Coverage initiated on: 2020-05-11 Research Coverage Report by Shared Research Inc. Last update: 2021-08-26
8595 JAFCO Group
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Executive summary ...... 3. Key financial data ...... 5. Recent updates ...... 6. Trends and outlook ...... 7. Quarterly results ...... 7. Business ...... 1.2. Business overview ...... 1.2. Business model ...... 2.2. Market and value chain ...... 3.2. Scale of the VC investment market in Japan ...... 3. 2. Major providers of risk capital ...... 3.3. Trends at competing companies ...... 3.4. Strengths and weaknesses ...... 3.7. Historical performance and financial statements ...... 3.9. Income statement ...... 3.9. Balance sheet ...... 4.0. Cash flow statement ...... 4.1. Historical performance ...... 4. 1. Other information ...... 5. .3. News and topics ...... 5.8. Company profile ...... 6.0.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 2 Executive summary Business overview
JAFCO Group (“JAFCO”) is the largest specialist venture capital company in Japan. JAFCO raises capital from investors and allocates it to the funds (investment limited partnerships) it establishes. These funds then make equity investment in startups and other high-potential unlisted companies to provide growth capital. JAFCO’s main businesses are Japanese domestic venture capital (VC) investment (37.9% of total investment amount), domestic buyout (BO) investment (27.6%), VC investment in the US (23.3%), and VC investment in Asia (excluding Japan; 11.2%) (as of FY03/21). Total commitments to JAFCO- managed funds stood at JPY451.5bn in FY03/21. Annual investment of JPY32.8bn represents a 10.2% share of the Japanese VC market. CAGR (FY03/11 to FY03/21) was 3.6% for revenue and 12.2% for operating profit.
JAFCO was established in 1973 by three financial institutions, led by Nomura Securities (now Nomura Holdings [TSE: 8604]). In 2017, it acquired and cancelled all shares held by its largest and second-largest shareholders, Nomura Holdings and Nomura Research Institute (TSE1: 4307), dissolving its capital relationship with the Nomura Group to ensure independence and transparency.
In 1982, JAFCO established Japan’s first investment limited partnership, JAFCO No. 1 Investment Partnership, which was an investment partnership under the Civil Code. This scheme became the prototype for fund management as it is practiced today. Over a history spanning more than 40 years, JAFCO has made VC investments in 4,051 companies (including 864 companies outside Japan), of which it supported initial public offerings (IPOs) of 1,012 companies (including 206 overseas companies) (as of the end of March 31, 2021).
JAFCO’s business model involves setting up investment limited partnerships (funds). JAFCO becomes the GP (general partner) of its funds and raises capital from LP (limited partner) investors. The fund term is 10 years. The company provides management support aimed at increasing enterprise value of its portfolio companies and lead them to successful exits through IPO, M&A, etc. Ultimately, the company receives capital gains along with investors through the sale of shares. Whereas a GP typically commits several percent of a fund’s total commitments, JAFCO is unique in committing around 40%, thus sharing incentives to pursue high investment returns with investors and reducing conflicts of interest.
JAFCO’s clients are mainly financial institutions and business firms that invest in its funds. On March 2, 2020, the company completed fundraising for the JAFCO SV6 Fund Series (SV6). SV6 closed at JPY80.0bn, of which JAFCO committed JPY29.1bn. Of the outside investors (75 in total), financial institutions accounted for 71%, business companies 25%, and others 4%. Outside investors invested an average of JPY700mn for 64% of the fund’s total (excluding JAFCO’s interest).
JAFCO provides value to its clients in the form of an investment product, as alternative to stocks and bonds, and stable returns. Investors who focus on long-term performance look to VC and other private equity investments (shares of unlisted companies) as alternative investment options that provide diversification. JAFCO’s funds aim to attract investors by offering relatively high and stable returns on VC investments. In fact, gross investment multiple (revenue from operational investment securities divided by cost of operational investment securities) rose from 0.8x in FY03/11, still affected by the aftermath of global financial crisis, to 3.3x in FY03/21 (2.8x in FY03/20) on the success of “highly selective, intensive investment.”
