End of the Fierce Battle for the National Growth Fund... Concerns Over Decreasing Profitability [PE Now]

Selection of Fund Managers Concludes in Rounds One and Two
Fierce Competition for Policy Fund Anchor Investor Status
Low Fees and Limited Investment Targets Raise Concerns Over Profitability

This year, with the selection of fund managers (GPs) for the National Growth Fund concluded through the first and second rounds of investments, the private equity fund (PEF) industry is seeing mixed fortunes. While some view it as one of the most fiercely competitive policy fund placements, concerns are also being raised that excessive competition may ultimately lead to a decline in future returns.

Billions Guaranteed Upon Selection... The Race for the National Growth Fund

The National Growth Fund is a policy-driven growth capital platform slated to be established at a total scale of 200 trillion won over the next five years. Among these, the indirect-investment policy funds attracted the sharpest focus from the private equity (PE) and venture capital (VC) fields. In the first round of investment this year, 11 fund managers were chosen for a total of 3.9 trillion won; in the second round, 7 managers were picked for the 1.6 trillion won program. The first round drew a pool of 81 applicants, leading to a competition rate exceeding 7 to 1, while the second round saw 65 funds and consortia competing intensely.

According to the results, the large-cap league in the first round was won by Skylake Equity Partners and Atinum Investment. The M&A league went to Well to Sea Investment; the AI·semiconductor (mid-cap) segment was awarded to Daishin Private Equity and Intervest; and the KOSDAQ league went to the consortium of Mirae Asset Venture Investment and Brain Asset Management. In the second round, the most anticipated "Scaling Up" league was clinched by STIC Investments. The mid-cap league saw Dominus Equity Partners, Woori Venture Partners, and Korea Investment Partners chosen. For AI·semiconductor (small-cap), SL Investment was selected, while the regional allocation was awarded to an SBI Investment and KB Securities·Ecopro Partners consortium.

On the other hand, there were also many notable participants who failed to pass the selection. In the Scaling Up league, Affirma Capital made a bid but did not get through the first round. J&PE was in the running to the last stage, but lost out to STIC Investment.

Industry observers note that, as a policy fund targeting advanced strategic industries, there was significant behind-the-scenes scrutiny concerning the fund managers' nationality and governance structure. Beyond quantitative scoring criteria, the qualitative question of "Is this house suitable for managing policy capital?" appears to have been a strong deciding factor. A source in the investment banking sector explained, "When creating private blind funds, the possibility of actually raising the fund is most important. For the National Growth Fund, once you are selected, private limited partners (LPs) line up to invest, so the certainty of fund formation was much higher and competition was even more intense."

"Lower Fees, but... Symbolic Value as a Policy Fund Anchor Is Huge"

It is widely agreed that fierce competition among fund managers wasn't merely about management fees. The effective management fee rate for the National Growth Fund is estimated at approximately 0.8–1.0%, depending on the league. For a 500 billion won large-cap fund, the annual management fee cap is about 4.1 billion won, which means the fee rate is roughly 0.82%. For a 300 billion won fund, it works out to around 1.0%. Given that private blind funds typically charge a 1.5–2.0% management fee, these are not high margins.

Nonetheless, the symbolic value of being an anchor investor representing policy capital attracted many fund managers. Forming a fund with anchor money from Korea Development Bank or the Advanced Strategic Industries Fund makes subsequent private LP fundraising far easier. Especially in today's challenging fundraising climate, being designated as a "National Growth Fund GP" serves as a highly valuable reference. Also appealing is the opportunity for additional track records in investments in advanced sectors such as AI, semiconductors, biotech, defense, and robotics.

The Scaling Up league in particular drew exceptional industry attention. Although it was structured around Korea Development Bank anchor capital of 200 billion won, the fund must raise at least 500 billion won in total, and there is no hard cap (upper limit) for private capital. Once selected, inflows could easily exceed the targeted amount by several trillion won.

Limited Investment Destinations... Concerns Over a 'Chicken Game'

However, there are significant concerns that excessive competition may end up backfiring. Due to policy objectives, the National Growth Fund must invest specifically in sectors such as AI, semiconductors, secondary batteries, and biotech. This means that large numbers of fund managers may flock to similar industries and companies at similar stages of growth. One PEF executive said, "There are only so many good investments out there. If a number of policy funds with similar mandates compete at the same time, entry valuations may rise and, ultimately, returns will be lower."

The lack of participation from some major fund managers can be understood in this context as well. Apart from MBK Partners, which is currently preoccupied with the aftermath of the Homeplus incident, leading buyout houses such as Hahn & Company, IMM PE, and VIG Partners also refrained from actively joining the National Growth Fund contest. The industry notes that these houses were not in urgent need of a policy fund anchor. For firms already managing trillion-won-class blind funds, the symbolism may be attractive, but not enough to compensate for restricted investment autonomy.

Investment restrictions and the burden of public disclosure are also cited as reasons. The National Growth Fund cannot freely invest as it wishes in any industry or structure at any time. Adherence to policy objectives is required, and there are accompanying burdens of post-investment reporting and disclosure. The strong focus on advanced strategic industries means that both investment processes and exit results are subject to public scrutiny by regulators and the market.

A PE industry source explained, "VIG Partners is reportedly still considering whether to participate in the National Growth Fund placement, but firms like Hahn & Company are not even considering entering. Houses that specifically value the 'policy fund GP' title will face the dual burden of engaging in overheated competition and grappling with the resulting impact on returns."

This content was produced with the assistance of AI translation services.