Most general partners are familiar with the prevailing tailwinds characterising the deal landscape in Japan: aging demographics are creating an influx of acquisition targets for sponsors to step in and fill the “succession” void, while the pandemic has accelerated corporate carveout trends that were already afoot.
A burgeoning venture capital market, meanwhile, is providing oxygen to a reinvigorated technology and start-up ecosystem, which will be aided by Prime Minister Yoshihide Suga’s focus on digital transformation.
As the opportunity broadens for GPs to become more active, Japan also represents one of the few developed markets left in which GPs can build new investor relationships on the ground floor. Many institutional investors are new to private market investments, so the opportunity is ripe to build relationships with these investors as they initiate and expand allocations to the asset class.
Equally important, bellwether institutions in Japan, such as the Government Pension Investment Fund and Japan Post Bank, have built out their own alternatives programmes, thereby eliminating the stigma that private market investments are inherently risky or without appropriate reward.
All the pieces are seemingly in place for GPs looking to make inroads to raise institutional capital in the country. There is a catch, however. The fundraising market in Japan is unlike any other. Beyond just strict licensing requirements, other more nuanced considerations pose challenges, ranging from expectations for more frequent contact and communication (in the local language, of course) to a bias for name-brand funds perceived to be less risky.
A paradox adds further complexity. Although LPs are looking to boost their exposure to alpha-generating assets, they remain quite conservative, particularly amid a high-valuation environment. There is also a general reluctance to back emerging managers that haven’t encountered full economic and credit cycles.
For these reasons, GPs that are looking to diversify their investor base will want to keep certain considerations in mind.
1 Get to know the gatekeepers
As is to be expected, LPs are leaning heavily on consultants, fund-of-funds managers and other gatekeepers to make introductions and help initiate new relationships beyond just the biggest brands. One trend that characterises the Japanese market is that some LPs will even bring in two or more gatekeepers, usually pairing a local firm and a global consultant.
2 Communicate, with granularity
Although LPs in Japan will leverage consultants to initiate relationships and better understand a GP’s unique investment edge, they are not looking to ‘outsource’ their GP relationships altogether. On the contrary, they are seeking closer relationships, with more communication, more transparency and more granularity in reporting. This level of scrutiny speaks to investor ambitions to graduate from fund-of-funds to more direct fund and even co-investment exposures.
The conservative bent of most Japanese LPs also translates into demands for a higher frequency of communication and more details in reporting. For those earlier in their journey, conferences and even digital events can be effective ways of building their brands in the market and create relationships with prospective LPs that are actively seeking information on the asset class.
3 Find a cornerstone investor, then branch out
Generally, GPs will focus their fundraising efforts on the very largest LPs in Tokyo and ignore other areas, where investors may be earlier in the development of their alternatives portfolios. To do so, however, is to overlook a compelling opportunity to get in on the ground level with LPs newer to the asset class and seeking to follow in the footsteps of their larger peers. In Japan, cornerstone investors add credibility and open doors elsewhere in the country.
Hiroshi Nishimuro leads Monument Group‘s Japan fundraising efforts and general partner relationships in Tokyo. He joined the global placement agent in 2021 after about a decade at Morgan Stanley Private Equity Asia.