JAFCO’s revenue consists of management fees, success fees, and capital gains. Management fees are paid to JAFCO in exchange for fund management and administrative services, calculated at 2% of a fund’s total commitments. When cumulative distributions to investors exceed paid-in capital contributions, success fees are paid by multiplying 20% by the said excess amount (no hurdle rate). Cost of securities sold is the acquisition cost of portfolio companies’ shares corresponding to JAFCO’s own investments (cost of operational investment securities). Employee salaries and other personnel and welfare expenses accounted for 44.9% of SG&A expenses (FY03/21), and SG&A expenses as a percentage of revenue (five-year average) were 17.8%. Core income (management fees minus SG&A expenses) remained negative, but management fees increased following the establishment of SV6 in FY03/21 and more funds are to be established going forward.
Because JAFCO sources its earnings from fund management (management fees and success fees) and capital gains, improving fund performance leads to growth in business performance over the medium- to long-term. As key metrics, JAFCO targets gross MOIC (multiple on invested capital) of 2.5x or more (sales proceeds, including valuations of unsold portfolio companies, divided by invested capital), and net TVPI (total value to paid-in capital) of 2.0x or more (cumulative distributions plus net asset value divided by paid-in capital). As a result of financial restructuring, the total investment balance, which JAFCO had been reducing since FY03/10, bottomed out in FY03/17. Based on JAFCO’s highly selective, intensive investment strategy, Shared Research understands there is some leeway for the company to increase its average investment amount per portfolio company.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 3 Earnings trends
In FY03/21, revenue was JPY21.5bn (-27.9% YoY), operating profit was JPY9.0bn (-40.1% YoY), recurring profit was JPY11.7bn (-31.3% YoY), and net income was JPY38.5bn (+225.2% YoY). There were six JAFCO-backed IPOs (in line with other years) and capital gains fell 26.7% YoY. Net income increased YoY as the company booked JPY44.8bn in gains on the sale of investment securities (extraordinary gains) as it disposed of 39.3% of the shares it held in Nomura Research Institute, Ltd., for pure investment purposes.
JAFCO does not disclose short- or medium-term forecasts because of the nature of the venture capital business, whereby earnings are significantly affected by fluctuations in domestic and overseas stock markets and the IPO market. Strengths and weaknesses
Strengths: 1) JAFCO has built trust as a financial business based on its knowledge and expertise attested by a track record of VC investments in more than 4,000 companies and over 1,000 IPOs. 2) A strong information network enables JAFCO to identify attractive deals globally. 3) The ability to provide comprehensive, hands-on management support differentiates JAFCO from its Japanese domestic peers.
Weaknesses: 1) Retaining talent is challenging, so that costs to pass on the company’s DNA can be high. 2) JAFCO lacks VC brand strength to develop business overseas. 3) JAFCO is drawn into competition to invest in innovative IT startup companies at high valuations due to concentration of capital-rich corporate-VCs.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 4 Key financial data
