Blockbuster startup IPOs curb NPS' VC diversification

South Korean startups' blockbuster initial public offerings over the past year, including Krafton Inc. and HYBE Co., have left the National Pension Service (NPS) in a tricky situation. The pool of qualified venture capital managers is sharply narrowed to a few VC firms that have made early-stage investments in the startups.

The South Korean pension fund is planning to commit 150 billion won ($130 million) to three to four domestic venture capital firms around November of this year. For the mandates, it has received applications from around 20 firms by the Aug. 26 deadline, according to sources with knowledge of the matter.

Its selection criteria will remain the same: the VC firm's assets under management (AUM) and track record make up half of the quantitative evaluation, or taking 30 scores out of the total 60.

That compares with its standards for infrastructure investment mandates, for which the AUM and track record account for 20 scores of the 60. 

The other half of the 60 scores are comprised of 18 for the VC firm's management structure and headcount: seven for the management stability and the proposal's attractiveness; and five for whether the proposal provides a new investment opportunity.

For qualitative assessment which makes up the other 40 scores of the sum of 100, the NPS looks at the firms' investment strategy and investment process; their risk management systems; and the management structure and managers' expertise. 

"Excluding the investment track record, it's hard to make a difference in other criteria among the management companies," a VC company head told Market Insight, the capital news outlet of The Korea Economic Daily.

"There is almost no difference in terms of AUM as well, meaning the biggest difference will come from their investment track records."

Last year, unidentified four domestic VC firms received the NPS' mandates. They were all early-stage investors in Krafton Inc. which went public on the Korea Exchange last month.

Before its high-profile IPO, the developer of the PlayerUnknown’s Battlegrounds (PUBG) has already made a huge success from the blockbuster mobile game.

"In terms of track records, the gap between those who had Bluehole in their portfolios and those not was so huge that we could not cacth them up in other criteria," said another asset management industry source.

Bluehole is Krafton's old name.

"It was as if they said we will pick the VC managers who invested in Bluehole," he said, in reference to last year's selection process for the NPS' venture capital mandates.

With $785 billion won in AUM as of the end of June, the NPS is concerned about its growing reliance on a limited number of VC firms that hit the jackpot from the recent blockbuster IPOs, according to the sources.

But the world's third-largest pension fund may not be able to change the situation before its relevant rules are revised, which are unlikely to happen in the near future.

"Aside from Krafton, there were a number of other blockbuster IPOs last year and this year," said another asset management industry source. "Those who have invested in at least one of them will likely sweep the NPS' VC table," said another fund industry source.

Write to Jae-fu Kim at hu@hankyung.com

Yeonhee Kim edited this article.