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
05
01 KOREA AT A GLANCE
Economic indicators
Economic indicators Classification
2007
2008
2009
2010
2011
2012
2013
1,122.7
1,001.7
902.3
1,094.3
1,202.7
1,222.4
1,304.3
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
GDP (USD billion) Real GDP growth rate (%)
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
262.0
201.0
270.0
292.0
306.4
327.0
346.5
Foreign exchange reserves (USD billion) * 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
07
02 STATUS AND PROSPECTS OF KOREAN PEF MARKET
Status of the Korean PEF market
Current status of PEF investment • It has been 10 years since the introduction of private equity funds (PEFs) in Korea, and the
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 No. of PEF
Committed capital (Unit: KRW trillion)
37
200
40.7
45.2
29.3 150
24.6
50 0
277
18.5
100
13.5 8.3 44 2007
76 2008
110 2009
148
2010
* Source: Financial Supervisory Service (FSS), as of December 2014
* Currency conversion based on March 12, 2015 rate.
181
2011
226
2012
237
2013
2014
50 45 40 35 30 25 20 15 10 5 0
08
Growth of the Korean PE market
PRIVATE EQUITY & VENTURE CAPITAL
Growth factor: Pension fund’s alternative investment Within the domestic PEF market, the main limited partners (LPs) are pension funds, mutual aid 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
4.9% (11.9bn)
3.6% (8.0bn)
2009
2008
8.1% (24.1bn)
6.5 % (17.5bn)
2010
2011
(Unit: %, KRW trillion)
10.1% (36.3bn)
9.1% (29.8bn)
2012
2013
Ratio of PEF investment of Korea's national pension fund
(Unit: %, KRW trillion)
10.3 9.1 8.0 5.7 3.1 0.0 2005
0.7 2006
3.8
1.7
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.
09
02 STATUS AND PROSPECTS OF KOREAN PEF MARKET
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 1.60
2012
1.74 1.62
2013
1.40 1.20
1.07 1.01
1.00
1.04 0.89
0.80 0.60 0.40
0.24 0.28 0.20 0.21 0.20 0.18
0.20 0.00
Israel
United United South States Kingdom Korea
India
0.09 0.12 0.06 0.09 0.09 0.08 0.04 0.06 0.09 0.04 0.04 0.03 0.070.01 0.05 0.01 Brazil SSA* Poland China South Japan Turkey Russia MENA** 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.
Fund cycle
PE fundraising 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)
Large
More than 300
Medium
100 – 300
Small
Less than 100
Number of PEFs 47 (20%) 76 (32%) 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. omestic PEFs can be broadly categorized into two groups: independent PEFs and financial D 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 (KRW billion)
Number of PEFs
Korea Development Bank
6.010
14
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
Ranking
General Partner (GP)
01 02
* Source: FSS, as of December, 2014
11
02 STATUS AND PROSPECTS OF KOREAN PEF MARKET
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 ue to the domestic regulatory environment that limits the leverage level of PEFs, returns on D 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
PEF regulation reform
PRIVATE EQUITY & VENTURE CAPITAL
Due to the excessiveness and complexity of regulations, the growth and contribution of Korean PEFs to the general capital market had been limited compared to other developed countries. Thus, the government presented a plan to reorganize the PEF system which would minimize 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
T he 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.
13
02 STATUS AND PROSPECTS OF KOREAN PEF MARKET
Types of PEF in Korean law (present) PEFs for corporate financial stability
PEFs for corporate restructuring
PEFs for overseas resource development
Industry Development Act
Overseas Resource Development Business Act
2010 (Effective for 3 years)
2009 (Replacing CRC)
2006
Corporate restructuring corporations (no participation in management)
Companies selected for restructuring
Investment in companies specializing in development of overseas resources
Type
PEFs
Applicable law
Capital Market Act
Time of adoption
2004 (former Indirect Investment Asset Management Business Act)
Types of investment
Participation in management
Registration
Financial Services Commission
Characteristics
Buy-out purpose
Flexible in Investment Type
LP Commitment
No. of registered companies
239
20
3
6
Total amount of capital
KRW 42.2 trillion
KRW 3.92 trillion
KRW 60.1 billion
KRW 2.3 trillion
Financial Services Commission (Consent of the Ministry of Trade, Industry & Energy) Tax cuts, government financing, existing period
* 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 • O ther 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.
