Japan’s monster new LP

The merged entity will have total trust assets of ￥119 trillion ($1.34 trillion), topping Mitsubishi UFJ Financial Group’s ￥102 trillion ($1.15 trillion).

Japan’s banking M&A rounds

The two firms will merge all their subsidiaries under a new entity named Mitsui Sumitomo Trust Holdings, expected to be formed on April 1, 2011. One year later, Sumitomo Trust Bank, Chuo Mitsui Asset Trust and Banking, and Chuo Mitsui Trust and Banking will be merged to create Mitsui Sumitomo Trust and Banking on April 1, 2012.

The share swap ratio for the two banks has not yet been confirmed, but the last time both banks failed to reach mutual agreement on a merger, back in February 2005, Sumitomo Trust was reportedly in line to receive 0.6 of a Chuo Mitsui share for every share it swapped.
The merger plan first surfaced more than ten years ago, during a previous round of M&A, when the Japanese banking industry was in a transition period of consolidation, with institutions seeking ways to survive the stagnant domestic market as the competitive threat from megabanks such as Tokyo Mitsubishi UFJ, Mizuho Bank, and Mitsui Sumitomo Bank was growing. However, differences in the corporate cultures of the two banks delayed a final decision.

Sumitomo Trust, which has total assets of ￥21.5 trillion ($242.3 billion), is the fifth largest bank in Japan, with strength in M&A, while Chuo Mitsui Trust is Japan’s seventh largest bank with ￥15 trillion ($169 billion) in total assets and a focus on retail sales. 

The banks’ private equity presence

In Japan’s private equity industry, Sumitomo Trust Bank has been involved through its credit investment group and Sumitomo Trust Finance Ltd., while Chuo Mitsui Trust bank engages in growth capital investment, funds of funds and gatekeepers service for investors in Japan and overseas, through its subsidiary Chuo Mitsui Capital Co., which is also well-known as a mezzanine finance lender.

What this merger means to the private equity industry in Japan, particularly to LPs, is primarily that the merged group with its enhanced assets may threaten to take over the allocations of other LPs in Japan with their favorite private equity funds.

The reason for this is the group could have the opportunity to increase its voting rights in a fund if all its private equity-related units allocate their assets in one fund at the same time. This is not what GPs and LPs prefer, as the investment risk for the LP would be increased, while the entire fund will be influenced by a single investor.

Given this situation, the Mitsui Sumitomo Trust Group may well extend its investment activities wider to seek out other funds for capital allocations. If their exposure in the private equity market spreads further, then LPs with less prominent branding may find themselves squeezed out of popular funds.

For instance, if the target fund is a mid-market focused fund, the commitment amount from a single investor is likely to be between $10-30 million, one LP source said, and it is unlikely that all the private equity teams at the Mitsui Sumitomo Trust Group could squeeze into one particular fund.

Other sources noted to AVCJ that the number of desirable funds with good track records and experience is limited, so that the new Mitsui Sumitomo Trust Group may leave less space for less important LPs in Japan. So the allocation race may intensify among Japanese LPs, while fewer new funds are raising in the current economic climate

Pension money’s best partner: Trust banks

Trust banks in Japan are lenders which manage assets, real estate brokerage and pension funds, wills and inheritance services, alongside traditional banking services. Trust banks are also well-known as investors in domestic and foreign private equity funds.

In Japan, one of the key factors that give trust banks a strong presence in private equity is their close connections to pension funds, both public and corporate. All Japanese citizens above 20 years of age are legally obliged to participate in a pension fund scheme. Japan’s national pension fund is reportedly the world’s largest sovereign wealth fund, with $1,28 trillion in total assets as of December 31 2008.

According to their materials, the two merging groups will have ￥12 trillion ($135.5 billion) in trust accounts and will manage 2033 corporate pension funds in total upon completion of the consolidation.

Motoya Kitamura, senior vice president and associate director at Macquarie Funds Group told AVCJ, "Under the regulations in Japan, Japanese trust banks have natural access to pension funds. Therefore, trust banks in general are well-positioned to provide advisory services on the private equity fund investments that these pension funds make. This is not understood very well outside Japan."

Nevertheless, Japan’s pension funds reportedly only allocate less than 8% of assets to alternative investments. If the new Japanese government becomes more open toward private equity investment, vast amounts of money will flow into trust banks in Japan.

The pressure of the ongoing global downturn is driving many Japanese financial institutions  under in a wave of consolidations driven by the need to sustain balance sheets. Earlier this year, Mitsui Sumitomo Insurance Group Holdings Inc., Aioi Insurance Co. and Nissay Dowa General Insurance Co. agreed to merge to form the top non-life insurer in Japan, and more recently, Sumitomo Trust Bank took over Nikko Asset Management from Citigroup for ￥112.4 billion ($1.26 billion).

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