Private equity firms cover for thinned venture capital financing for Korean startups

2022.06.24 11:13:04 | 2022.06.24 11:32:18

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Private equity firms are emerging as new financial backers for startups in South Korea amid risk aversion environment.

According to the investment banking industry on Thursday, VIG Alternative Credit (VAG), a private credit fund under VIG Partners, decided to invest 50 billion won ($38.47 million) in local travel platform My Real Trip jointly with Korea Growth Investment. While VIG Partners pursues high-risk, high-return in buyouts and equity investments, VAC seeks low-risk investments, like mezzanine financing, a hybrid of debt and equity financing that gives lenders the right to convert the debt to an equity interest in the company.

VAC invested in detachable warrants of My Real Trip with a target yield of 10~20 percent in internal rate of return (IRR), a metric to estimate the profitability of potential investments, to lower risk. Generally, venture capitalists seek more than ten times in returns from their investments.

IMM Credit Solution (ICS) under IMM Holdings is also raising a blind pool targeting 300 billion won for investments in startups. The fund without a stated investment goal has already collected 200 billion won. It also carries out another funding project to acquire e-commerce platform W Concept’s convertible preferred shares worth 100 billion won, pitching for more than a 5-percent return for the deal.

As other private equity firms, such as STIC Investment, JKL Partners, and Keistone Partners, have set up credit funding operations to increase investments in growing startups, investment banking insiders eye on whether traditional buyout firms’ advances into venture capital areas would revive demand for startup investments.

As private equity firms have emerged as alternatives to venture capitalists, startups are expected to seek ways to maintain their corporate valuation high enough to seek funding from PEFs to stay afloat at a difficult time. Many startups were evaluated at over 1 trillion won in the past couple of years during a liquidity-led boom, although their business was in the red.

By Park Chang-young, Kang Doo-soon, and Jenny Lee

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