Japan's Jafco launches buybacks to thwart activist threat

Jafco outlined the plan in a presentation that also pledged to reduce the percentage balance sheet commitment to new funds, improve capital efficiency, and promote growth strategies by enhancing investment management capabilities and expanding external fundraising efforts.

The buyback will be funded through the sale of Jafco's 3.9% interest in Nomura Research Institute (NRI), a listed research affiliate of Nomura, for approximately JPY 52bn. It will be executed through a tender offer for 13.9m shares – or a 19.53% stake – in Jafco held by Aya Nomura, Murakami's daughter, through City Index Eleventh and other entities.

Jafco's stock ended November 28 up 9% at JPY 2,523 – a 12-month high – giving the company a market capitalisation of JPY 185bn. A separate filing indicates the price range for the tender offer will be JPY 2,500-JPY 2,800, suggesting that the City Index investors will receive up to JPY 38.9bn.

City Index has previously intervened in several private equity transactions in Japan, generally pushing for higher pricing. It is said to have been instrumental in thwarting Bain Capital's take-private of printing and IT services provider Kosaido in 2019 and it delayed – but ultimately did not deter – The Carlyle Group's carve-out of assets from Japan Asia Group in 2021.

Jafco disclosed in August that the City Index investors had increased their holding in the company from 6.54% to nearly 15%. They raised the possibility of continuing share purchases until they reached 51% if certain conditions were not met. These included Jafco liquidating its NRI position to fund a share buyback of approximately JPY 50bn.

Jafco expressed concerns about their motivations, given a lack of information regarding the terms of the proposed buyback and previous situations in which Murakami had "placed their management under pressure, and earned resale gains by causing those listed companies or their affiliated companies to purchase at high prices all or a substantial part of the shares purchased."

It raised the possibility of mounting a poison pill defence by issuing share options to all existing investors apart from the activist groups with a view to diluting the latter's position.

Jafco was founded in 1973 and set up the country's first VC fund in 1982. Its sixth flagship Japan buyout fund closed on JPY 80bn in 2020; the latest vehicle in an Asia VC series – known as Jafco Asia S-8 Fund – closed on USD 130m in January 2022; a debut Taiwan fund closed on NTD 2bn (USD 67m) in 2020; and the most recent vehicle under US-focused Icon Ventures closed on USD 375m in 2015.

The firm had JPY 332.3bn in total commitments as of March, of which JPY 138.9bn was subject to management fees. Fund investments accounted for JPY 186.9bn out of a total investment balance of JPY 190bn. Jafco interests in those funds amounted to JPY 72bn. Over a 10-year period, it plans to reduce net assets to JPY 120bn and reduce balance sheet commitments to funds from 40% to 20%.

Of the JPY 190bn total investment balance, JPY 185.3bn was held in unlisted equities. Jafco had JPY 110.2bn invested across 151 Japanese companies, comprising 137 VC investments and 14 buyout investments. There was a further JPY 50.3bn in 31 US-based companies and JPY 24.8bn in 54 Asia ex-Japan-based companies.

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• Topics
• North Asia
• GPs
• Japan
• JAFCO
• activist investor