LP interview: Japan Investment Corporation

Japan Investment Corporation (JIC) had a rough start. Launched in September 2018 as a JPY2 trillion ($18.3 billion) government support program for the technology sector, it was supposed to offset local tendencies of risk aversion, build a fledgling start-up ecosystem, and help steer mature industries towards a digital future. By January 2019, all nine board members had quit, and everything was in limbo.

At the heart of the drama was a familiar mistrust about the role of government in private investment and a breakdown in communication between the two sides. This manifested itself in disputes over leadership compensation, government influence over fund management, and the idea that an insufficient level of independence would reduce JIC to a prop for pet projects and a rescuer of dead-end companies.

Stability returned later in 2019 with Keisuke Yokoo, formerly chairman of Mizuho Securities, joining as CEO, and Toshiyuki Kumura, ex-head of private equity at Tokio Marine Asset Management, coming in as CIO. The following year, they hired Yuka Hata (pictured), previously PE head at Nissay Asset Management and Nomura Asset Management, to lead fund investments. JIC’s investment capacity was subsequently lifted to JPY3 trillion to help shore up the pandemic-hit economy.

“JIC does not intend to intervene in the private market so long as the market is in a healthy condition,” Hata says. “Our intent is to strengthen the ecosystem of PE and VC markets and transform the industry for the next generation. In this way, JIC exists in a very important transition period of Japan.”

Venture agenda

Hata’s mandate has provided comfort on one of the key sticking points about government control by including scope to make LP commitments to non-Japanese funds. No such investments have closed to date, but they are expected to be pursued where US, Israeli or Asian managers are keen to collaborate with domestic industries and bring in global knowledge. Part of the thinking is to fill financial and capacity gaps in the later-stage VC space.

So far, JIC has made four LP commitments to independent managers. They include seed-stage investor Anri’s fourth fund, as well as the second vintages from Miyako Capital, which is investing in partnership with Kyoto University, and Beyond Next Ventures, a firm set up by a former Jafco executive. First-time funds are also on the menu, with Catalys Pacific Fund, a life sciences specialist launched in 2019, receiving JIC backing in February. Checks sizes fall in a range of $30-40 million.

On the surface, this activity betrays a preference for deep tech and the commercialization of “sleeping science.” But the underlying plan is more about professionalizing a class of local fund managers that remains under the industry radar yet has demonstrated a modest amount of traction and is believed to possess the potential to be among the ecosystem leaders.

Support on governance is an important part of this agenda, especially in terms of helping entrepreneur-led GPs avoid the conflicts of interest that come with playing both sides of the table. Ultimately, the idea is to help portfolio GPs attract other institutional LPs.

This value-add focus is perhaps the key differentiator between JIC and Innovation Network Corporation of Japan (INCJ), the government VC investor it made redundant in 2018. INCJ still exists as a subsidiary of JIC, but most of its team has been moved into new divisions, leaving a core of senior leadership to wind down the legacy portfolio.

“We found that there is not enough risk capital in the venture growth space in Japan, and there are no original local funds in the larger end of buyouts,” Hata says. “So, we had to create our own to achieve policy objectives and enhance international competitiveness.”

Going direct

Hata’s directly managed team currently includes two directors, two vice presidents, three associates, and is in the process of expanding. JIC’s overall headcount is 142, including 66 in the parent company, 27 in INCJ, 24 in a VC unit called Venture Growth Investments (VGI), and 25 in the PE unit, JIC Capital (JICC).

JIC seeded VGI and JICC last year with JPY120 billion and JPY400 billion, respectively. VGI aims to solve social and industrial challenges in Japan through technology, while JICC’s mandate is to supply risk capital for the creation of new industries that can realize “Society 5.0.”

Although these are essentially an indirect means of making direct government investments, they are viewed in-house as part of JIC’s mission to build up an underweight ecosystem of private-sector GPs. In time, there is also potential for the captive GPs to be spun out as independents.

“Japanese managers are still in the development stage. That’s why we’re here: to support and to bring them to the next stage,” says Hata. “We will share our knowledge and experience with the managers so that they will be able to build their teams and communicate with investors properly. We’re not here just to provide them with money.”

Robust interest in Japan’s carve-out and succession opportunities has meant that LP commitments to external middle-market managers are not yet required. Still, these investments are considered a possibility, where they can help take the buyout ecosystem to a new level of maturity. This could include supporting the creation of funds dedicated to specific sectors or industry consolidations.

JICC’s direct investment experience could help inform some of these moves down the track, given the program is likely to concentrate on the more dynamic large-cap end of the buyout space. This process will be guided by Kumura’s and Hata’s global investment background.

“The small to mid-sized buyout market is healthy in Japan, so we don’t necessarily feel the need to support that as an LP at this time. However, at the larger end, we feel that as a government-backed investor, we need to support these industries,” Hata says.

“We will not provide them with rescue capital – our mission is to support the buyout ecosystem so the right industries can continue to be competitive in the global market. We’re going to have to be very selective in picking the right buyout investment theme for our LP investments.”

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• Topics
• North Asia
• LPs
• Technology
• Venture
• Growth
• Fundraising
• Japan
• Japan Investment Corporation (JIC)