In Japan the post office plays a big part in daily life. It’s not just a speedy and safe way to ship parcels or a bureau to buy stamps from other countries. The country’s postal savings bank does everything from cashing cheques, receiving payment for school lunches as well as selling life insurance. Its network of 24,000 post offices is impressive and it is the biggest collector of Japanese savings.
While its origins date back to 1871, Japan Post Holdings or Nippon Yusei Kabushiki Kaisha, which consists of Japan Post Bank, Japan Post Insurance and Japan Post, was established in 2007. In 2015, the state-run postal services underwent a multi-billion dollar privatisation 10 years in the making. It was sold for about ¥1.4 trillion ($12 billion; €10 billion) worth of shares in a three-way initial public offering, the largest privatisation of a state-owned firm since Nippon Telegraph and Telephone Corporation went public in 1987.
The government’s goal: to use proceeds of the IPO to finance the reconstruction of areas devastated by the 2011 earthquake and tsunami.
Today the banking and insurance units are two of the most sought-after institutional investors in Japan, with about ¥290 trillion ($2.7 trillion; $2.2 trillion) of combined assets under management.
What’s more, the investors have taken the necessary steps to move away from a government bonds-heavy investment portfolio and towards alternatives. Both of the investment units have already been investing in private equity via fund commitments. But the pair made a significant move in February, by establishing a private equity fund management company, Japan Post Investment Corporation, or JPIC, which will have around $1.1 billion for co-investments.
The investors will provide a total of ¥90 billion to the new company as initial investment money, with an additional ¥30 billion expected to be raised from outside investors.
According to Japan Post Bank’s senior managing director and head of private markets investment Tokihiko Shimizu, the investment corporation wants to strengthen its foothold both in Japan and Asia. Roughly 70 percent of the fund will back domestic deals, and the remaining 30 percent will go to overseas transactions. Asia deals will make up a large proportion.
“The Asian investment opportunity is a core target of JPIC’s overseas deals, however this doesn’t mean we don’t want to invest in the US or Europe,” Shimizu says. “When executing the direct deals, the distance from Japan is very crucial, therefore potential markets like China, Singapore and Hong Kong are attractive.” China is also a target because of its growth story and stable political situation, he adds.
On the investment strategy, JPIC is allocating 60 percent of the capital raised for the fund for buyouts, 30 percent for late- to growth-stage or technology-related investments, and the remaining 10 percent for special situations and turnaround transactions that will “revitalise the Japanese economy”.
Domestic managers are optimistic about JPIC and see Yucho and Kanpo – as the banking and insurance units are known locally – as potential business partners. Gregory Hara, chief executive of J-STAR, says: “We see JPIC as co-investors. And this provides us a chance to work on slightly larger transactions than we would have done.”
Mark Chiba, group chairman and founder of North Asia-focused The Longreach Group, also notes: “It’s very good for the ecosystem. Although traditionally conservative in their investments, the fact that they are interested in not just being an LP but also co-investing and trying to develop that capability is a very strong signal for our asset class. Private equity has arrived in Japan and it will grow.”
The market sentiment on JPIC, however, is not all positive. “Don’t expect too much from JPIC,” a Tokyo-based manager tells us, “because they will be passive investors”. Meanwhile, another GP is sceptical about the investment team’s experience and expects the fund “to be managed in a bureaucratic and orthodox way”.
Like most institutional investors, the move into direct investing comes with specific challenges and requires a different skillset not typically found inside the firm, such as in-house talent for deal sourcing and monitoring of opportunities. The ability to execute a co-investment successfully also requires operational capabilities.
Shimizu says, however, that JPIC has been preparing for this for the last year. “The investment division of the bank itself has been implementing market-based compensation schemes. The new investment team for JPIC likewise adopts the same standard.”
What’s more, JPIC has been beefing up its team since February. Among the new hires are six senior investment professionals, which include Kei Mizukami, former head of CVC Japan, and Naoki Otani, former CIO of Revamp Corporation who also spent 10 years at Unison Capital, Shimizu says. “We’ve also hired Tetsuro Onitsuka, who is the former head of TPG Japan. You’ll find that everyone has had years of experience on the investment side.”
He points out they now have a team of around 20 people that includes investment professionals as well as mid- and back-office staff.
JPIC is positive about its co-investment dealflow and emphasises it will not compete with domestic GPs on deals. “We are pleased with how the private equity industry has welcomed our strategy. We are introduced to so many investment opportunities, not just from the GPs but also companies are approaching us directly,” Shimizu says. “In the area of buyouts, we are already considering several deals, while in venture, there are so just so many.”
In addition, he says the team is already seeing targets they are interested in across the Asia region. He points out: “US and European deals will be hard to manage because of the distance and time difference, but we are comfortable investing in Asia with the appropriate GPs.”
Japan’s business succession issue is an important investment target for JPIC. Shimizu tells us the fund will focus more on the mid- to large-cap companies and will pick up minority stakes, ranging from $10 million to $20 million on the smaller end and between $100 million and $150 million for larger deals, depending on the strategy and opportunity. It also plans to tap Japan Post Insurance’s network as an LP, which will provide them with “very good dealflow”.
Along with succession-driven deals, JPIC will also focus on carve-out opportunities, such as domestic manufacturing-related companies that are forced to improve their return on equity via the revised Corporate Governance code.
And when it comes to regional revitalisation, he shares that it will focus more on service sectors in addition to succession-related investment opportunities. “Currently the service sector accounts for about 70 percent of Japan’s $5 trillion economy. When you compare Japan’s services sector to the US, however, the return on equity is just half of the US market. If we double up our productivity, we could have another $2 trillion added to the economy. I believe this is a very big deal, and a big space for us to look into.”