Changing perceptions on Japanese private equity

As AVCJ noted in last week's edition (see the January 18th issue), domestic institutional investors such as banks, that were active in PE investment before the financial crisis, are no longer backing local managers to the same extent. AVCJ heard from several Japanese LPs who explained that their interests are in off-shore investments, which leaves local funds in need of foreign capital.

Cross-border dialogue

In response to the concerns of many GPs, the Ministry of Economy, Trade and Industry (METI) and The Japan External Trade Organization (JETRO) organized the first-ever networking event between Japanese GPs and foreign LPs in Hong Kong, with support from the Consulate-General of Japan in Hong Kong, following their participation in the Asia Finance Forum, during which Keisuke Sadanaga, Deputy General for METI spoke about the prospects for the Japanese local economy.

On January 17, 32 industry professionals from 22 foreign limited partners gathered at the business luncheon and networking event to meet 36 senior executives from private equity and venture capital funds in Japan. Following the opening speech by Yuji Kumamaru, Consul-General Japan, METI explained the year-old Free Tax scheme designed to encourage foreign participation, as well as the new industrial revitalization plan, which could bring new investment targets into the fold for PE. The event also included a presentation by Japanese GP, Brightrust PE Japan. According to Joji Takeuchi, CEO and co-founder of Brightrust., there are about 80 buyout/turnaround GPs in Japan, of which 55 are Japan-focused GPs that manages third party's capital. The firm reported that since the late 1990s, 588 deals have been executed, of which 280 have been exited. He further noted that the SME market is becoming increasingly interesting, especially as companies begin to look at de-listing as opposed to continuing to pay the fees associated with being publicly listed.

An improving investment environment

During a Q&A session, one US institutional investor pointed out that the penetration rate of the private equity industry is the lowest among developed countries (especially given Japan's GDP numbers), and that cultural issues of an unwillingness to sell to PE made investing in PE funds in Japan difficult compared to other Asian countries. In response, one Japanese GP stressed that Japan has a 13 year history of the PE buyout model, and thus it is still too early for local corporates to fully understand or embrace the concept. However, this is changing.

Another question arose as to why 73% of public pension money has been invested in Japanese government bonds, with very little devoted to alternatives strategies. Due to Volcker rule implemented under the Obama government last year, Japanese banks that used to be the core investors for local PE/VE fund are no longer allowed to commit any capital. This change has totally impacted on local fund players. Therefore, fund players would have to seek overseas institutional investors to find the capital sources for their fund raisings. Now local LPs who are still active in insurers and small numbers of corporate fund, but allotment was said to be decreased.

METI explained that it is presently in discussions with the government to develop an investment program, noting that all parties felt this was a move that would be crucial to re-energizing the Japanese economy.

In Japan, there are two major pension funds operated by the government: The Government Investment Pension investment Fund (GPIF), Japan's sovereign wealth fund which manages JPY1.2 trillion ($14.4 billion) of capital; and The Pension Fund Association, which has incoming cash flow of around $2 billion annually.

Improved relationships

Yasushi Ando, CEO and COO at New Horizon Capital, a Tokyo-based private equity fund, is one of the industry peers who has been appealing to the government to bring pension money to local industry. He was one of the members of Japan mission team. He explained to AVCJ, "It is very important that that this event helps to bring overseas investors into the local funds. This is the first time in my experience in the private industry to see leading LPs and GPs gathering together with government bodies; it is an exciting step."

One LP said that the presentation made by METI "gave us to gain new angle on Japan's current economic environment. We hope that the government will keep holding this kind of event regularly to keep us updated."

With macro drivers pushing groups toward investment in China and India, and investors so far not pushing for the inclusion of Japan-specific allocations, there has not been pressure over the past few years to monitor the investment environment. Consequently, unless Japan proactively courts attention from the LP community, it is difficult to change the status quo.

Hideaki Fukazawa, President and Managing Partner at Tokio Marine Capital Co., Ltd, told AVCJ, "Many foreign LPs believes that there are not many deals in Japan, especially large cap [deals]. Given the current private equity environmnt, we cannot just sit and wait to receive investments; we need to aggressively go out and talk to LPs." Presenting facts like the increasing number of SMEs open to private investors, and the moves by METI to decrease the number of competitors in each industry are all part of this PR tour.

Calling it a "rare event" and a "great opportunity," Fukazawa, who is also a Board member of the Japan Private Equity Association - noted that this kind of event should be held even when economy is bad, because there still a lot of opportunity in the Japanese VC and PE industry.

There is of course still the issue of LPs that have had bad experiences: they may need to adjust their exposures, while GPs may need to adjust their investment strategies (lower leverage levels, for one). And, noted one GP in the room, creating a better investment environment can only be done through lessons learned through experience.

 

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• Topics
• North Asia
• LPs
• New Horizon Investment Advisors