An official walks through the corridor of the National Growth Fund secretariat in Yeouido, Seoul, on May 6. [Yonhap]
An official walks through the corridor of the National Growth Fund secretariat in Yeouido, Seoul, on May 6. [Yonhap]

Concerns are growing that the government's flagship National Growth Fund investment program has become a "black hole" draining liquidity from South Korea's venture capital market. Pension funds and mutual aid associations that would normally have been actively issuing investment mandates have gone quiet, crowded out by the sheer scale of the National Growth Fund. Voices in the capital markets warn that private equity fund managers left out of the National Growth Fund league face an increasingly difficult fundraising environment.

Investment banking industry sources said Tuesday that the general fundraising climate among domestic private equity fund managers has grown noticeably tight of late. As capital market firepower concentrates in the National Growth Fund this year, managers not participating in the program are finding the funding environment particularly unforgiving.

"The volume of requests for proposals from pension funds and mutual aid associations — both ad hoc and scheduled — has dropped off sharply of late," said one private equity fund manager. "It seems limited partners have calculated that, from a risk management standpoint, it is safer to wait and see how the National Growth Fund's matching results shake out before committing their own capital."

Another industry official said LP investment decisions are being pushed back one after another, deepening the frustration of general partners who had hoped to close their funds this year. "There is a real risk that the inability to secure matching capital could trap GPs in a prolonged fundraising cycle," the official said.

The dynamic reflects how the symbolic weight and credibility of a government-led policy program can capture market liquidity ahead of all other players. Major institutional investors, rather than running their own independent investment programs, are using the National Growth Fund's capital flows as a benchmark — a posture that is reinforcing both the wait-and-see mood and the concentration of funds.

Particularly acute is the flow of bank capital — a core pillar of private-sector liquidity — into the National Growth Fund. A key incentive has been a relaxation of risk-weighted asset requirements. Banks had previously faced a 400 percent risk weight under the Basel III framework set by the Bank for International Settlements when investing in ordinary private equity funds. The government this year granted a special exemption reducing that weight to 100 percent for National Growth Fund investments alone. In effect, banks can now commit the same amount of capital while carrying only one-quarter of the balance-sheet burden.

With bank capital — attractive on both reputational and financial grounds — flowing into the National Growth Fund, private equity managers that were not selected for the program or chose not to apply have seen their standing in the market shrink rapidly. Even well-regarded managers with distinctive investment philosophies and clear portfolio strategies have found themselves temporarily sidelined, unable to secure matching capital. Ultimately, those left out of the National Growth Fund's gravitational pull must simply weather the gap in LP commitments on their own.

Market participants warn that the trend could ultimately erode the flexibility of the broader venture capital market and create structural imbalances in the investment ecosystem. "Policy finance playing a priming role in supplying market liquidity is appropriate, but absorbing too much of the other core liquidity in the market risks undermining the diversity of the venture capital ecosystem," one investment banking official said. "For warmth to spread across the entire fundraising market, the channels for investment need to be diversified, and the ecosystem that allows private LPs to move independently must also be restored."


an@heraldcorp.com