Venture capital supply by large securities firms rose to 11.6 trillion won in the second quarter. Financial authorities are also pushing institutional changes to expand supply, reduce a bias toward buy recommendations in brokerage research and increase analysis of small and mid-cap stocks.

The Financial Services Commission said on Wednesday that the FSC, the Financial Supervisory Service and the Korea Financial Investment Association held the second consultative body meeting to strengthen venture capital capabilities in the investment banking sector on Sept. 30. They discussed venture capital supply performance by comprehensive financial investment business operators and ways to improve the research system.

Total second-quarter supply by seven such operators, which have mandatory venture capital supply requirements, came to 11.6 trillion won. That was up 2 trillion won, or 20.4 percent, from the first quarter.

The average venture capital supply ratio versus funding raised through short-term notes and integrated management accounts (IMA) was 19.5 percent, up 2.7 percentage points from the first quarter. All seven exceeded this year's mandatory ratio of 10 percent. The mandatory ratio will be raised in stages to 20 percent in 2027 and 25 percent in 2028.

By investment target, primary collateralised bond obligations (P-CBO) were the largest at 3.4 trillion won. Small and venture firms accounted for 2.5 trillion won, new technology finance companies and venture capital firms 2.3 trillion won, mid-sized companies 1.3 trillion won, debt securities rated A or lower 1.0 trillion won, and KOSDAQ venture funds 700 billion won.

By investment method, debt securities were the largest at 5.6 trillion won. Equity securities totalled 2.8 trillion won, new types of securities such as redeemable convertible preferred shares (RCPS) and convertible bonds (CB) came to 1.9 trillion won, and loan receivables stood at 1.3 trillion won.

Samsung Securities and Meritz Securities, which received licences last month for short-term note issuance businesses, also plan to expand venture capital supply. Financial authorities plan to continue monitoring supply trends and effects from new operators.

If venture capital supply increases steadily, authorities will also review differentiating the performance recognition ratio by investment risk.

Currently, lower-risk investments such as guaranteed bonds including P-CBOs or secured loans and higher-risk investments such as equity investments in venture companies are recognised at the same ratio as venture capital performance.

Financial authorities plan to encourage qualitative improvements in venture capital by applying a higher performance recognition ratio to higher-risk investments such as equity investments in venture companies.

Authorities will also revamp brokerage research rules. They judged that research reports by domestic brokerages are overly skewed toward buy recommendations and lack analysis of small and mid-cap stocks.

Of 85,030 research reports published over the past three years, 14,648 targeted companies ranked outside the top 300 by market capitalisation, accounting for 17.2 percent of the total. By contrast, reports related to companies ranked 1 to 100 by market capitalisation totalled 41,239, or 48.5 percent. Sell recommendations by domestic brokerages account for less than 1 percent.

Authorities plan to elevate the principle banning undue influence over research departments into financial investment business regulations. They also plan to improve the system so research department budgets do not rely excessively on revenue from retail and institutional sales or investment banking units.

They will bar analysts from explaining anything beyond publicly available information when supporting sales departments. They will also impose duties to report in advance to compliance officers and to conduct follow-up management and supervision.

For analyst evaluations, authorities will reduce the influence of sales units and use objective indicators such as the divergence rate between actual share prices and target prices. They also plan to periodically disclose brokerage-by-brokerage research publication status and analysts with strong divergence-rate performance.

They will also introduce a minimum coverage ratio to expand small and mid-cap research.

As an example, authorities proposed requiring such operators to make at least one quarter of annual research performance consist of stocks ranked outside the top 300 by market capitalisation on the KOSPI or outside the top 150 on the KOSDAQ. More than half of that would be filled with stocks ranked outside the top 150 on the KOSDAQ.

Authorities are also reviewing incentives under venture capital supply regulations for operators with a high share of small-cap research. One approach would be to recognise an additional 5 percent in supply amounts to small and venture firms for IMA and short-term note operators whose small-cap research ratio in the prior year was 40 percent or higher.

They will also expand research obligations for initial public offering (IPO) candidates to at least two reports annually for three years, from the current requirement of at least two reports over one year. They are also pushing a plan to let authors choose whether to include their names after an internal approval process to reduce the burden of issuing sell recommendations.

Financial authorities plan to check venture capital supply quarterly with the government, related agencies and the financial investment industry. They also plan to revise relevant rules in stages so the research system improvements take root in the market.