Analysis: After Mercari: Japanese asset managers see new era in venture capital investing
09/08/2018 05:35
* Mercari's IPO ignites investor interest in Japanese
startups
* More institutional money seen flowing into Japanese VC
world
* METI-backed "J-Startups" project aims for 20 unicorns by
2023
By Tomo Uetake
TOKYO, Aug 9 (Reuters) - The hugely successful IPO by online
marketplace Mercari in June was a bonanza for its shareholders –
and may transform lukewarm attitudes among mainstream asset
managers about investing in startups, according to major
Japanese institutional investors and industry officials.
Mercari 4385.T became Japan's first home-grown unicorn,
with a pre-IPO valuation of more than a billion dollars in early
2016. Its value increased further and led to rich rewards for
early backers who had invested in the firm either directly or
through venture capital (VC) funds. The stock soared on its
Tokyo market debut on June 19, doubling at one point.
"Venture capital used to be the 'ugly duckling' of private
equity in Japan. Now we are seeing way more interest from
institutional investors," said James Riley, head of startup
accelerator 500 Startups Japan. "Thanks to Mercari for making a
big splash noticeable on a global scale."
The large gains recorded by Mercari, which operates a
popular smartphone app that allows people to trade used items
online, should encourage more institutional players to look to
domestic startups and other firms at an early stage of their
development as a viable investment option despite the risks,
especially given razor-thin returns on domestic bonds.
"Not only VCs but also other institutional people took part
in Mercari's late stage pre-IPO fundraising rounds. It was a big
success for them," said Soichi Kariyazono, chairman of the Japan
Venture Capital Association (JVCA), referring to the unicorn's
debut on Tokyo's Mothers market.
Its pre-IPO shareholders included Development Bank of Japan
DBJPN.UL and Japan Post Capital. Neither will talk about how
much they still own.
"When many institutional investors have a target annual
return of 4 percent or so, Mercari's late-stage investors had
their funds more than double in just 1-2 years," added
Kariyazono.
In addition, its pre-IPO backers - through money they had in
VC funds - included wider institutional investors, from
insurance companies and banks to domestic pension funds, said
Shinichi Takamiya, partner at Globis Capital Partners. He
declined to name them citing confidentiality agreements.
Takamiya said Mercari was a potential game changer in
Japan's nascent venture industry, with "before-Mercari" and
"after-Mercari" buzz phrases.
Among the other recent unicorns was MTG 7806.T , a
manufacturer of beauty and workout products. It became the
second Japanese unicorn to go public as the firm’s value soared
above $1 billion shortly before its IPO last month.
And one of the next could be Sansan, a company that offers
an app for managing business cards or business contacts. It has
been attracting increasing interest from venture capitalists and
other investors and its value has been growing.
In the pre-Mercari era, because Japanese startups were too
small to attract big players, Japanese investors interested in
the sector mostly looked to foreign ventures, primarily those in
Silicon Valley.
GATEWAY TO PARTNERSHIPS
Nippon Life NPNLI.UL , a prominent Japanese investor in VC,
had invested 60 billion yen ($540 million) in venture capital
assets as of March 31, with half of that amount invested in
domestic startups. The firm says it intends to increase its VC
allocation but cannot say by how much.
In recent years, the insurer has wanted to increase its VC
investments as it represents a fraction of its total assets of
66 trillion yen, but it has been difficult in practice because
of the limited size of the domestic market, said chief
investment officer Kazuhide Toda.
Nippon Life now sees venture capital not just as an
investing route but also a gateway to finding possible partners
in technology sectors it is keen on developing, such as FinTech
or InsurTech - the use of the latest technology to transform the
banking and insurance sectors.
"We plan to increase our exposure to venture capital
assets, both domestic and foreign. We are keen to find
opportunities that are attractive not only in terms of return
but also help our core businesses," said Toda.
The Government Pension Investment Fund (GPIF), the world's
largest pension fund, is also looking to start investment in the
domestic VC market, its officials said.
The Pension Fund Association of Japan, another big pension
fund which manages 12 trillion yen on behalf of corporate
pension funds, says it has invested in the sector for 4-5 years
and plans to seek further opportunities.
"Japan's startup ecosystem is evolving, with more
institutional players participating in late-stage pre-IPO
funding rounds," said Shuzo Takahashi, head of private equity at
the PFA. "We welcome it as a much-needed development to the
industry."
Their stance could lead smaller institutional investors to
follow suit.
Rheos Capital Works' president Hideto Fujino, a well-known
fund manager whose Hifumi Fund LP62006808 is the largest among
all Japanese stock toshin funds, told Reuters he was considering
starting a venture capital arm.
Even the Japanese government is stepping up support. The
Ministry of Economy, Trade and Industry (METI) launched the
"J-Startup" project in June as it seeks to breed 20 unicorns by
2023.
($1 = 111.00 yen)
(Reporting By Tomo Uetake
Editing by Martin Howell)
((tomo.uetake@thomsonreuters.com; +81-3-6441-1645; Reuters
Messaging: tomo.uetake.thomsonreuters.com@reuters.net))