Plan for 2021 and Beyond
In order to prepare for a post-pandemic era and promote a transition toward a digital and green economy, the government announced the Korean New Deal initiative on July 14, 2020, pledging to make fiscal investment of KRW160 trillion in New Deal projects until 2025.
Successful implementation of the New Deal initiative will require not only fiscal investment but also promoting private sector investments and channeling abundant market liquidities toward the New Deal sectors. As such, the government unveiled its plans for launching the New Deal fund in September last year, focusing on creating a public sector-driven New Deal fund in the amount of KRW20 trillion, promoting the development of SOC investment funds in New Deal areas and encouraging private sector investments in New Deal projects.
After having close consultations with experts and industry officials, the government finalized the guidelines on New Deal investment last December with detailed information about investment targets and management of assets. Through a series of IR events and information sessions, diverse opinions concerning the direction of the fund management and ways to provide incentives for investors have been collected. In addition, fiscal investment of KRW510 billion allocated to the New Deal fund from the 2021 budget has been finalized last December. Against this backdrop, the government announced more specific plans for the creation and operation of the New Deal fund as follows.
Creation of New Deal Fund
From 2021 to 2025, the government aims to create and operate the New Deal fund in the amount of KRW20 trillion through fiscal investment and matching investments from the private sector. Over the next five years, the public sector will invest a total of KRW7 trillion in the fund, which will pump prime investments and participation from the private sector.
In 2021, the government seeks to raise up to KRW4 trillion, of which approximately thirty-five percent will be financed through both fiscal investment (KRW510 billion) and investments from the Korea Development Bank and Korea Growth Ladder Fund. The remaining portion of the fund will be raised from both institutional and retail investors in the private sector. In this regard, retail investors will be given opportunities to invest through public offerings of private funds, which will make up about five percent—or KRW140 billion in 2021—of the total private sector investments. In order to encourage participation from the general public, the fiscal investment portion of the fund will serve as a backstop for losses and help absorb up to twenty percent of losses first and reduce investment risks for retail investors.
Investment Allocation Plan
In 2021, the New Deal fund will make investments according to policy priorities and the purpose of the investments. About seventy to ninety percent of investment will be made on New Deal sector businesses while ten to thirty percent will be allocated to the New Deal-related infrastructure investment.
First, a bottom-up approach will be taken to allocate business investment funds. In this regard, investments will be made based on the proposals made from the private sector in the following six major New Deal areas—data, network and artificial intelligence (DNA) sectors, future car & green mobility sectors, eco-friendly & green industries, New Deal services, SOC & digital logistics and smart manufacturing & smart farming sectors. In addition, growth-oriented funds will be created to facilitate M&As, acquisition of technologies, R&D, facility investment and business transformation. Second, New Deal infrastructure funds will be set up to make investment in data centers, offshore wind farm projects and so on.
The investment allocation plan can be readjusted biannually if it becomes necessary based on the market demand, policy priorities and investment performance of different sectors.
Incentives for Private Sector Participation
In order to promote active participation from the private sector in the New Deal fund, the government will provide the following incentives.
- I. PERMIT LONGER-TERM INVESTMENT:
- For New Deal investment projects requiring longer-than-usual periods to generate returns, the New Deal fund will be set up to allow operation of funds for up to ten years, which is longer than the seven-to-eight-year ordinary operation period for a government-initiated fund. For infrastructure funds and other sectors that require a longer term investment due to their sectoral particularities, the fund operation will be allowed for up to twenty years.
- II. PROVIDE DIVERSE INCENTIVES AND OPTIONS FOR PRIVATE SECTOR PARTICIPATION:
- The New Deal fund will offer different incentives and options for private sector investors, such as a partial coverage of investment loss, priority distribution of excess returns and call options to buy certain portions of assets at a predetermined price within a specific time frame, while allowing stronger incentives on stronger investment performance.
- III. REDUCE INVESTMENT RISKS AND OFFER PREFERENTIAL BENEFITS:
- For fund managers choosing to invest in New Deal projects with relatively higher risks, the proportion of government investment may be raised up to forty-five percent (higher than the average of thirty-five percent) on particular investment projects to alleviate investment risks and encourage their participation after conducting a thorough assessment of the necessity of the investment as well as risk factors. Investment by fund managers in higher risk projects will also be incentivized through the application of a lower hurdle rate (from seven percent to between four and six percent, for instance). If a particular investment proposal and management strategy is considered to be highly innovative with an outstanding fit with the New Deal initiative, the fund manager will be offered a preferential standing during the fund manager selection process.
The Korea Growth Investment Corporation and the Korea Development Bank have begun the application process for choosing fund managers in December 2020 and plan to announce the selection results in February 2021.
The government will continue to look for investment projects in New Deal sectors, promote network building between entrepreneurs and investors and work on improvements to New Deal investment environment through close collaboration between the relevant ministries. In the meantime, the government will continue to hold public IR events on a diverse range of New Deal sectors and look for new investment opportunities throughout 2021. Meanwhile, the publicly offered private funds for retail investors will be launched when a sufficient pool of the relevant New Deal investment projects has been secured.
Last updated: Jan. 18, 2021