Korean LPs
Asset size of major Korean LPs Ranking
Limited Partner (LP)
Size (USD billion)
01 02 03 04 05 06 07 08 09 10 11 12 13
National Pension Service (NPS) Korea Post (Office of Postal Service) Korea Finance Corporation (KoFC) Korea Investment Corporation (KIC) The Korean Teachers’ Credit Union (KTCU) The Korea Teachers Pension (TP) The Military Mutual Aid Association (MMAA) Public Officials Benefit Association (POBA) Government Employees Pension Service (GEPS) Growth Ladder Fund The Police Mutual Aid Association Construction Workers Mutual Aid Association (CWMA) Korea Venture Investment Corp (KVIC)
436 103 70 65 23 15 6.9 6.2 4.2 1.8 1.6 1.5 1.4
* Source: ASK 2014
Asset size of Korean life insurance companies Ranking
Company Name
01
Samsung Life Insurance
AUM (KRW trillion)
Ranking
Company Name
184
06
MiraeAsset Life Insurance
AUM (KRW trillion) 20
Shinhan Life Insurance
18
02
Hanwha Life Insurance
78
07
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
17
03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET
Korean venture companies
At the end of 2013, a total of 29,135 companies were classified as venture companies and 700 companies, or 2.4% of the total, were sponsored by venture capital funds. By industry, 72% of the venture companies are from the manufacturing sector and 16% from IT software. And by 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
24,645
26,148
28,193
29,135
18,893
12,218 7,702
7,967
2003
2004
14,015
15,401
9,732
2005
2006
2007
2008
2009
2010
2011
2012
2013
* Source: Venture-In (2013)
Korean venture capital companies
Current Status of Venture Capital Companies • At the end of 2013, 101 VC companies were registered and active. • In addition to the VC companies, 6 new technology financing companies and 8 limited liability
companies (LLCs) were managing the KVF sponsored funds. • 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
Number of VCs
18
18
16
31
20
101
15.8
17.8
15.9
30.7
19.8
100.0
Percentage
Total
* 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 Paid-in Capital Number of VCs Percentage
(Unit: Companies, %, KRW billion)
~5
5-7
7 - 10
10 - 20
20 - 30
30 - 50
At least 50
Total
15
13
23
31
7
9
3
101
14.8
12.9
22.8
30.7
6.9
8.9
3.0
100.0
* Source: KVCA (2013)
Korean venture capital funds
Fund formation & Investment • In 2013, 49 new funds were established, recording a total of about KRW 1.5 trillion. The average
size of newly established funds is about KRW 31 billion, while the average size of active 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 No. of New Funds Amount New Cum. No. of Funds Amount Total
(Unit: number, KRW billion)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
40
39
46
48
67
51
74
67
67
41
2013 49
709
645
945
862
1,128
976
1,421
1,590
2,286
773
1,537
430
423
400
350
333
336
366
393
417
412
431
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)
19
03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET
Amount of new funds for VCs
Amount (KRW 100 mn)
25,000 Amount
22,865
No. of funds
20,000 194 15,000
14,209
14,341
90
5,000 0
11,279
7,910
10,000
9,454 6,290
7,086
8,617
2001
2002
15,374
9,751 7,727
6,450
60
2000
15,899
40
39
46
2003
2004
2005
48 2006
74
67
51
2007
2008
67
67
2010
2011
41 2009
2012
40 2013
* Source: KVCA (2013)
VC funding resources
• At the end of 2013, the total commitment for the 431 VC funds reached KRW 10.4 trillion while
the principal investment resource for VC companies reached KRW 1.1 trillion. Total investment 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
