Alt Investments

Japan's VC Sector Gathers Momentum

Tom Burroughes Group Editor 23 January 2024

Japan's VC Sector Gathers Momentum

While Silicon Valley has hogged much of the limelight in VC, Japan's much smaller sector hasn't enjoyed the same kind of attention, but reforms and other changes mean that this obscurity is fading, an investment firm says.

There’s been plenty of commentary (here and here) over the past 12 months about how Japanese equities have awoken from a decades-long slumber. Corporate governance reforms to unlock shareholder value and put cash to work, for example, are cited as positive forces in the world’s third-largest economy.

But given a secular global trend towards more private market investing, how does an investor plug into opportunities for non-listed firms in the Asian nation? MCP, founded in 1999 under its old brand of Millennium Corporate Partners, reckons it is well placed to answer that question.

“People have started to look at Japan from a private markets perspective,” Kei Yamashita (pictured), chief investment officer, managing director, head of venture capital and private equity investment, MCP Alternative Asset Partners, told this news service in a recent call. “We think private markets, particularly venture markets, are witnessing an inflection point.”

The firm manages about $2.5 billion, mainly for Japanese institutional investors including major banks, insurers, pension funds and university endowments. Last Friday, MCP announced that LPS, a Japanese limited partnership that it manages, had come to a second closing, receiving new investments from Development Bank of Japan and Amita Holdings. The fund was established in March last year. It invests in mid-stage and later-stage startups.

“People, even those close to Japan, never think that the venture ecosystem exists in Japan. They just assume that it is an ageing country with no focus on startups,” Yamashita, who is based in Tokyo and at the firm since 2022, said. “Contrary to stereotypes, people have moved into the venture space which is well supported by the government; they know that without growth in this industry there is no growth in Japan.”

Ever since the government led by the late Shinzo Abe began in late 2012, one of its policy elements was addressing corporate governance and supply-side reform. In simple terms, they were designed to make it easier for shareholders to wring more value from businesses often hobbled by crossholdings and restrictions, creating a situation in which, after three decades of ultra-low interest rates, firms were flush with cash. And while some of the focus on change has applied to listed firms, the reform programme also took heed of the role that startups and venture-backed businesses could make in reviving Japan’s economic fortunes. Silicon Valley’s successes have bred imitators.

According to data from the Japanese Venture Capital Association, in a report published in September 2023, the sizes of VC funds and investment from institutional players has risen 10 times over the past decade. Total funds raised in Japan by VCs stood at ¥616.5 billion ($4.16 billion) in 2022, with assets under management in the space rising 12 per cent from 2013. Japanese VC funds with a 2012 vintage have clocked up distributions to paid-in capital (DPI) of 323.6 per cent, way ahead of 132.7 per cent for North American funds of that year, and 165 per cent for Europe. For 2014 vintages, North America (115.9 per cent) has an edge on Japan, however, at 98.3 per cent, but the gap certainly isn’t particularly large. And while the past couple of years have seen startup investing in North America and Europe hit by rising interest rates, that’s not the case in Japan. In 2022, the last year for which full data is available, Japanese startup funding rose to ¥877 billion, from ¥851 billion a year earlier; the rate has risen 29 per cent since 2013. 

Entities such as Japan’s TSE Growth Market have enabled the country’s VC sector to clock up a robust DPI result, MCP says.

Rising trend
In June last year, research firm Preqin said that total private equity deal value has already reached $20.7 billion in Japan. 

All this ferment means that it is not just domestic investors who want a piece of the action, according to MCP’s Yamashita. “Just like private equity (buyout) space, venture markets will provide tremendous opportunity for foreign investors,” he said.

In 2022, funding from Japanese startups was about $7 billion. “The [Japan] government announced a five-year development plan for startups and wants to increase funding by 10 times by 2027…and they need to attract foreign capital,” he continued. Sectors in play include not just Software-as-a-Service (SaaS) but also, robotics, agritech, intellectual property, and semiconductors.

“Lots of foreign wealth managers and family offices are showing a growing interest in the Japanese venture sector but they lack access to the market,” Yamashita said. 

Given the changes to Japanese corporate governance and other reforms, there should certainly be opportunities arising in the next three to five years. As far as venture capital as an industry goes, Japan is probably about 10 to 15 years behind where Silicon Valley has been, he said.

As an area requiring “patient capital,” Japan would seem ripe for family offices’ attention. There isn’t a particularly large family offices sector in the country, although a few names come up, such as Hidaka Family Office, based in Tokyo, which invests in areas including VC and private equity (source: Pitchbook). According to the Highworth Research database, with which this news service is an exclusive media partner, Japanese family offices include Terrasias Capital, based in Tokyo, which is run by the Nilsson family. Home also to a complex ecosystem of life insurance and pension plans looking for yield, Japan has plenty of potential buyside interest in areas such as VC, it would appear.

With VC rising in size – and profile – in Japan, Yamashita said people from investment banks, private equities and consulting backgrounds are transitioning into this space. 

This development has also made MCP want to educate and inform the market about the possibilities. 

“We closely communicate and educate local investors (LPs) and portfolio companies so that they can look at things from a global standpoint. I believe this is one of MCP’s strengths as we have a global network while understanding what’s lacking in local communities,” Yamashita added.

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