ASEAN Investment Flash Japan March 2015

Transcription

1 ASEAN Investment Flash Japan March Reciprocus

2 Chairman s Message Dear readers, In our last few updates, I have shared with you our endeavour to establish Reciprocus in the Japan-ASEAN nexus. The effort has not only helped us grow our roots in Tokyo, but has also recently been an opportunity to help our clients to invest in greater capabilities for markets like Australia and the Philippines where we are assisting them undertake expansion initiatives. We have also become more active in Singapore s start-up scene in recent months, with our Vice President Robert MacPherson s appointment to chair the Singapore International Chamber of Commerce s entrepreneurship committee. In our core business of M&A, we are excitedly anticipating the completion of a pending acquisition in Europe by a local Singaporean SME as we assist in final negotiations and the drafting of a final shareholders agreement. As always, thank you for following along our exciting journey and we hope you find our latest report on the Land of the Rising Sun insightful. David Emery Founder and Chairman Reciprocus International Pte Ltd Letter from the Editor We see qualitative changes occurring as a result of the stabilization formulas undertaken through Abenomics, which have loosened the economic noose of a decade long inflation that strangled Japan since the burst of Nikkei. While the path forward radiates with greater optimism, the journey, however, will still be gripped by emerging areas of complexity coinciding with recent political economic constraints. Quantitative easing measures have consequently weakened the weak Yen, while geopolitical tensions, such as the Diaoyu/Senkaku island dispute with China, have translated into bouts of uncertainty among Japanese players with global expansion aspirations. Despite these challenges, however, we see many Japanese investors and corporates deciding to chart a new course to ASEAN and India, one that largely circumvents China in the process. Under President Abe, Japan s Ministry of Foreign Affairs has aggressively strengthened political, security and economic ties with India. This has to a great extent contributed to Japan s US$ 15 bn worth of FDI to India in 2013, earning them a spot as the country s 4 th largest investor. Meanwhile, Japan has also doubled down on ASEAN, increasing FDI by over 100% since 2012, while significantly pulling back on new investments into China. However, as the Yen now hits 7 year lows, we are increasingly seeing the Japanese mid-market move forward with interest in FDI bets being replaced by a greater appetite for franchising and the forming of strategic partnerships. In our opinion, this a shrewd strategy that effectively reconciles the I consider it to be a historical inevitability that Japan and ASEAN would become true partners and an inseparable community surrounded by a single sea. President Abe, December 2013 mid-market s need to increase foreign earned revenue, while mitigating concerns about the Yen s depreciation. Such strategies will break dependency on the domestic market and still allow for sustained growth amid the slower than expected emergence from the recent recession. The recession was triggered by an April 2014 VAT hike which temporarily curbed the flow of consumer spending. Since then, the government has looked to aggressively strengthen its efforts to take advantage of the resulting cheaper Yen in order to increase foreign investment. To that end, they are looking to further incentivize foreign players by establishing National Strategic Special Zones, opening up more accessible channels for regulatory reform requests through JETRO, and relaxing criteria for foreign work visas in a bid to attract greater levels of talent from abroad. We are seeing high levels of interest among real estate, tourism, and renewable energy sectors particularly among foreign corporates, with the latter driven by strategic policy moves to reduce reliance on imported energy. As a result, hydroelectricity and solar energy is currently booming with a 33% expected growth in total capacity for With widespread expectations that the Bank of Japan will announce more upcoming stimulus to achieve its higher inflation target of 2%, pressure on the Yen will remain. As such, this will discourage some outward investments, but incentivize a greater renewal of inbound interest. Although Japan is not yet moving ahead at full-throttle, it has broken free from a lost decade of growth and is on a path towards achieving a future renaissance. Going forward in 2015, we recommend close monitoring of potential growth accelerators and their respective on-going negotiations, such as the Trans-Pacific Partnership and ASEAN Integrated Economic Community both of which will benefit Japan greatly in the coming years. Robert MacPherson Vice President and Editor Reciprocus International Pte Ltd 2015 Reciprocus

