Japan Post: Stamp of approval

There is a joke among Japanese start-ups that the Series B is an IPO. It’s a bit of gallows humor that points to a number of cultural headwinds around risk-taking and investment industry development, but its days of pertinence may be numbered. 

In one of the more significant evolutionary milestones in local private equity, Japan Post Bank and Japan Post Insurance have agreed to form a new entity that will partner with GPs to make direct investments. In its essence, the move signals that Japan has joined a global trend where GP-LP combination strategies are bringing a new level of sophistication to traditional M&A markets. But in its details, there could be greater benefits still.

Japan Post Investment Corporation (JPIC) plans to invest an initial JPY120 billion ($1.1 billion) across a five-year period, with about 60% going to buyout deals and 10% to special situations opportunities. Importantly, and perhaps uniquely, the remaining 30% has been earmarked to fill a growth capital gap in local technology markets around the Series B and C stages.   

“During our investment activity over the past two years, we’ve had a lot of co-investment opportunities from the GP side and Japanese companies have also asked us to invest in their businesses directly,” says Tokihiko Shimizu, head of private markets for Japan Post Bank and president of JPIC. “This program is a first-of-its-kind in Japan, and we would welcome it if other Japanese investors also tried to capture that opportunity.”

Forgotten venture 

Japan’s venture funding woes are nothing short of a threat to the long-term competitiveness of the national economy. As a lack of later-stage capital compels entrepreneurs to go public in premature IPOs, company priorities shift toward short-term profitability, a cultural bias against risk-taking is exacerbated, and the bulk of the technology space remains stalled in an increasingly outdated focus on hardware.

For the smattering of Japanese investors that offer Series B rounds, JPIC represents new competition, but the mood appears welcoming nevertheless. The consensus is that the start-up funding environment in Japan has a lot of room to expand, and the more capital entering the system, the better it is for all parties involved. 

Increased participation by the kinds of financial LPs that JPIC represents will extend the limited VC support currently received from major corporates, fuel larger venture rounds, and help start-ups draw talent away from legacy companies. At the same time, it will encourage more ambitious business modeling at the seed level because expensive, unproven concepts will have a wider array of plausible funding options on the horizon. 

“Japan Post is just one example of the many institutional investors that are now interested in getting into VC. This institutional interest is significant and positive for the market overall,” says James Riney, head of 500 Startups Japan. “We’ll likely be able to raise larger funds, and we’ll definitely be passing on deals for later stage rounds when our companies are at the right stage.”

Meanwhile, JPIC’s primary focus remains the buyout opportunities related to business realignment, succession planning and restructuring processes among the country’s more established companies. This effort will be 30% directed toward larger valuation deals overseas and 70% toward the domestic M&A space, which is dominated by a competitive but growing middle market. 

”If they [JPIC] are professional, highly disciplined, value-added investors, then that’s good for the market, and it will help expand the market,” says Jun Tsusaka, managing partner at NSSK, comparing Japan’s current PE landscape to that of the US in the 1980s. “We’re really only at the tip of the iceberg, so to have professional investment managers making a case for PE as a solution for owners and sellers, that’s not a bad thing.”

Tsusaka notes that out of almost 4,000 M&A deals that occur in the Japan middle market every year, his firm looks to invest in only five or six. This suggests that GPs that can move quickly in offering growth capital and business process support will continue to have an audience even as new entrants come into play. But deal sourcing remains difficult in Japan, and in a market with no shortage of capital, GPs need points of differentiation to be successful. 

For Japan Post, this scenario is aggravated by challenges around convincing rapidly expanding companies to take a chance on a quasi-government buyer that could be viewed as a sluggish bureaucracy. Although the Japan Post entities are listed and JPIC appears accordingly set to pursue deals with returns-oriented rigor, a strong government heritage does imply potential for a restrictive operational profile.   

People power

Dispelling any such perceptions will depend on JPIC assembling a sufficiently savvy execution team – a process that industry professionals are tracking optimistically. Japan Post Bank and Japan Post Insurance have already shown a willingness to staff their alternatives divisions with private sector hires, as evidenced by the former recruiting Hideya Sadanaga from Nissay Asset Management and the latter bringing in Tadasu Matsuo from Daido Life. 

“Japan Post’s strong brand and network stand out and will allow them to attract very high caliber people,” says Paul Ford, a Tokyo-based partner at KPMG. “If JPIC can also leverage Japan Post Bank or Japan Post Insurance relationships in any way while maintaining confidentiality and independence requirements, it will be in an even stronger position to source proprietary deals.”

The market-wide ramifications of the JPIC launch will also be driven by this brand recognition. Although Japan Post’s current incarnation and moniker are relatively new, the Japanese post office, or yubinkyoku, has been a symbol of stability since the 1870s. As such, few organizations could offer a more convincing endorsement of private equity as an asset class. 

Other Japanese LPs will therefore be watching for signs of success and could be motivated to play more proactively in PE, especially as underpenetrated markets appear increasingly de-risked. “It is very hard for Japanese growth-stage companies to find equity from institutional investors and expand their businesses while remaining private,” says JPIC’s Shimizu. “That’s why we are looking at being a first mover in institutional growth equity – it’s a blue ocean-type of space.”   

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• Topics
• North Asia
• LPs
• GPs
• Japan
• Japan Post Bank
• Japan Post Insurance
• Co-investment
• Venture