[Edaily Marketin, Reporter Soyoung Park ] The supply of policy funds targeting the investment exit market is increasing this year. Specifically, the scale of funds allocated through the selection of general partners (GPs) dedicated to secondary and mergers and acquisitions (M&A) funds has grown compared to last year.

This is interpreted as a result of growing demand within the venture capital (VC) industry to secure investment exits and liquidity. The slump in the initial public offering (IPO) market has narrowed the pathways for investment exits. Additionally, the number of firms whose funds have reached maturity has increased.

The industry has reacted by saying that the inflow of policy funds has provided some much-needed breathing room. However, some observers note that it remains to be seen whether the injection of funds will lead to actual deals being closed and a revitalization of the exit market.

According to E-Daily’s own tally on the 1st of the amounts that major limited partners (LPs) have allocated to secondary and M&A-related investment projects—or have actually committed to investing after selecting general partners (GPs)—the total funds have risen from 306 billion won last year to 447 billion won this year. This represents an increase of approximately 46%. As the exit crisis in the venture capital (VC) industry has persisted, the scale of policy funding allocated to the exit market has expanded.

In fact, earlier this year, the Ministry of SMEs and Startups announced plans to increase the scale of investments in the “fund of funds” (FoF) recovery promotion sector. The allocation, which stood at 30 billion won last year, has quadrupled to 120 billion won. The Ministry revealed plans to establish a dedicated M&A and secondary fund totaling 300 billion won.

In accordance with this plan, the Master Fund invested a total of 90 billion won in the exit promotion category of the first regular investment program, for which selections were finalized last April. Consequently, efforts are underway to establish sub-funds totaling 240 billion won—140 billion won for the secondary market and 100 billion won for M&A supporting business succession in small and medium-sized enterprises. To date, the Master Fund’s total investment in the exit market—including ad hoc investments—amounts to 125 billion won.

Korea Growth Finance Investment & Management expanded its investment in the IBK Growth M&A Fund to 100 billion won this year. It is investing 80 billion won in blind funds and 20 billion won in project funds. Last year’s investment totaled 60 billion won.

In addition, the Culture Account of the Fund of Funds will invest 45 billion won in the M&A and secondary markets this year. The Tourism Account has also recently completed the selection of an asset manager for its M&A and secondary markets and has invested 20 billion won.

Although the investment amount has decreased compared to last year, there have still been investment initiatives this year aimed at supporting the exit market. The Industrial Bank of Korea (IBK) is pursuing the establishment of a 400 billion won secondary fund to support the exit market, with a planned investment of 120 billion won this year. Last month, it completed the selection of general partners (GPs) even for the small-scale sector.

In addition, the secondary segment of the Growth Finance “Growth Ladder Fund 2” has a capital commitment of 19.5 billion won this year. The Korea Agricultural Policy Insurance and Finance Corporation (KAPIF) also plans to invest 17.5 billion won in the secondary sector as part of its additional investment program for the Agri-Food Master Fund.

The reason LPs have increased the supply of policy funds for the secondary and M&A sectors this year is to create a virtuous cycle. The venture capital market grew rapidly during the pandemic, fueled by abundant liquidity. Subsequently, as investment sentiment cooled, the VC industry experienced fluctuations in exits for several years. In particular, the IPO market—a key exit channel—suffered a prolonged downturn. Cases where investors’ funds remained tied up for extended periods also increased.

Consequently, a consensus has emerged both within and outside the industry that it is necessary to revitalize not only new investments but also the secondary exit market. The general view is that a structure is needed where funds recovered through secondary transactions or M&A are reinvested.

The industry generally welcomes the increase in policy funding for the exit market this year. However, some voices are expressing concern. An official from the VC industry pointed out, “We still need to wait and see whether transactions involving existing shares or M&A deals will actually pick up.” He added, “To change the structure that is overly reliant on IPOs, various exit strategies, such as M&A, need to be considered,” and noted, “Now, the key lies not only in policy funding but also in whether private capital will flow in.”