[News Focus] Chaebol ownership of corporate venture capital sparks debate

Deregulatory moves by financial authorities to allow South Korean conglomerates to own corporate venture capital firms have raised concerns over the manifold consequences of such a scheme.

The Finance Ministry is set to unveil plans next month to revise the law so that Korean equivalents of Alphabet-backed GV -- formerly known as Google Ventures -- can be launched. The revision of the Fair Trade Act is expected to make significant changes in the history of corporate environment that has banned chaebol control of capital raised from the financial sector.

Chaebol reformists, however, expressed concerns that the nation -- with a small group of chaebol scions yielding a large influence across the industry -- is not ready for such changes.

Claiming that the revision of law is in favor of conglomerates with a holding company structure, Jun Sung-in, economics professor at Hongik University, said at a panel session held in the National Assembly that it is highly likely to nullify efforts to restore checks and balances on the owner families.

“The discussion should start when we are able to prevent conglomerates from benefiting their owner families using outside money,” Jun said.

“It is undesirable for CVCs to pool money from external financial institutions. Money should come from the owner family’s pocket, from the holding company or from its affiliates.”

The revision of the law, proposed by three lawmakers including the ruling Democratic Party Rep. Kim Byung-wook, is meant to exempt a holding firm’s ownership of CVCs from the antitrust restrictions and disclose its investment and fund compositions to the Fair Trade Commission.

Jun said he was not just speculating on the misuse of conglomerates’ investment arms but was arguing based on history.

He cited Samsung Group heir apparent Lee Jae-yong’s failed tech startup financing via loss-making investment arm e-Samsung and e-Samsung International in early 2000s. Jun claimed that the losses Lee made then in the wake of the US dotcom bubble burst were covered up by other group affiliates, including Cheil Industries, Samsung SDI and Samsung Electro-Mechanics, as they bought shares of the investment arms at a much higher price.

“We cannot be sure that such misdeeds will not be repeated again,” he said.

Under the Korean rules, business groups with a holding company structure, including SK and LG, are not allowed to create a CVC to own stakes in Korean privately-held companies including startups. Some groups chose to invest in foreign startups via arms such as LG’s Formation 8, while some other groups, such as GS Group’s unit GS Home Shopping, has funded startups through an in-house venture, instead of creating a separate company.

Those without the holding company structures had few restrictions to establish CVCs, giving birth to investment houses such as Samsung Venture Investment, Kakao Ventures and Hanwha Investment.

With conglomerates’ money already coming in the VC scene here, deregulation should not be necessarily done immediately, argued another expert.

It must precede a legal ground to guarantee protection of startup by allowing them to “file punitive suits against large companies in case of technology theft,” Park Sang-in, public administration professor at Seoul National University, told panelists Friday. Park added CVCs may be exploited to ensure succession plans of chaebol

Drawing a sharp contrast, business circles called for a swift law revision, saying that the golden time to save struggling startups with corporate capital is running out.

“As the technology advances much faster than what it used to be, conglomerates are finding it harder to generate new opportunities with investment in traditional research and development,” said Yu Hwan-ig, deputy secretary-general at the Federation of Korean Industries.

“CVC-led investments are essential for conglomerates to enter into new growth opportunities.”

FKI added that some eight conglomerates without holding companies have roughly made a combined 4 trillion won ($3.32 billion) so far. Yu called this a “reverse discrimination” that holding companies face.

VCs, on the other hand, said a lack of exit opportunities for Korean startup investors could be addressed with more conglomerate engagement, pointing out the lack of flotation opportunities and mergers and acquisitions here, compared to the US.

In this regard, allowing CVCs is the first step to induce large companies to tap into more M&A opportunities, said one of the panelists at Startup Ecosystem Conference 2020 held in southern Seoul Friday.

“Large corporations will be able to learn about the startup ecosystems and the startups’ cultures via CVCs,” Lee Young-min, chief executive at the state-run fund of funds operator Korea Venture Investment Corp., told an audience. KVIC has backed a combined 7.87 trillion won to venture investing vehicles since 2005 until April.

“Not knowing their culture, large firms will be reluctant to take on startup M&A opportunities,”

On the other hand, operating CVCs is a matter of a conglomerate’s survival, and therefore is an urgent issue to solve.

“Large corporations here might desiccate without new investment opportunities via CVCs,” said Kim Hong-il, managing director of Banks Foundation for Young Entrepreneurs, which manages a pool of commercial banks’ risk capital. “This also has to do with Korea’s growth engine as a whole.”

By Son Ji-hyoung (consnow@heraldcorp.com)