3 Table of Contents Introduction Country Profile 1 Economy 2 Investing in Japan Factors Driving Investments 3 FDI in Japan 5 Financial Markets in Japan Banking Sector 7 Tokyo Stock Exchange (TSE) 8 Insurance Sector 9 Private Equity in Japan Private Equity Market 11 SWOT Analysis of the PE Industry 14 Appendix 15 Disclaimer: This report is an aggregation of available information gathered from extensive research done on the net. While Reciprocus endeavors to ensure accuracy of information, we do not accept any responsibility for the consequences of any actions taken on the basis of the information provided and any loss or damage to any person resulting from it Reciprocus

4 JAPAN Country Profile Map Eastern Asia, island chain between the North Pacific Ocean and the Sea of Japan, east of the Korean Peninsula Among world's largest and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, processed foods Flag Figure: 1 About Japan Capital City - Tokyo Religions Shintoism 83.9%, Buddhism 71.4%, Christianity 2%, other 7.8% Figure: 2 White with a large red disk (representing the sun without rays) in the centre Population Languages Japanese Administrative Divisions 47 prefectures; Aichi, Akita, Aomori, Chiba, Ehime, Fukui, Fukuoka, Fukushima, Gifu, Gunma, Hiroshima, Hokkaido, Hyogo, Ibaraki, Ishikawa, Iwate, Kagawa, Kagoshima, Kanagawa, Kochi, Kumamoto, Kyoto, Mie, Miyagi, Miyazaki, Nagano, Nagasaki, Nara, Niigata, Oita, Okayama, Okinawa, Osaka, Saga, Saitama, Shiga, Shimane, Shizuoka, Tochigi, Tokushima, Tokyo, Tottori, Toyama, Wakayama, Yamagata, Yamaguchi, Yamanashi Main Industries Age Structure Figure: years: 13.2% (male 8,681,728/female 8,132,809) years: 9.7% (male 6,429,429/female 5,890,991) years: 38.1% (male 23,953,643/female 24,449,655) years: 13.2% (male 8,413,872/female 8,400,953) 2015 Reciprocus 1

5 65 years and over: 24.8% (male 14,218,655/female 18,531,653) (2014 Estimates) Economy Transparency International s Corruption Perception Index (2013) Rank 18 out of 177 countries Global Competitiveness in Rank 6 put of 144 economies Global Enabling Trade Index 2014 (World Economic Forum) Rank 13 out of 138 countries Figure: 4 International Organization Participation ADB, AfDB (non-regional member), APEC, ARF, ASEAN (dialogue partner), Australia Group, BIS, CD, CE (observer), CERN (observer), CICA (observer), CP, EAS, EBRD, EITI (implementing country), FAO, FATF, G-20, G-5, G-7, G-8, G-10, IADB, IAEA, IBRD, ICAO, ICC (national committees), ICRM, IDA, IEA, IFAD, IFC, IFRCS, IGAD (partners), IHO, ILO, IMF, IMO, IMSO, Interpol, IOC, IOM, IPU, ISO, ITSO, ITU, ITUC (NGOs), LAIA (observer), MIGA, NEA, NSG, OAS (observer), OECD, OPCW, OSCE (partner), Pacific Alliance (observer), Paris Club, PCA, PIF (partner), SAARC (observer), SELEC (observer), SICA (observer), UN, UNCTAD, UNDOF, UNESCO, UNHCR, UNIDO, UNMISS, UNRWA, UNWTO, UPU, WCO, WFTU (NGOs), WHO, WIPO, WMO, WTO, ZC World Rankings World Bank Doing Business (2014) Rank 27 out of 189 countries Currency Japanese Yen (JPY), Symbol - GDP Composition by Sector (2012 estimates) Agriculture: 1.1%, Industry: 25.6%, Services: 73.2% (2013 Estimates) Budget Highlights Revenues: US$ trillion, Expenditures: US$ trillion (2013 estimates) Nominal GDP growth rate will be 3.3% under the expectation that movement towards economic recovery is ensured Consumer Price Index will be increased by +3.2% from the previous fiscal year, progress is expected towards exit from deflation Primary balance of the General Account of national government will be improved by JPY 5.2 trillion yen, more than targeted in Medium-term Fiscal Plan both in FY2014 and FY Reciprocus 2

