The government has expanded tax breaks and increased the share of initial public offerings set aside for KOSDAQ venture funds, yet investors pulled large sums out of the products over the past six months. With returns deteriorating sharply, analysts say the broader policy support has failed to translate into a recovery in investment demand.
The 21 domestic KOSDAQ venture funds held a combined 290.4 billion won ($198 million) as of the 12th of this month, down 739.4 billion won from five years earlier, according to financial data provider FnGuide on the 15th. Over the past six months alone, a net 100.9 billion won flowed out. Outflows continued more recently, with 15.3 billion won leaving over three months and 2.2 billion won over one month. The funds posted average returns of minus 17.61% over one month and minus 34.84% over six months.
The gap between individual funds was wide. Over the past month, the S-class shares of Welcome IPO KOSDAQ Venture Fund No. 3 held up relatively well at minus 3.92%, while the C-e class of Hyundai Investment Active KOSDAQ Venture Fund 1 fared worst at minus 26.76%. Even among funds of the same type, the loss investors shoulder varies widely depending on holdings and investment style.
The government has steadily broadened support for the funds. In July last year, it extended the income tax deduction, which had been set to expire at the end of 2025, by three years to the end of 2028. In January this year, it changed the cap on investment eligible for the deduction from a one-time 30 million won per person to a renewable 20 million won per year, effectively raising the amount investors can deduct over time. Under that structure, an investor who puts in 20 million won annually can deduct up to 2 million won from taxable income.
The authorities also widened access to IPO shares to make the funds more appealing. From January this year, the Korea Financial Investment Association raised the portion of shares in newly listed KOSDAQ companies set aside for KOSDAQ venture funds to 30% from 25%. That preferential allocation was likewise extended to the end of 2028.
Those incentives are seen as insufficient to encourage long-term investment. Returns across the funds have fallen sharply, and investors must keep their money in place for three years to claim the deduction. The deduction itself remains subject to a sunset clause, with only its expiry date pushed back to the end of 2028. Industry participants have long argued that making the tax break permanent would give long-term investors more predictability.
Some also say policy should weigh investment conditions and the sustainability of supply rather than focus on the size of inflows alone. “Conversely, if money floods into KOSDAQ venture funds, companies issuing mezzanine securities gain bargaining power, which can actually lower the funds’ expected returns,” an official in the financial investment industry said. “Beyond expanding the scale of support, the government needs to reexamine how effective the long-term holding requirement really is.”
The government is also rolling out measures to draw new institutional money into the KOSDAQ market. A cornerstone investor system took effect on the 13th of this month, allotting a portion of IPO shares in advance to institutions that pledge to hold them long term. The pre-allocation limit for KOSDAQ companies is up to 30% of the tranche reserved for general institutional investors, higher than the 20% set for the main KOSPI board. A segmentation system that separates higher-quality KOSDAQ companies and allows them to move between tiers is due next year. Still, there is concern that if large investors concentrate on stronger companies, the spillover of investment demand to smaller and venture firms will be limited.
#KOSDAQ#VentureFund#IPO#KoreaMarkets#TaxDeduction#CornerstoneInvestor
Original reporting by Jang Mun-hang for Seoul Economic Daily.
AI-translated from Korean. Quotes from foreign sources are based on Korean-language reports and may not reflect exact original wording.
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