Korea's sovereign wealth fund launches domestic investment following Temasek model

what is a Korean-style sovereign wealth fund?

the government has officially announced plans to establish a new type of sovereign wealth fund. the idea is to actively manage the country's assets to generate profits and pass them on to future generations. similar to Singapore's Temasek and Australia's Future Fund, the idea is to utilize the country's finances as a growth engine.

how it differs from KIC

korea currently has a sovereign wealth fund called the Korea Investment Corporation. however, since the KIC is funded by foreign exchange reserves, it has to prioritize stability, which limits its ability to invest in high-yielding investments and can only invest overseas.

in contrast, the Korean sovereign wealth fund will be able to invest domestically, which is the biggest difference. it will directly invest in stakes in domestic companies and seek dividends and market price gains.

why Singapore's Temasek model is a role model

the role model cited by the government is Singapore's Temasek. temasek invests 52% of its assets in local companies and manages around S$680 trillion in assets. since its inception in 1974, its assets have grown 1900 times, and as of March of this year, it had a 15% return. This compares to KIC's 4.5% return, which is more than three times higher.

how is the investment funded?

the initial funding comes from the government's holdings of taxable shares. this is a system where inheritance tax is paid in shares or real estate instead of cash. currently, the government holds about 6.8 trillion won ($6.8 billion) in tax stocks.

in the past, we've sold these shares on the market to cash out, but in the future, we plan to put them into a sovereign wealth fund and manage them for the long term. if necessary, we are also considering a strategy to acquire additional stakes and sell them at a management premium. there are also discussions about expanding the eligibility to publicly traded shares, which is currently only possible for unlisted shares.

concerns and challenges

along with the positive expectations, there are also concerns. first, the initial size of the fund is very small compared to other sovereign wealth funds abroad. If additional government finances are injected or a separate management organization is established, it will require the issuance of government-guaranteed bonds, which could lead to a burden on the country's finances.

in addition, a number of government policy funds of a similar nature already exist. the 150 trillion won National Growth Fund has been launched, and there are funds to support SMEs and the space sector. the fact that these funds have been unable to find suitable investments this year, leaving KRW 2 trillion in contributions, suggests duplication and inefficiency.

promote the Strategic Export Finance Fund in parallel

the government has announced that it will also create a strategic export finance fund. the intention is that the government will play a solid funding role when Korean companies win nuclear power plant orders, defense exports, and energy plant projects overseas.

existing policy finance institutions such as the Korea Development Bank, Export-Import Bank, and Trade Insurance Corporation focus on risk management and providing conditional financing. The new fund will invest from the beginning and return a portion of the profits if the project is successful. however, the benefits may be concentrated on larger companies, and the specifics of how the fund will be structured are subject to further announcement.

frequently asked questions

Q1. What is the main difference between a Korean sovereign wealth fund and a KIC? A1. The biggest difference is the investment targets. A KIC can only invest overseas, while a Korean sovereign wealth fund can invest directly in stakes in domestic companies.

Q2. What is a payable share? A2. It is a system where inheritance tax is paid in stocks or real estate instead of cash. currently, the government holds about 6.8 trillion won ($6.8 billion) in Mulnap stocks.

Q3. Why are Temasek's returns so high? A3. Temasek's returns are high because it has an active management strategy that involves long-term investment in promising local companies and participation in their management.

Q4. What sectors does the Strategic Export Finance Fund support? A4. It supports large-scale overseas business orders such as nuclear power plant orders, defense exports, and energy plants.

conclusion

the Korean sovereign wealth fund is an ambitious plan to pass on wealth to future generations by actively managing the country's assets. benchmarking the Temasek model to enable domestic investment is key. however, the financial burden and overlap with existing funds remains a challenge as it scales up.

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