6 INVESTING IN JAPAN Figure: 5 Huge Market Potential Japan is a developed nation; the country is full of business opportunities due to its strong ties with the other countries across the globe. In recent years, the growing economic power of other Asian countries has placed Japan in a central role - forming a gateway to Asia for many foreign investors Figure: 6 Japan is: o Recognized as a leading centre for innovation o The main power behind Japan's economy is its manufacturing industry o Boasts of highly attractive business and living environment, in terms of safety, medical services o Japan has some cultural philosophies that they apply to their economy and that could possibly be a reason for much of their success in the economic sector Figure: 7 Supportive Economic Policies Due to the importance of overseas investments, the Japanese government undertakes various activities to help developing it. The government policies are friendly toward foreign investors Figure: 8 Inflation In December 2013, the new government announced an ambitious policy framework to end decades-long deflation and raise growth 2015 Reciprocus 3

7 After decades of mild deflation, the Bank of Japan (BoJ) has entered unchartered policy territory by targeting 2% inflation The three-arrows of Abenomics approach (aggressive monetary easing, flexible fiscal policy, and structural reforms) called for a coordinated policy effort by the BoJ and the government to jumpstart the economy and create sustained growth synergies through bold structural reforms Political stability The politics of Japan is conducted in a framework of a multi-party parliamentary representative democratic Constitutional monarchy where the Emperor acts effectively as the symbolic Head of state, and the Prime Minister acts as the Head of government and the Head of Cabinet. Since these co-exist side by side, this ensures political stability in the country Excellent Infrastructure Japan's industrial structure is similar to that of the US and Europe Skilled Workforce The Japanese are extremely skilled, hardworking and committed. The country s culture supports high levels of loyalty to the workplace and encourages life-long ties to one single enterprise, which in turn contributes to workers' experience and skill Innovative, Unique Products Japan is known worldwide for its new and advanced technologies and products. It is not just a world trend-maker and gadget superpower, but it is also one of the most popular countries for experiments and testing of new products, given its R&D capabilities Science and technology related research is conducted spiritedly in Japan. The country is also very aggressive in R&D and innovation, and has filed large number of patents, many of which have high distribution value internationally Consumer spending to rise - Japanese sales tax The new bill raised the sales tax to 8% in April The government also plans to raise the tax again to 10% in October The government believes that increasing the tax will help pull the Japanese economy out of deflation and reverse decades of falling prices Safe Pleasurable Living Environment Japan manages to obtain many positive western culture habits. Visitors to Japan can enjoy luxurious, pleasurable lifestyle, clean urban environment, effective social system and crime-free environment The Investments landscape in Japan The appeal of the Japanese market is increasing through the economic growth under the leadership of Prime Minister Shinzo Abe The government is strengthening its efforts to attract foreign companies and foreign visitors, aiming to open the Japanese market and further business expansion 2015 Reciprocus 4

8 The Japan External Trade Organization (JETRO) is a government-related organization promoting mutual trade and investment between Japan and the rest of the world JETRO assists foreign investors with information on all aspects of doing business in Japan, by providing expert consultation and offering free temporary office space in major business areas across the country The "3 Windows on Japan" is on the value of setting up new businesses in Japan. Advantages for foreign companies when investing in Japan include: (1) Innovation Hub: Japan has great potential to become a regional hub and a R&D center in Asia, as exchanges of personnel, goods and money accelerate within Asia (2) Business Platform: Japan plays an important role as a "bridge nation" connecting Asia and the world, which contributes to Asia's growth (3) Trendsetter: Japan is a huge market with one of the world's largest economies. In addition, sectors with large growth potential exist in Japan, including health and tourism markets Important sectors of growth in the country include: renewable energy/secondary battery, life sciences and ICT Through the designation of National Strategic Special Zones (NSSZ) and tax reforms, the government is aiming to double Japan s investment balance from JPY 17.8 trillion to JPY 35 trillion by Six areas are designated as NSSZs which forms a part of the bold regulatory and institutional reforms to promote a range of international business and advanced industries The idea of the NSSZs is to designate some areas to be model cities, free from opportunity-narrowing regulations Foreign Direct Investments (FDI) in Japan FDIs in Japan displayed some interesting trends in recent years As far back as 2003, the Japanese government realized the importance of FDIs in boosting the growth of the nation's economy A host of factors contributed towards this increment in inward FDI flow for Japan over the years. Some of these factors include: o Deregulation which led to the opening up of the various sectors of the Japanese economy for investment of foreign capital o The appreciating Yen rendered Japanese assets more valuable o An increased occurrence of corporate bankruptcies resulted in foreign acquisition of many business companies in Japan o Mergers and Acquisitions were facilitated by the setting up of the requisite legal framework 2015 Reciprocus 5