Income statement (JAFCO's interest) FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Revenue 15,143 19,804 22,072 44,890 61,945 41,155 27,857 29,470 25,878 29,855 21,512 YoY -9.1% 30.8% 11.5% 103.4% 38.0% -33.6% -32.3% 5.8% -12.2% 15.4% -27.9% Gross profit 2,176 4,046 10,496 33,163 38,167 24,316 14,668 19,293 15,433 18,455 15,812 YoY 30.6% 85.9% 159.4% 216.0% 15.1% -36.3% -39.7% 31.5% -20.0% 19.6% -14.3% Gross profit margin 14.4% 20.4% 47.6% 73.9% 61.6% 59.1% 52.7% 65.5% 59.6% 61.8% 73.5% Operating profit 2,847 2,086 8,007 27,302 38,419 19,226 12,324 14,252 12,239 14,970 8,964 YoY - -26.7% 283.8% 241.0% 40.7% -50.0% -35.9% 15.6% -14.1% 22.3% -40.1% Operating profit margin 18.8% 10.5% 36.3% 60.8% 62.0% 46.7% 44.2% 48.4% 47.3% 50.1% 41.7% Recurring profit 3,202 3,620 9,028 28,404 40,132 19,808 13,666 15,554 13,410 17,045 11,707 YoY - 13.1% 149.4% 214.6% 41.3% -50.6% -31.0% 13.8% -13.8% 27.1% -31.3% Recurring profit margin 21.1% 18.3% 40.9% 63.3% 64.8% 48.1% 49.1% 52.8% 51.8% 57.1% 54.4% Net income 2,329 6,106 6,583 17,292 27,707 17,018 11,073 24,235 10,162 11,839 38,504 YoY - 162.2% 7.8% 162.7% 60.2% -38.6% -34.9% 118.9% -58.1% 16.5% 225.2% Net margin 15.4% 30.8% 29.8% 38.5% 44.7% 41.4% 39.7% 82.2% 39.3% 39.7% 179.0% Per-share data (split-adjusted; JPY) Shares issued (year-end; '000) 48,294.3 48,294.3 48,294.3 48,294.0 48,294.0 48,294.0 48,294.0 32,550.0 32,550.0 32,550.0 32,550.0 EPS (JPY) 137.6 137.6 148.4 389.7 624.5 383.6 249.6 687.0 328.6 382.8 1,249.4 EPS (fully diluted) ------Dividend per share 25.0 25.0 25.0 25.0 100.0 100.0 100.0 107.0 112.0 118.0 138.0 Book value per share 1,995.1 2,214.0 2,536.3 3,591.5 4,240.1 4,271.2 4,684.9 5,182.5 5,276.8 6,090.0 7,316.1 Balance sheet (JPYmn) Cash and cash equivalents 27,918 43,027 59,563 72,290 101,895 99,301 107,179 70,086 63,878 72,040 107,517 Other assets 182 32 28 37 38 49 27 22 30 31 851 Investments 97,662 89,689 101,824 144,310 133,373 110,004 128,082 119,217 117,412 147,434 163,125 Operational investment securities 87,896 76,583 81,880 111,449 78,785 60,644 62,274 61,287 59,267 63,532 79,547 Listed 11,243 8,120 11,760 46,422 21,519 9,780 14,601 11,669 7,744 8,470 16,444 Unlisted 68,994 63,085 65,159 60,538 53,767 48,215 45,589 47,743 49,803 55,061 63,102 Other funds 7,658 5,377 4,960 4,488 3,498 2,648 2,084 1,874 1,719 0 0 Allowance for investment losses -28,163 -19,701 -18,843 -18,788 -15,757 -15,176 -12,332 -10,351 -9,501 -8,229 0 Investment securities 37,929 32,807 38,787 51,649 70,345 64,536 78,140 68,281 67,646 92,131 83,578 Listed 28,482 31,588 37,593 50,470 69,364 63,568 75,743 67,412 66,650 90,514 82,177 Value above acquisition 27,567 31,543 37,590 50,467 69,359 63,545 75,716 67,389 66,606 90,480 82,156 prices Value below acquisition 915 45 3 3 5 23 27 23 44 34 21 prices Unlisted 9,447 1,219 1,194 1,179 981 968 2,397 869 996 1,617 1,401 Total assets 133,441 135,810 164,122 220,167 239,035 214,245 237,902 191,550 184,213 222,059 262,383 Interest-bearing debt 36,582 27,579 35,551 18,220 15,361 5,702 4,320 977 365 249 115 Other liabilities 8,032 9,927 16,035 42,600 35,549 19,042 25,726 30,274 20,633 33,444 47,030 Net assets 88,827 98,303 112,535 159,347 188,125 189,501 207,855 160,299 163,215 188,366 215,237 Total liabilities and net assets 133,441 135,810 164,122 220,167 239,035 214,245 237,902 191,550 184,213 222,059 262,383 Cash flow statement (JPYmn) Cash flows from operating activities -2,101 6,859 8,476 30,153 28,822 12,788 15,117 7,425 -1,350 12,177 8 Cash flows from investing activities 15 15,971 -4,623 2,550 -5,744 11,768 -1,580 24,732 213 -277 49,154 Cash flows from financing activities -1,977 -10,119 6,816 -18,442 -3,970 -14,092 -5,817 -69,046 -3,923 -3,581 -13,944 Financial ratios ROA (RP-based) 2.4% 2.7% 6.0% 14.8% 17.5% 8.7% 6.0% 7.2% 7.1% 8.4% 4.8% ROE 2.6% 6.5% 6.2% 12.7% 15.9% 9.0% 5.6% 13.2% 6.3% 6.7% 19.1% Operating profit margin 18.8% 10.5% 36.3% 60.8% 62.0% 46.7% 44.2% 48.4% 47.3% 50.1% 41.7% Equity ratio 66.3% 72.3% 68.6% 72.4% 78.7% 88.5% 87.4% 83.7% 88.6% 84.8% 82.0%
