[Edaily Marketin Soyoung Park Reporter Kim Yeon-ji] While interest in the domestic capital market from overseas limited partners (LPs) and general partners (GPs) has surged due to rising demand for artificial intelligence (AI) and semiconductors, concerns are emerging that this could prove to be a one-time phenomenon. What measures are needed to sustain this interest and establish a “Korea premium” that would allow Korean assets to command a premium?

Edaily sought opinions from professionals involved in cross-border deals, primarily in South Korea, the U.S., and Japan. The issue they unanimously identified as the most critical challenge was “diversifying exit structures.” They pointed out that a multifaceted exit structure—moving beyond reliance on initial public offerings (IPOs)—must take root. In addition, the experts unanimously agreed that “streamlining domestic direct investment procedures” for overseas limited partners (LPs) and general partners (GPs) is necessary.

“Investment Is Ultimately About Exit”… Beyond IPOs, M&A and Secondary Markets Must Be Cultivated

An official at a domestic VC firm responsible for cross-border investment strategies between the U.S. and Korea stated, “Whether domestic companies can grow in the global market or achieve a successful exit is what overseas investors are most eager to see,” adding, “To turn the current trend into a ‘Korea premium,’ we must diversify exit pathways.”

The fundamental goal of investors is “return on investment.” This is why industry insiders point out that “if returns aren’t properly realized, investors will walk away.” They noted that the sluggishness of the exit market was cited as one of the main reasons for the cooling of investment enthusiasm in Southeast Asia. Since then, there has been a growing consensus that global investors’ interest has shifted to other Asian markets, such as Japan and South Korea.

An official from a domestic VC firm remarked, “In Korea, too, nearly all exits rely on IPOs,” adding, “It is time to demonstrate to overseas investors that we have built a healthy ecosystem by accumulating case studies through policies that further stimulate the secondary market or actively encourage M&A.”

Diversifying exit pathways has been a challenge consistently highlighted by domestic stakeholders. For instance, the Venture Capital Association has identified revitalizing the exit market as a key priority for several years. There have also been persistent calls to move away from an exit structure overly reliant on IPOs and instead grow the M&A and secondary markets.

Aware of the industry’s demands, the government has also refined relevant policies. Earlier this year, the Ministry of SMEs and Startups fleshed out the “Comprehensive Plan to Leap Forward as One of the World’s Top Four Venture Powers,” unveiled by the Lee Jae-myung administration. As part of this effort, it introduced a package of measures to revitalize the exit market. These include expanding the scope and limits of guarantees for acquiring companies pursuing M&A. There are also policies aimed at fostering the secondary market. It has been decided that when sub-funds of the master fund purchase existing shares, up to 20% of the committed amount will be recognized as a primary investment.

In addition, officials noted that the challenge of creating an environment where companies can maintain and increase their enterprise value after an IPO must also be addressed. This is because companies must go beyond simply clearing the bar for listing and continue to demonstrate their enterprise value afterward in order to show investors tangible returns on their investments.

In particular, as the IPOs of domestic semiconductor and AI unicorns are coming into view, these challenges are expected to be put to the test. Global investors are expected to closely watch whether these companies can maintain the high enterprise values they were recognized for in the private market and demonstrate their growth potential even after going public.

An official in the investment banking industry stated, “Only if the IPO and post-listing performance are successful will global investors confirm tangible investment returns in the Korean ecosystem and naturally continue to monitor the Korean market in search of ‘second and third unicorns.’” The official added, “Of course, to support such corporate valuations and successful exits, there must be a ‘market’ where companies can generate operational results and grow.”

Barriers to Foreign Investment Must Be Lowered… Companies Must Also Transform Themselves into ‘Global’ Entities

Many pointed out that the conditions for global LPs and GPs to invest in Korea are simply lacking. Some expressed the view that domestic investors are monopolizing deals. A domestic VC executive pointed out, “There are many cases where deals that interest global investors end up with insufficient investment opportunities because domestic VCs take all the investment among themselves,” adding, “To break the so-called ‘kimchi shareholder’ cycle—a structure that makes it difficult for global investors to actually participate in co-investments—we must provide investment opportunities to foreign investors.”

This was followed by assessments that institutional and structural barriers remain high for overseas LPs and GPs to invest in domestic unlisted companies. The analysis suggests that the structure of the domestic unlisted investment market differs from that of overseas markets. Consequently, there was a consensus that fund management processes and structures that are understandable to overseas investors are crucial for LP solicitation.

An official involved in executing cross-border investments between Korea and Japan said, “According to foreign LPs, when foreign capital makes direct investments in Korea, the pre- and post-notification requirements for foreign capital inflows under the Foreign Exchange Transactions Act are complex,” adding, “For simple investments, it would be beneficial to simplify reporting obligations or relax regulatory requirements.” He continued, “This means that investments in Korean won need to be accompanied by ease in the inflow and outflow of foreign capital.”

Opinions were also raised that, in addition to institutional improvements, raising awareness among domestic companies is necessary. Overseas investors assess whether domestic companies can succeed when entering overseas markets. The analysis suggests that while there are many startups in Korea with strong technological capabilities, there are still not enough companies that prepare from the outset to target the global market.

An official from a Japanese venture capital firm advised, “The further you go into regional areas, the less prepared companies tend to be in terms of meeting global standards,” adding, “From the very beginning of the startup phase, they should directly research the overseas markets they wish to enter, understand local customers and competitors, formulate a business plan based on that, and then incorporate it into their global investor relations (IR) strategy.”