9 o An increasing number of shares were available in the market due to a fall in cross-shareholding Japan s outward FDI (balance of payments basis, net flows) for 2013 rose by 10.4% year-on-year to US$ 135 billion, achieving an increase for the third consecutive year. It recorded a historical high since the last peak in 2008 (US$ 131 billion). The United States was Japan s largest investment partner with outward FDI value of US$ 43.7 billion (36.7% growth). While the investment toward ASEAN marked a record high of US$ 23.6 billion, those toward China decreased by 32.5% to US$ 9.1 billion JETRO s Global Trade and Investment Report 2014 Key Points World trade and investment on its way to recovery. Moderate resurgence of world economy Japanese trade marks deficits for three consecutive years Japanese outward FDI reaches record high Realization of Free Trade Area of the Asia Pacific (FTAAP) through the promotion of Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) Japan s inward FDI for 2013 (balance of payments basis, net flows) increased 33.9% year-on-year to US$ billion, registering a net inflow for the second consecutive year Asian consumer markets becoming solid both in scale and quality Strategic development of promising overseas markets Investments from North America underwent a reversal from net outflow in 2012 to net inflow in 2013 (US$ 1.4 billion). In Asia, the fall in investment in the finance and insurance sectors made an impact, contributing to a significant drop in FDI For years, the ratio of outstanding FDI in Japan to GDP was the lowest among industrialized countries, and still trails many of the emerging economies in Asia and other regions New developments among Japanese companies seen in reorganization of their overseas bases Foreign-affiliated companies regard Japan s expensive business costs as problematic. Signs of improvement can also be seen Nationwide effort necessary to increase inward FDI into Japan Challenges Japanese corporations face in making Japan hub of international business circulation 2015 Reciprocus 6

10 FINANCIAL MARKETS IN JAPAN Financial System in Japan The main elements of Japan's financial system are similar to that of any other industrialized nation: a commercial banking system, which accepts deposits, extends loans to businesses and deals in foreign exchange; specialized government-owned financial institutions, which funds various sectors of the domestic economy; securities companies, which provides brokerage services, underwriting of corporate and government securities, and deals in securities markets; capital markets, which offers the means to finance public and private debt and to sell residual corporate ownership; and money markets monetary policies by adjusting the level of money stock to promote the sound development of the economy The Bank conducts operations in the field of international finance, such as foreign exchange transactions, as well as business related to assisting foreign central banks and international organizations in their investments in Yen In January 2013, the Government and the BoJ decided to strengthen policy coordination in order to overcome deflation and achieve sustainable economic growth with stable prices Types of Banks Banking The Bank of Japan (BoJ) is the central bank of the country The Bank of Japan Act (the Act) sets the Bank's objectives "to issue bank notes and to carry out currency and monetary control" and "to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of stability of the financial system" As the central bank, the Bank of Japan (i) issues Bank of Japan notes, or the currency of Japan; (ii) manages and stores treasury funds and provide loans to the government; (iii) provides deposit and loan services to general financial institutions; and (iv) implements Japan's financial system comprises of private and public financial institutions Private financial institutions include those that accept deposits (banks, credit depositories, agricultural cooperatives, etc.) and those that do not (securities companies, insurance companies, etc.) Private banks can be divided into several categories, based on factors such as their business functions (Refer Figure: 9 for the types of banks in Japan) The distinction between city, regional banks and member banks of the Second Association of Regional Banks (regional banks II) is not a legal one, but is a 2015 Reciprocus 7

