 2013 was about KRW 1.4 trillion, which is a 12.3% increase from the previous year. In addition, the number of newly invested enterprises was 755, and the average investment amount per enterprise was KRW 1.8 billion, which is a 2.2% increase from 2012.
Yearly Investment (Unit: KRW 100 million)
50,000 New investment Amount invested 45,000 44,673 40,000 35,913 35,000 30,448 39,525 28,827 31,010 30,000 26,271 26,613 30,514 25,000 27,627 21,957 20,211 27,628 24,781 20,000 22,675 15,000 12,608 9,917 8,671 13,845 10,000 6,306 7,573 8,913 10,910 12,333 5,000 6,177 6,044 7,333 7,247 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
* Source: KVCA (2013)
Analysis of Investment Patterns Classified by Industry Type
•In 2013, the information technology sector received the most investment (35.2%), followed by general manufacturing (22.5%), and cultural contents (20.6%). •Compared with the investment amount from the previous year, investment in information technology, bio-technology, service / education, and distribution increased by 38.9 - 155.1%, while investment in general manufacturing and cultural contents decreased 9% and 18%, respectively. 22 PRIVATE EQUITY & VENTURE CAPITAL
Type of investment Looking at investment type, preferred stocks represented the majority vehicle (36.4%), then common stocks (25.0%), bond type investments (22.0%), and projects (14.0%).
Investment by industry Investment by type Percentages (100%=KRW 1.4 trillion) Percentages (100%=KRW 1.4 trillion)
Distribution 3.6 Environmental protection 1.8 Other 2.6 Service/ Other 1.4 Education 4.3 BW 12.0 Biotech 10.6 Information BW Preferred technology 12.0 stock 35.2 36.4 Cultural Project- content based 20.6 14.0 General Common manufacturing stock 22.5 25.0
Investment in early-stage businesses accounted for 45.3% of the total number of companies invested, while investment accounted for 27.2% of the businesses in the expansion stage and 25% in the later stage.
Investment by amount Investment by enterprise Percentages (100%=KRW 1.4 trillion) Percentages (100%=755 enterprises)
Expansion stage Expansion 23.5 stage 27.2 Later Early stage stage 49.8 45.3 Early stage Later 26.7 stage 27.5
* Source: KVCA (2014) * Stage classification: Early stage (Less than 3 years), Expansion stage (3-7 years), Later stage (Over 7 years)
The top ten VC companies represented investments worth KRW 555.8 billion, or 40.1% of the total invested amount of KRW 1.4 billion in 2013. 03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET 23
Status of Exit by Type Exit •In 2013, VCs used various types of exit tools, of which trade sales and redemption (49.8%) took up the highest proportion, followed by project realization (23.5%), and then Initial Public Offerings (IPOs) (15.7%), which took up the smallest proportion. •Unlike in the U.S., M&A has not been an effective exit tool for Korean venture capital firms. This is primarily because there are very few companies both able and willing to do M&A. •Another reason for the limited M&A activity is likely the unwillingness of most entrepreneurs to relinquish management control. There is also a cultural aversion toward M&A, especially hostile ones.
Types of exits (Unit: %)
IPO M&A Project Off board transactions & Redemptions Other (Overseas Investments.etc.)
0.1 1.6 1.0 0.6 2.8 10.7
55.6 53.8 56.2 61.1 64.7 59.7 62.5 59.2 61.3 56.0 49.8
16.5 23.2 15.6 18.5 17.7 16.4 23.7 18.5 22.4 23.5 15.1 4.7 3.3 5.9 0.8 2.4 2.6 7.1 4.9 1.5 1.0 0.3 19.6 17.7 21.4 23.2 17.2 17.1 15.7 14.2 18.1 17.8 15.7
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
* Source: Korean Venture Capital Association (December, 2013)
IPO trend in KOSDAQ •There were 37 KOSDAQ listings in 2013, which was an increase of 15 from 2012 (22), whereas the number of companies delisted (including 8 SPAC companies) decreased, 48 in 2012 to 33 in 2013. •Compared to 2012, IPO applications fell while IPO approvals rose. Public offerings rose by 65.1%.
