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2022 Jul/05
Business Development Companies: Characteristics and Implications from Foreign Schemes
Issue Papers 22-10
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- Research Topic Corporate Finance
- Page 26
- Summary
- A Business development company (BDC) slated to be introduced to Korea is a listed risk capital investment vehicle. BDCs are designed to contribute to creating a risk capital ecosystem through the public capital markets and offer an opportunity to make diversified investments in non-listed innovative firms. In this regard, Korea should examine similar schemes implemented in foreign countries such as the BDC of the US and the venture capital trust (VCT) of the UK to figure out how to properly operate BDCs (K-BDCs) that accommodate conditions of its risk capital market.
The US introduced the BDC as a closed-end investment company that was allowed to invest in privately-place securities by enacting the Small Business Incentive Act in 1980. The BDCs of the US are subject to relaxed regulations, compared to ordinary registered investment funds. The UK has operated the VCT that is a closed-end, listed investment vehicle characterized by favorable tax treatment for retail investors since 1995, aiming for expanding venture capital funding for early-stage firms. How the BDC and VCT schemes have been operated varies according to features of the risk capital markets of respective countries. More concretely, the BDC of the US has evolved into a debt-focused investment vehicle while the UK’s VCT has served as an equity-focused listed investment vehicle designed to facilitate venture capital investment.
To ensure the successful operation of the K-BDC scheme, the following aspects should be taken into consideration in terms of operational regulations, tax benefits, prevention of conflicts of interest and expandability. First, operational regulations should be established to ensure that K-BDCs are subject to a compulsory investment ratio similar to that of foreign schemes. Also, the regulations need to determine the minimum equity investment ratio and enable follow-on investment for supporting scale-up. Second, tax benefits should be offered only to equity-focused investment vehicles, for which sub-categories of investment vehicles could be defined. Third, considering that a wide range of business entities is expected to operate K-BDCs, including existing private VC funds and PE funds, asset management firms and securities firms, regulatory safeguards should be put in place to minimize the possibility of conflicts of interest that may arise from a firm operating both a private venture capital fund and a public K-BDC. Fourth, it is worth considering the possibility that K-BDCs would evolve into a listed investment vehicle that encompasses various investment strategies and target growth stages in the long run.