11 customary classification for the purposes of administration and statistics Group and Sumitomo Mitsui Financial Group City banks are large in size, with headquarters in major cities and branches in Tokyo, Osaka other major cities and their immediate suburbs Regional banks are usually based in the principal city of a prefecture and they conduct a majority of their operations within that prefecture and have strong ties with local enterprises and local governments Like traditional Regional Banks, Regional Banks II serve smaller companies and individuals within their immediate geographical regions. Most of these banks have converted from mutual savings banks to ordinary commercial banks These mergers/integrations were made possible by the provision of the legal and tax system, which enabled banks to undergo large-scale organizational transformations, in addition to the changes in the management environment requiring banks to deal with nonperforming loan problems and cope with international competition These industry-wide reorganizations were not limited to major banks but also spread to Regional Banks, resulting in the establishment of holding companies in some cases which cover regions broader than before Tokyo Stock Exchange (Refer Figure: 10 for the number of financial institutions in Japan) Industry Reorganization From 1999, non-financial institutions began to enter the banking business by establishing new types of banks such as banks specializing in settlements or Internet Banks. In addition, banks focusing on lending to small and medium-sized enterprises and start-up companies appeared In the 2000s, a succession of mergers/integrations occurred over a short period of time to create Mega Banking Groups such as the Mizuho Financial Group, Mitsubishi UFJ Financial The Tokyo Stock Exchange (Tōshō) or TSE for short, is the third largest stock exchange in the world by aggregate market capitalization of its listed companies In July 2012, a planned merger with the Osaka Securities Exchange was approved by the Japan Fair Trade Commission. The resulting entity, the Japan Exchange Group (JPX), was launched on 01, January 2013 The main indices tracking the TSE are the Nikkei 225 index of companies selected by the Nihon Keizai Shimbun (Japan's largest business newspaper), the TOPIX index based on the share prices of First Section companies, and the J30 index of large 2015 Reciprocus 8

12 industrial companies maintained by Japan's major broadsheet newspapers TSE operates four basic markets: the First and Second Sections, Mothers, and JASDAQ. The First Section represents a main board of TSE for a number of globally operated companies whose shares are traded with high liquidity The Second Section is an equity market for second tier and medium-sized companies with established profiles and business bases The third market, Mothers (Market of the high-growth and emerging stocks), lists emerging companies with high growth potential The fourth is JASDAQ (Japan Association of Securities Dealers Automated Quotations), which initially launched as an OTC market The Tokyo AIM Market was subsequently incorporated into TSE, which restarted the market as the newly branded TOKYO PRO Market, effective from 01, July 2012 The TOKYO PRO Market limits its participation to professionals (Specified Investors). This allows it to apply less restrictive standards in terms of disclosure language, disclosure documents, accounting standards etc. compared to traditional markets Changes in policies of the Bank of Japan in April 2013 were regarded as affecting stocks and markets, and the Nikkei Stock Average at the end of 2013 was JPY 16,291.31, representing an increase of 56.7% as compared to the end of 2012 (JPY 10,395.18) and the first significant gain in 41 years. However, this value fell for four consecutive months starting in 2014, and the Nikkei Stock Average was JPY 14, at the end of April 2014 (Refer Figure: 11 for the market structure of TSE) Insurance While new listings on the main board are generally assigned to the Second Section, some companies with outstanding liquidity prospects may be directly assigned to the First Section The Law on the Establishment of the Financial Services Agency (LEFSA) defines the Financial Services Agency (FSA) as the authority generally responsible for supervision of the insurance business in Japan In June 2009, the TOKYO AIM Market was established as a joint venture between TSE and the London Stock Exchange in conjunction with the professionaloriented market scheme contemplated in the amended Financial Instruments and Exchange Act in 2008 The Insurance Business Act (IBA), the primary legislation through which the insurance business is regulated, identifies some insurance activities as being outside its scope and therefore not supervised by the FSA 2015 Reciprocus 9

