Korea moves to introduce high-yielding BDC stocks to boost investments in SMEs

[Photo by Kim Ho-young]

South Korea is engaged in efforts to introduce business development company (BDC) stocks where individuals can invest in companies that focus on startups and innovative companies but a related bill is pending at the National Assembly on concerns over lack of investor protection measures and conflict of interest issues.

BDC is a vehicle that allows financial investment firms to raise funds to invest in venture capital and small- and mid-size enterprises. The system allows venture firms to boost their fund-raising capacity and promote venture investment. Targets are non-listed companies, venture firms, listed companies on the secondary Kosdaq and Konex markets whose market capitalization is under 200 billion won ($151.3 million), venture associations, and startup private equity funds.

Brokerages and asset management companies must invest 5 percent or more in the BDC, which will have to be listed within 90 days such as mutual funds.

Korean financial authorities and the Korea Financial Investment Association launched moves to introduce the BDC scheme in the Korean stock market. Local brokerage houses and asset managers are also keeping tabs on the developments to launch BDC products.

According to a survey on market demand, 39 financial investment institutions said they plan to create BDC funds.

Industry insiders note that individual investors will be able to invest in unlisted companies and ventures easily without having to rely on over-the-counter trading once the BDC vehicle is introduced.

The BDC scheme was introduced by the U.S. Congress and delivers an annual dividend yield of over 10 percent.

A number of BDCs have already been listed and are trading like stocks in the U.S. Most of the BDC stocks there deliver high yields.

[Photo by MK DB]

The largest BDC stock by asset is Ares Capital Corp (ARCC), which delivers an annual dividend yield of 10.6 percent. The dividend yields of Hercules Capital Inc. (HTGC) and BlackRock TCP Capital Corp. (TCPC) are 13.3 percent and 12.7 percent, respectively. Exchange-traded funds (ETFs) are an option if investing in individual stocks feels risky. The VanEck BDC Income (BIZD) ETF, which invests in 25 major BDC stocks, is also estimated to have a dividend yield of more than 10 percent.

BDC-related stocks have high yields as most of their assets comprise loan products. Interest rates on floating-rate loans have risen significantly due to recent base rate hikes by the U.S. Federal Reserve, and the net investment income and dividend payments have naturally increased as a result.

“The surge in interest rates is easing gradually and market attention is returning to next-generation growth industries and technologies such as artificial intelligence (AI), secondary batteries and new renewable energy,” said Kim Jin-young, an analyst at Kiwoom Securities Co. “Initial investment in emerging ventures can lead to both market recovery and corporate growth.”

A bill that allows BDC stocks in Korea, however, is pending at the National Assembly. There has been no progress for nearly one year since the amendment to the financial investment services and capital markets act was approved by the Cabinet members last year.

Some lawmakers that oppose the revision question the potential conflict of interest and investor protection measures. They are concerned about conflict of interest that can occur if a securities company or a venture capital adds a company in which it has already invested in to the fund.

“There are risks of insolvency such as in the past with private equity funds unless the qualifications and transparency of investments are reviewed in depth,” said an unnamed lawmaker from the opposition party. “A safeguard is required to prevent indiscriminate listing.” Another unnamed official questioned the need for introducing the system, saying it is “not certain if it needs to be pursued urgently when the market is highly volatile.”

Woori Financial Management Research Institute has also raised the fact that local financial companies lack experience in investing in unlisted equities and loans where BDCs invest in and that it is necessary to train related professionals and establish procedure first.