The investment and management standards for business development company (BDC) funds, set to launch in March next year, have been detailed. BDCs must invest at least 60% of their asset in unlisted venture and innovative corporations, and cash lending is allowed only on a limited basis.
The Financial Services Commission (FSC) said on the 3rd that it had given advance notice of legislation for amendments to the enforcement decree of the Financial Investment Services and Capital Markets Act and the regulations on financial investment businesses to introduce BDCs. The comment period runs from the 4th to Jan. 13 next year.
A BDC is a public fund that must diversify investment by allocating more than half of the fund's asset to unlisted venture corporations with high growth potential. Under the revised enforcement decree, at least 60% of total assets must be invested in unlisted and innovative corporations, KONEX- and KOSDAQ-listed small and midsize companies, and venture funds.
However, to prevent concentration in specific sectors, the weight of investments in KOSDAQ and venture funds will each be reflected only up to 30% when calculating the minimum investment ratio of 60%, and KOSDAQ investments are limited to listed companies with a market cap of 200 billion won or less.
◇ Focus on stocks and CBs, with cash lending capped at 40%
The investment method must focus on purchasing stocks or equity-linked bonds (CB, EB, BW), and cash lending is permitted only within 40% of the total investment amount. For cash lending, an internal control system to manage credit risk must be in place.
BDCs must invest at least 10% of assets in safe assets such as government bonds, cash, and deposits, and the remaining 30% can be managed at the manager's discretion within the scope of existing public fund regulations.
BDCs are restricted from investing more than 10% of their asset in the same way in a specific corporation, or holding more than 50% of a corporation's equity (10% for general public funds). They are also prohibited from attempting to circumvent operating regulations through funds of funds such as venture funds, and from investing more than 50% of BDC assets in funds of funds, such as venture funds, managed by the same operator.
However, considering the characteristics of unlisted assets, the operating regulations will be deferred for one year after introduction. In light of market conditions, the minimum investment ratio of 60% can also be deferred for one year, and if the ratio temporarily rises due to price increases in invested unlisted stocks, exceptions will be allowed for two years.
◇ Investor safeguards strengthened; managers required to make seeding investments
BDC fund maturities will be set at five years or longer, and the minimum offering amount is set at 30 billion won. To ensure responsible management, asset managers must make seeding investments in proportion to the fund size (5% for up to 60 billion won, 1% of the amount exceeding 60 billion won), and must hold them for at least five years or more than half of the fund's maturity.
Investment transparency will also be strengthened with mandatory establishment of an investment review committee, mandatory external evaluations, quarterly fair-value assessments, and ad hoc disclosures.
Requirements for BDC manager authorization include minimum equity capital of 4 billion won, at least four professionals, and at least one person in each of risk management, internal control, and IT.
Separately, the amendments also expand operating flexibility for policy-oriented funds of funds that primarily invest in private funds in which the state and others have made subordinated contributions, given their strong investor protections and policy necessity. Policy-oriented funds may invest up to 100% of the total private fund collective investment securities, up from the current 50%.
An official at the Financial Services Commission (FSC) said, "In line with the September amendment to the Financial Investment Services and Capital Markets Act related to the introduction of BDCs, we have specified the matters delegated by the law," adding, "Given that the general public will be investing in unlisted corporations, we strengthened investor protection by setting out requirements for managers' seeding investments and evaluation and disclosure obligations."