13 The insurance activity of cooperatives is supervised by various ministries. As a consolidated supervisor, the FSA has been able to use economies of scale; however the large insurance sector served by cooperatives is supervised by independent departments within several ministries The insurance industry in Japan is an important part of the financial sector Japan is the second biggest insurance market in the world after the US and generates nearly 20% of global premiums Japan Post Insurance (JPI) accounts for 21% of the life premium Foreign insurers are present as branches, subsidiaries, and representative offices and are active in all lines of business. About one-half of the insurers operating in the Japanese insurance market are now foreign-owned. The preferred operating form in the life sector is through a subsidiary, and through a branch in the nonlife area. Foreign-owned companies have a 20% market share in the life sector and a less than 10% share in the non-life sector Independent Insurance Agents of Japan, Inc., The Small Amount & Short Term Insurance Association of Japan, Japan Insurance Brokers Association, Loss Adjusters Association of Japan and the All Japan Independent Adjusters Association (Refer Figure: 12 for the various insurance players in the country) Life products are mainly traditional individual endowments, whole life, and term insurance The non-life sector is dominated by motor insurance As of 01, September 2014, a total of 52 general insurance companies were operating in Japan; a total of 30 companies were licensed as domestic insurers, including 7 foreign capital domestic insurers, while 22 companies were licensed as foreign insurers Total of direct premiums, including the savings portion written in fiscal 2013 was JPY 8,568.8 billion, up 4.6%. The total of net premiums written was JPY 7,771.3 billion, up 5.4% There are also cooperatives, whose services include life and nonlife insurance (Refer Figure: 13 for direct premiums & net premiums over 2013) General Insurance Organizations (01, September 2014): General Insurance Rating Organization of Japan, Japan Atomic Energy Insurance Pool, The General Insurance Institute of Japan, The Foreign Non-Life Insurance Association of Japan, Non-Life Insurance Policyholders Protection Corporation of Japan, 2015 Reciprocus 10

14 PRIVATE EQUITY IN JAPAN Introduction Over the years, the Japanese economy has transformed Today, the country is less viewed as a slow-growth environment, but instead has emerged as an upcoming hub for investments on the back of a highperforming stock market, growing exports and a welcomed respite from the risks present in the other emerging markets in Asia The Japanese private equity market continues to be dominated by small-tomidcap transactions and deal flows are strong on the back of underperforming companies looking to sell against the backdrop of an improved economy, and baby boomer founders reaching the retirement age According to various research studies, foreign fund managers find that private equity deals clash with Japanese corporate culture, inflexible corporate structure, change resistance, risk aversion, and a fundamental lack of understanding about the nature of private equity making Japanese executives less than receptive to investment by foreign funds An analysis of the overall trends in the Japanese PE sector, the last two years have paved the way for significant change, helping to revitalize many of Japan's once stagnant sectors Fund managers can find further evidence of evolving corporate attitudes among other recent deals. For example: Panasonic's sale of its Sanyo digital camera division to Advantage Partners in late 2012 for US$ 1.3 billion Statistics According to industry figures, in 2014, Japan recorded 101 private equity deals amounting to US$ 2.8 billion through October. This compares with 90 deals worth US$ 4.7 billion in the same period last year KKR s September 2013 acquisition of Panasonic's health care unit: The divestment allowed Panasonic to offload its non-core business and strengthen its balance sheet. The sale, aside from a record deal for KKR in Japan, was a symbolic victory for foreign private equity, which has typically been shunned by Japanese sellers In late July 2013, the Carlyle Group launched its third Japan focused fund to raise US$ 1 billion Japan-focused private equity funds raised US$ 5.3 billion last year, or 1% of the global total (Refer to Figures 14 & 15: for PE investments in Japan by industry (2013) & PE investments in 2013 (Appendix)) 2015 Reciprocus 11

15 Source: AVCJ Research Figure: 14 Unique Growth Opportunities According to data from Thomson Reuters, compared with markets in North America and Western Europe, Japan has a significantly lower penetration of private equity assets, accounting for less than 0.05% of its GDP. One can compare this with North America's 0.7% and Western Europe's 0.2%; the Japanese market presents significant room for growth The country also offers an alternative for private equity funds looking away from emerging markets According to statistics, private equity fund raising for emerging markets fell by 30% in 2013, compared with Slowing growth in China, Russia, Thailand and Ukraine have given rise to investor woes about the future growth prospects of these markets Japan offers several key growth sectors that are attractive to fund managers, thereby enabling an enhanced environment for private equity investing Amid the country s rapidly aging population, companies that deal in medical-related fields like pharma, medtech and services, can grow with a level of specialization unrivalled in Asia. As the aging population continues to grow, demand for healthcare is expected to be robust In line with healthcare growth, the aging population in Japan will increasingly require better financial services to help manage their retirement needs, over the 2015 Reciprocus 12

