"Wait 15 Years for Incentives?" Ultra-Long-Term VC Fund Sparks Concerns [VC Now]

880 Billion Ultra-Long-Term Technology Fund with 15-Year Lifespan

Easier to Earn Performance Fees as Criteria Are Lowered

Significant Delay in Payment Timing, "Challenging to Retain Talent"

"Fifteen years is truly a long time. The challenge lies in maintaining the best team with optimal personnel to operate the fund over such a period."

On July 20, the IR Center at the headquarters of Korea Development Bank hosted a public discussion on the National Growth Fund's ultra-long-term technology investment fund. Wonho Hong, CEO of SV Investment, focused on people rather than money when addressing the "15-year" condition. He said, "If incentives are really paid out only after 15 years, what matters is how to incorporate good deals into the fund and how to properly reward the management team."

The ultra-long-term technology investment fund unveiled that day totals 880 billion won. Public funding constitutes 78% of the fund's resources, combining 600 billion won from the High-tech Strategic Industries Fund and 80 billion won from the government budget, while private investors are to raise over 200 billion won. The fund's life spans 13 to 15 years, with a 7-year investment period. These terms differ significantly from typical policy funds, which last 8 to 10 years and have a 20% to 40% share of government funding. However, the long 15-year duration has given rise to complex considerations about compensation.

Performance Fees Calculated by Fund, Not by Deal

Venture capital (VC) firms have two primary revenue streams. One is management fees, received annually in proportion to the fund size, which cover salaries and operating expenses. The other is performance fees, known as carried interest, or "carry."

Typically, the carry is calculated on a fund-wide basis, not on individual investments. Returned capital first goes to Limited Partners (LPs) to recover their principal. Only when excess profits exceeding a specified hurdle rate are realized does a certain portion (usually 20%) go to the General Partner (GP). This means that when a portfolio company is exited via IPO or M&A, the carry for that deal is rarely paid out immediately. In most cases in Korea, the carry is determined only when significant proceeds have been distributed, or when the fund is liquidated.

The problem with long fund durations is that the settlement of carry is pushed further into the future. Deep tech funds tend to have returns concentrated in the later stages, so the time when LP principal and hurdle rate are surpassed is already delayed. For a 15-year fund, it takes that much longer to finalize any carry.

A VC industry insider explained, "While long-term capital is welcome and it could transform the internal rate of return (IRR), thus raising expectations for larger carry payouts, the paradox is that the actual payment of incentives is delayed." He added, "It is never easy to retain specialized personnel for 15 years in an industry with frequent job changes. If the money is simply tied up but the talent can't be retained, even the IRR may be at risk."

Government Incentives to Support the Compensation System... Exceptional Rewards Amid Global Talent Shortages

The government has also responded. For this fund, the required IRR for performance fee payouts was lowered from 7% to 5%. When excess profits are within a 6% range, additional incentives will be paid. For the first 10 years after fund establishment, management fees are increased to strengthen the cash flow of the operating organization. Conversely, if the fund is liquidated early for reasons inconsistent with its objectives, the IRR threshold remains at 7%. This concretizes the "disadvantages of early liquidation" as mentioned by Financial Services Commission Vice Chairman Yi Ookwon during the public discussion. The requirement that prevents GPs from launching new funds before exhausting 60% of their committed capital was also eased to 50%. However, Hyuncheol Kim, CEO of S Ventures, pointed out, "There are still separate rules binding key talent to specific funds," and added, "I'd prefer that this fund not confine human resources elsewhere."

These measures are designed to increase both the likelihood and the size of carry payouts. Nonetheless, they do not change the fundamental structure where carry is paid later, on a fund-wide and back-loaded basis. That's why Vice Chairman Yi noted, "Whether the management team has outstanding talent and whether real and sufficient compensation systems have been implemented for them will be factored into the selection of asset managers."

There is also considerable movement around carry in overseas capital markets, where exits have slowed. In Hong Kong, the tax rate on performance fees has been set to 0% in an effort to attract talented fund managers, while the Monetary Authority of Singapore (MAS) is reviewing additional cuts in special incentive tax rates for investment companies to enable operators to offer better compensation to their teams. Carry is being leveraged as a policy instrument for talent retention.

One VC industry insider said, "Overseas, it is not uncommon for private equity (PE) and VC professionals, who may struggle with liquidity, to use unrealized carry as collateral for loans." He added, "For a 15-year patience capital strategy to take root, we need to consider not only the time horizon for the funds themselves, but also the timeline for the professionals entrusted with their management."

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