Number of venture companies that received VC investment •With the addition of 37 newly listed enterprises and delisting of 33 enterprises, there are a total of 1,009 enterprises receiving VC investment. •Among new IPOs in 2013, 23 are venture enterprises, of which 22 are recipients of VC investment. 24 PRIVATE EQUITY & VENTURE CAPITAL
Trends in the KOSDAQ IPO, 2003-13 (Unit: Companies, %, KRW billion) Paid-in Capital 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 No. of listed companies 879 890 918 963 1,023 1,038 1,028 1,029 1,031 1,005 1,009 No. of IPOs 71 52 70 56 67 38 55 76 60 22 37 No. of IPOs of venture companies (A) 58 37 61 43 52 29 29 34 35 17 23 No. of IPOs of VC-backed venture companies (B) 36 28 49 35 44 25 20 26 30 14 22 B / A (%) 62.1% 75.7% 80.3% 81.4% 84.6% 86.2% 69.0% 76.5% 85.7% 82.4% 95.7%
* Source: Korea Exchange
(Number of Companies)
180 171 No. of IPOs No. of VC company IPOs No. of venture backed IPOs 160 153 140 134 120 105 100
80 73 76 71 70 67 58 61 60 60 53 56 55 52 49 52 43 44 38 40 36 37 35 35 37 28 29 29 34 30 25 26 23 20 20 22 22 17 14 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
* Source: Korea Exchange (2013)
Future VC funds Prospects for the Korean •Government commitment is expected to increase to KRW 1.7 trillion (from KRW 1.5 trillion in VC market 2013) to be in line with venture business-supporting policies. •Due to the larger contributions of major LPs, venture capital funds are steadily increasing. More large VC funds are expected to be established. •Currently, government-initiated public institutional investors, such as KVIC and the Korea Finance Corporation, provide 42.9% of the newly formed funds. They are expected to continue playing a vital role in supporting VC enterprises. •The biggest fund type is the VC investment fund sponsored by the Korea Venture Fund. However, KRW 1.2 trillion worth PEFs and new technology funds are also expected to be set up in the year 2014 for VC investment. 03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET 25
Future VC investment •New investment toward VC enterprises in 2014 is expected to rise to KRW 1.52 trillion, from KRW 1.4 trillion in 2013. •The amount of VC funds was low (KRW 773 billion) in 2012, but investment trends are expected to remain steady due to the overflow of previously accumulated funds. •In November 2013, total VC funds exceeded KRW 10 trillion, reaching an all-time high. •In line with its policy to support small- and medium-sized enterprises, government policies supporting new enterprises and venture businesses are expected to positively affect the investment growth of VC funds.
Recent and expected VC investment trends •In 2014, the information technology industry received the most investment, accounting for 29% of the total investment. This industry is expected to continue attracting investment in the coming years. •The cultural contents industry and the biotechnology industry have attracted 25.3% and 14.7% of the total investment, respectively. The general manufacturing industry (21.2%) is expected to attract relatively low amounts of investment compared to previous years. •In line with current trends, preferred share (44.1%) and common stock (54.1%) remain to be considered as primary investment types.
Homepage Sources The Bank of Korea www.bok.or.kr Financial Services Commission www.fsc.go.kr Financial Supervisory Service www.fss.or.kr Korean Venture Capital Association, KVCA www.kvca.or.kr Korean Federation of Banks www.kfb.or.kr Korea Life Insurance Association www.klia.or.kr General Insurance Association of Korea www.kfpa.or.kr National Pension Service, NPS www.nps.or.kr Korea Exchange, KRX www.krx.co.kr Venture-In www.venture-in.co.kr Invest Korea's Global Network Supporting foreign investors worldwide
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