16 course of increasingly long lifespans. This, in turn, will create robust opportunities for private equity investment in the financial services sector Most Japanese PE deals are between US$ 10 and US$ 50 million, with most opportunities coming from SMEs While Japan is still re-building from the aftermath of the 2011 earthquake and tsunami, specific opportunities within energy and infrastructure have also emerged. Japan's Government Pension Investment Fund has announced plans to invest up to US$ 2.7 billion in infrastructure assets over the coming five years Japanese buyouts are expected to grow with private equity firms supporting midcap companies in their overseas growth ambition, while domestically large-cap corporate restructurings may mean spinoffs and divestitures One challenge for larger private equity firms seeking to buy non-core assets from large corporates is competition from INCJ Similarly, at the end of 2013, Mitsubishi launched Japan's first energy equity fund. This chimes with the 73% surge in Japanese renewable energy investment in 2012 (Bloomberg) Looking Forward Japan s PE market has been gaining renewed attention because many founder-owned enterprises still haven t handed secured their successors INCJ s increasingly important role as a domestic consolidator has eroded opportunities for private equity firms While Japanese institutional investors have been known to be sceptical about private equity opportunities given the country s past track record, some are returning to Japan to seek opportunities amid challenging conditions in other markets such as China and India Private equity fund managers with access to an experienced and knowledgeable team will be more successful sourcing, evaluating and executing deals Governmental agencies in Japan have also recently become major investors in PE funds, including the Organisation for Small and Medium Enterprises and Regional Innovation, Japan (SMRJ) and Innovation Network Corporation of Japan (INCJ) A number of foreign private equity firms have shown their intent to focus on Japan in the past year. In late July 2013, the Carlyle Group launched its third Japan focused fund to raise US$ 1 b.9 KKR has also shown renewed interest in Japan, saying that a portion of its second Asia- Pacific fund worth US$ 6 billion would be dedicated to Japan-focused investments 2015 Reciprocus 13

17 SWOT Analysis Strengths New government policies under Abenomics are encouraging private investment in addition to relaxing monetary policy, actions that are expected to fuel deal-making Better corporate governance has opened the door to opportunities for private equity investment and an improved appreciation for shareholder-oriented culture Japan offers investors an alternative for PE funds looking away from emerging markets Weakness Japan is a difficult market to access, due to language and cultural barriers, the relationship-driven business culture, high tax rates and business costs Cost of capital is cheap, thus corporate owners generally do not need expensive PE capital After investing, PE managers often have to change not only the top management team but also middle management members, to effectively enhance corporate governance Opportunities In Japan, the private equity industry including buyout and venture capital funds is expected to play a key role in helping the country rebuild its infrastructure after the devastating earthquake and tsunami in March 2011 In order to increase investments in Japan, progress has been made toward reviewing existing corporate governance structures, such as through the introduction of independent external directors In 1993, foreign ownership in Japanese corporations stood at approximately 6%. By 2013, the same rose to over 28%. This is indicative that the market has become more receptive to the these concepts of improved corporate governance and shareholder-oriented ideals, in part due to this foreign investment Packed with mid-cap companies looking to expand abroad and a growing number of smaller businesses in desperate need of capital, Japan offers abundant opportunities to finance business growth or survival Japan s main strength is in its high-tech industry and consumer space, which is likely to see private investment in the next few years Threats Industry experts caution that changes brought by Abenomics, such as a declining Yen, increased consumption taxes and shifting labour rules, will be detrimental to mid-size companies 2015 Reciprocus 14

18 APPENDIX Types of Banks in Japan Figure: 9 Source: Japanese Bankers Association Number of financial institutions in Japan Source: Japanese Bankers Association Figure: 10 * Excluding branch offices of foreign securities firms in Japan 2015 Reciprocus 15

19 Market structure of TSE EQUITY MARKET 1st Section Large Sized Companies - 1,805 Companies JASDAQ JASDAQ STANDARD Companies MOTHERS 195 Companies 2nd section Medium Sized Companies Companies TOKYO PRO MARKET 6 companies JASDAQ GROWTH - 48 Companies Various Sectors & Growth Companies Figure: 11 Source: Tokyo Stock Exchange Insurance players in Japan Source: General insurance Association of Japan Figure: Reciprocus 16

20 Source: General insurance Association of Japan Figure: 13 10, Total PE investment in , , , , , , Amount (in US$ mn) No. of Deals Source: Asian Venture Capital Journal Figure: Reciprocus 17

21 For More Information Contact: Robert MacPherson Vice President Reciprocus International Pte Ltd 10 Anson Road, #10-22, International Plaza, Singapore Mobile: Tel: Fax: Website: Reciprocus 21