General corporate 14.8
Government agencies 41.7
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 10,000
6,000
1,750
1,703
1,883
2,195
1,987
3,891
4,246
4,758
4,878
5,076
2003
2004
2005
2006
2007
4,000
0
1,169
9,460
9,349
2011
2012
1,147
8,000
2,000
1,142
1,177
1,471
1,309
5,645
6,574
7,614
2008
2009
2010
10,407
2013
* Source: KVCA (2013)
Top 10 venture capital funds
(Unit: KRW billion, %))
Funds Raised (A)
Invested Amount (B)
Invested Ratio (B/A, %)
Dry Powder (A-B)
Korean Investment Partners (KIP)
682
464
68.0
218
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
4,152
2,792
67.2
1,360
Ranking
VC Investment Company
01
Total * Source: KVCA (2014)
21
03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET
VC investment performance
• Korea’s venture capital market has been on the rise in recent years. Total investment as of the
end of 2013 was KRW 4.4 trillion, with 2,771 venture businesses receiving such investment. • 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
45,000 40,000 35,000 30,000 25,000
44,673
35,913 30,448
28,827
21,957
27,627
20,211
15,000 10,000
9,917
7,573
6,306
27,628
24,781
22,675
2001
2002
2003
12,333
10,910
2004
2005
2006
13,845
7,247
7,333
6,044
6,177 2000
12,608
8,671
8,913
5,000
39,525
31,010
26,613
26,271
30,514
20,000
0
Amount invested
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)
Environmental protection 1.8 Other 1.4
Distribution 3.6 Service/ Education 4.3
BW 12.0
Biotech 10.6
Cultural content 20.6
Other 2.6
Information technology 35.2
Preferred stock 36.4
BW 12.0 Projectbased 14.0
General manufacturing 22.5
Common stock 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)
Expansion stage 23.5
Percentages (100%=755 enterprises)
Expansion stage 27.2 Later stage 49.8
Early stage 26.7
Early stage 45.3
Later 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.
23
03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET
Exit
Status of Exit by Type • 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
0.1
Off board transactions & Redemptions
1.6
1.0
0.6
Other (Overseas Investments.etc.)
2.8 10.7
61.1
64.7
18.5 19.6
15.1 2.4 17.7
2003
2004
0.8
59.7
15.6 3.3
55.6
16.5 4.7
62.5
17.7
21.4
23.2
2.6 17.2
2005
2006
2007
53.8
23.2
59.2
56.2
61.3
56.0
49.8
16.4
23.7
18.5
22.4
23.5
1.5
1.0
18.1
17.8
0.3 15.7
2011
2012
2013
5.9
7.1
17.1
15.7
4.9 14.2
2008
2009
2010
* 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 Paid-in Capital
(Unit: Companies, %, KRW billion)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
No. of listed companies
879
890
918
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
36
28
49
35
44
25
20
26
30
14
22
No. of IPOs of VC-backed venture companies (B) B / A (%)
963 1,023 1,038 1,028 1,029 1,031 1,005 1,009
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
160 140
No. of venture backed IPOs
134
120
105
100 80
73
71
60
53
70
58
52 36
40
37
61 49
28
76
67
56 43
52 35
44 38
20 0
No. of VC company IPOs
153
2001
2002
2003
2004
2005
2006
2007
60
55 29
2008
34
29
25
20 2009
26
2010
35 30
2011
37 22
17 14
2012
23 22 2013
* Source: Korea Exchange (2013)
Prospects for the Korean VC market
Future VC funds • Government commitment is expected to increase to KRW 1.7 trillion (from KRW 1.5 trillion in
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.
25
03 STATUS AND PROSPECTS OF KOREAN VENTURE CAPITAL MARKET
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.
Sources
Homepage 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
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