[Edaily Marketin Won Jae-yeon Reporter] While the Agricultural Policy Insurance and Finance Institute (APIFI) is expanding its regional funds to provide financing to local agri-food companies, it is facing difficulties in finding general partners (GPs) to manage the funds. Industry sources explain that even if a fund is established, there are not many local companies capable of rapid growth through venture capital investment, making it challenging to identify investment opportunities and secure returns.

According to the investment banking (IB) industry on the 22nd, the Institute, after failing to secure the targeted number of GPs in this year’s regular investment program, has conducted three rounds of additional investment initiatives. In the first supplementary investment round last April, not a single applicant emerged in three sectors: agriculture, forestry, and livestock; secondary investments; and general regional economic revitalization. On the 10th, the Fund launched its third supplementary investment round to recruit GPs. Including the regular investment round, this marks the fourth recruitment effort so far this year.

The NFA plans to raise a total of over 247 billion won in sub-funds in the agriculture and food sector this year. Of this amount, 24 billion won has been allocated to the regional economic revitalization sector.

Local Companies Exist, but “Investment-Worthy Companies” Are Scarce

Despite the substantial amount of policy funding available, fund managers are hesitant to participate in regional funds because there are not enough suitable investment targets. While there are many food manufacturing and processing companies, as well as brand operators, that utilize local specialty products, there are no companies capable of rapidly increasing their enterprise value through venture capital investment.

Typical regional food companies excel at generating stable sales based on specific raw materials and local distribution networks. Even if they achieve a certain level of sales, their production facilities and distribution networks are often tied to a specific region, or they maintain a family-centered management structure. A significant number of these companies also lack the accounting and corporate governance systems necessary to attract outside investment.

Companies capable of expanding their business into other regions and overseas markets by integrating artificial intelligence (AI), robotics, and data—or by possessing proprietary materials and process technologies—are also relatively rare. Even if a company makes a significant contribution to the local economy and creates many jobs, the number of companies that investment firms can actually consider for investment drops significantly when factoring in the potential for follow-on investment, initial public offerings (IPOs), and mergers and acquisitions (M&As).

An official from an investment management firm stated, “While there are many companies that process and sell local specialty products, few possess proprietary technology, platforms, or scalable distribution networks,” adding, “Even if they align with policy objectives, the options narrow when assessing whether they can attract follow-on funding and achieve a successful exit after the initial investment.”

A Narrow Investment Pool Compounded by Pressure to Deliver Returns

Another issue is the lack of a robust regional network capable of continuously identifying investment candidates. For example, BNK Venture Investment, which operates the Busan-Ulsan-Gyeongnam Investment Center to identify companies in those regions, has only three local investment analysts covering all three areas.

Given that even venture capital firms affiliated with regional financial groups are covering broad areas with a small staff, it is even more difficult for general venture capital firms headquartered in Seoul to identify investment candidates by tracking regional universities, research institutions, and agri-food companies over the long term. Consequently, this leads to a situation where due diligence from multiple funds is concentrated on a small number of companies already known in the market.

The requirement to meet the target investment ratio amid a shortage of investable companies also poses a significant burden. According to data released by the Korea Agricultural Finance Corporation (KAFCO) last May, the average internal rate of return (IRR) for the 27 agri-food sub-funds that had been liquidated by that time stood at 7.2%.

If asset managers fail to generate the expected returns from policy-purpose investments, they manage their funds by offsetting the shortfall through non-policy-purpose investments, such as pre-IPO or late-stage companies. However, they explain that for regional funds, since there are not many eligible targets for policy-purpose investments to begin with, it is difficult to meet investment obligations while also securing a satisfactory rate of return.

An official from an asset management firm stated, “To manage a policy fund, we must identify pre-IPO or Series C companies through non-core investments and generate returns of two to three times the initial investment in order to meet the overall fund’s return target, which includes core investments.”

Growth Support Comes After Investment… Identifying Companies Is the GP’s Role

The Korea Agro-Fisheries Trade Corporation (KAFTC) supports agri-food companies in which its sub-funds have invested by facilitating investor relations (IR) events to attract follow-on investment, publishing corporate reports, conducting online marketing, participating in food exhibitions, and arranging consultations with overseas buyers through KOTRA. This year, it also plans to host a financial investment roadshow connecting overseas venture capital (VC) firms, accelerators (AC), and distribution companies.

However, there is no shortage of opinions expressing disappointment that most of these support programs focus solely on expanding sales channels for companies that have already received investment and facilitating follow-on investment. In regional areas, it is not uncommon for technologies held by universities and research institutions to fail to lead to commercialization or startup formation, and for existing agri-food companies to be excluded from investment consideration because they lack established business models, accounting systems, and corporate governance structures. There is a lack of processes to identify companies, refine their business models, and nurture them into viable investment targets prior to post-investment support. The industry explains that regional fund managers often have to take on this role themselves.

The industry points out that, in addition to increasing capital contributions to regional funds, separate support is needed to expand the pool of potential investment candidates in the region. It argues that a system must be established to commercialize technologies from local universities and research institutions, with local accelerators nurturing early-stage companies and connecting them to VC investment.

An official from the accelerator industry stated, “While support for market expansion and follow-on investment is necessary, what is more urgent in the region right now is creating companies worth investing in,” adding, “If we simply increase the number of funds without establishing a foundation for technology commercialization and early-stage startup incubation, the difficulties in recruiting fund managers and executing investments are bound to recur.”