KOSDAQ-listed ERCOHS recently issued convertible bonds (CB) and successfully raised funds for new facility investments and operations. In the 13.5 billion won CB issuance, major domestic securities firms such as Mirae Asset Securities, Samsung Securities, KB Securities, and NH Investment & Securities participated in force, making it a hit.
Funds from major securities firms have also flowed into MOAdata, a software company whose stock price plunged after three straight years of losses. NH Investment & Securities and Korea Investment & Securities Co. underwrote a 2 billion won CB that MOAdata, with a market capitalization of only 30 billion won, issued to secure operating funds.
Money from major securities firms is flowing rapidly into the KOSDAQ market. Unlike in the past, when small and midsize listed companies mainly raised tens of billions to hundreds of billions of won through new share or mezzanine (midrange assets between stocks and bonds such as convertible bonds and bonds with warrants) issuances with small brokerages or private lenders taking the lead, in recent months large securities firms have increasingly stepped in directly as sources of operating and facility funding.
A finance manager at a KOSDAQ-listed company said, "Until not long ago, when small-cap companies like ours needed funding, it was common to be introduced to a well-known private lender or knock on the door of Sangsangin, which specializes in mezzanine investments. These days, however, large financial firms sometimes reach out quietly," adding, "The mood has changed significantly recently."
The expansion of major securities firms' activity in funding KOSDAQ-listed companies—long considered the league of small brokerages or well-capitalized off-market investment partnerships—began when the government started pressing financial institutions hard to ramp up the supply of venture capital.
To expand the supply of venture capital, the government last year for the first time designated Korea Investment & Securities Co. and Mirae Asset Securities as securities firms permitted to operate integrated managed accounts (IMA), and it significantly expanded the number of firms allowed to run short-term note issuance businesses. In particular, the government required that 25% of funds raised through IMAs or short-term notes must be supplied to venture capital such as securities issued by small, midsize, and venture companies.
An official at a major securities firm said, "The government's commitment to cultivating venture capital is clear," adding, "Most large securities firms have sharply increased corporate finance for unlisted companies and KOSDAQ-listed companies since last year."
Major securities firms are working to meet the government's required venture-capital supply ratio while also paying close attention to improving profitability and managing risk. By nature, venture capital can deliver high returns if successful, but the risk of failure is equally high.
They also must consider not only financial risk but the possibility of unexpected controversy. Another official at a major securities firm said, "Among small and midsize listed companies, there are not a few cases involving unfair trading or illegal acts," adding, "If funds are supplied to a problematic corporation, the firm's image or credibility could take a hit, so we conduct investment reviews from multiple angles."
Some warn that energizing venture capital could trigger unintended side effects. With the domestic venture-capital market limited in size, a bubble could form as major securities firms simultaneously pour in money. Currently there are two IMA operators and seven short-term note operators, and additional IMA and short-term note operators are to be designated.
Assuming IMA and short-term note operators raise funds up to the maximum limit based on their equity and invest 25% of that in venture capital, a simple calculation shows that 40 trillion won supplied by securities firms alone would flow into the venture-capital market. Many market participants question whether the domestic venture-capital market is large enough to absorb this.
A capital-market official said, "If large firms competitively ramp up funding to meet government criteria, 'dumb money' could delay the restructuring of marginal companies."