Two pioneers of Japanese secondaries target LP interests with joint fund

Japan’s regional banks have been expected to be a key source of secondaries dealflow after piling into alternatives over the past decade.

Two pioneers of Japanese secondaries have teamed up to provide the country’s burgeoning limited partner community greater access to liquidity.

Reijiro Samura AI Capital
Samura: We’re in discussions over Japanese GP-leds

Alternative Investment Capital, a Japanese fund of funds manager, has partnered with domestic secondaries and growth equity firm WM Partners to launch a jointly managed fund, per an October statement.

Japan Private Equity Opportunity 2021 is backed by AI Capital shareholder Sumitomo Mitsui Banking Corporation and WM shareholder Development Bank of Japan, AI Capital president Reijiro Samura told Secondaries Investor. It is seeking up to ¥10 billion ($87.8 million; €75.6 million) from domestic investors and has held a first close on an undisclosed sum.

“In Japan, the secondaries market is still very small,” Samura said. “There’s a few global secondaries players in the world, but they’re too big so they cannot take a small portion of LP [interests] that Japanese investors want to sell.”

Both firms have pedigree when it comes to secondaries. WM spun out in 2013 from Japan Asia Investment Company, which had been active in secondaries since 2002. AI Capital’s Samura was head of secondaries at Ant Capital Partners, one of the country’s largest secondaries players, from 2005 to 2013.

The new fund will primarily target LP interests from domestic investors and have the flexibility to participate in GP-led transactions.

“I think there are many chances in the GP [space] in Japan, so we’d like to start preliminary discussions with Japanese GPs on how we can work together in GP-led secondaries,” Samura said. “WM Partners has a great network in the venture capital industry and AI Capital has great relationships with Japanese buyout GPs.”

Softening the blow

Japan’s regional banks have been expected to be a key source of dealflow for LP interests. Such institutions have piled into private equity over the past decade to help soften the blow of negative interest rates and a dwindling rural client base, as affiliate title Private Equity International reported in 2019.

Regional banks had ¥329 trillion ($3 trillion; €2.7 trillion) of total assets as of March 2019, according to the Chiginkyo, the Regional Banks Association of Japan. A Bank of Japan report showed that alternatives and investment trusts accounted for more than 4 percent of regional bank assets in 2018, up from around 2.5 percent five years prior.

“For the last five years, 10 years, Japan regional banks and pension funds started private equity investment on a primary basis, so their exposure has become bigger and bigger and I think potentially they’d like to have a liquidity means, especially the regional banks,” Samura said. “They’re subject to regulation and also they’d like to make new commitments. Right now they don’t know how to liquidate their portion, so we’ve started communication with some regional banks.”

Complying with banking regulations has spurred secondaries sales in Japan in the past. Investment firm Ardian won a competitive process in 2019 to acquire around $5 billion of limited partnership interests from Japan’s Norinchukin Bank, Secondaries Investor reported at the time. The portfolio was sold to comply with Japanese regulations that affected banks with overseas operations, sources told Secondaries Investor at the time.

Still, Japan’s secondaries market remains comparatively small. This is despite an accounting quirk in the Financial Services Agency’s Generally Accepted Accounting Principles that could present an opportunity for secondaries buyers and sellers alike.

“In Japanese GAAP, unlike US or international accounting, there’s not mark to market accounting – it’s book accounting,” Samura said. “Net asset value should be lower than market value, so maybe in that sense sellers can enjoy a premium to the book value but a discount to the fair market value. Some GPs have international LPs and can give fair market value, but most domestic GPs are given only Japanese GAAP accounting.”