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Terminology: Operational investment securities: Operational investment securities are equivalent to inventories at general companies. These are shares issued by portfolio companies of funds JAFCO manages, and they are held for investment purposes. Investment securities: Securities held for purposes other than earning capital gains through venture and buyout investments Other funds: Reclassified as unlisted investment securities from FY03/20 Allowance for investment losses: This is an allowance posted in the estimated amount of future losses on operational investments as of fiscal year-end. A high balance of this allowance suggests that the company may be unable to exit from investments and be unable to secure investment returns on many stocks, leading to pessimistic forecasts. The company’s policy for recording allowance for investment losses differs for company-by-company allowance and general allowance. Company-by-company allowance is made if estimated returns are below 70% of book value. General allowance is an allowance on portfolio companies that are not subject to company-by-company allowance. As the number of portfolio companies declined and to allow for more detailed understanding of the status of individual portfolio companies, JAFCO stopped posting general allowance on investments made during or after January 2017.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 5 Recent updates Q1 FY03/22 Report Update
2021-08-26
Shared Research updated the report following interviews with JAFCO Group Co., Ltd. (“JAFCO”).
Q1 FY03/22 Flash Update
2021-07-21
On July 21, 2021, JAFCO Group Co., Ltd. ("JAFCO") announced earnings results for Q1 FY03/22; see the results section for details.
Full-year FY03/21 Report Update
2021-06-25
On June 25, 2021, Shared Research updated the report following interviews with JAFCO Group Co., Ltd. (“JAFCO”).
Cancellation of treasury shares
2021-06-16
On June 16, 2021, the company announced the cancellation of treasury shares.
The company’s shareholder returns policy is to cancel treasury shares in a timely manner following a buyback so that treasury shareholdings will be maintained at 3% of the total number of issued shares.
Number of shares (common stock) to be cancelled: 3,330,000
Percentage of total number of issued shares prior to cancellation: 11.0%
Cancellation date: June 29, 2021
Total number of issued shares after cancellation: 26,970,000 (includes 806,451 treasury shares [3.0% of total issued shares])
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 6 Trends and outlook Quarterly results
Earnings (cumulative) FY03/20 FY03/21 FY03/22 (JPYmn) Q1 Q1–Q2 Q1–Q3 Q1–Q4 Q1 Q1–Q2 Q1–Q3 Q1–Q4 Q1 Revenue 2,249 5,984 27,937 29,855 4,431 9,546 11,668 21,512 14,860 YoY -52.2% -62.0% 27.1% 15.4% 97.0% 59.5% -58.2% -27.9% 235.4% Revenue from operational investment securities 1,658 4,665 22,680 23,697 3,176 7,018 8,285 16,164 10,823 Income from partnership management 590 1,318 5,255 6,155 1,254 2,526 3,379 5,340 4,032 Other revenues 0 0 1 1 0 1 3 6 4 Cost of revenue 1,175 2,904 10,201 11,399 936 2,447 3,044 5,699 1,687 Cost of operational investment securities 1,021 2,473 7,166 8,337 791 2,155 2,614 4,903 1,391 Other costs 153 430 3,035 3,061 145 292 430 795 295 Gross profit 1,074 3,080 17,735 18,455 3,494 7,099 8,623 15,812 13,173 (Reversal of) provision for investment losses -194 -924 -1,605 -515 2,056 2,393 2,699 2,680 -213 Unrealized loss on operational investment securities -5 -7 -26 -88 -83 -89 -148 -150 0 Gross profit–net 1,273 4,011 19,366 19,058 1,521 4,795 6,072 13,282 13,386 SG&A expenses 978 1,930 2,996 4,088 864 1,805 2,672 4,319 1,039 Operating profit 284 2,081 16,369 14,970 658 2,990 3,400 8,964 12,348 YoY -86.8% -69.4% 62.5% 22.3% 131.7% 43.7% -79.2% -40.1% - Operating profit margin 12.6% 34.8% 58.6% 50.1% 14.8% 31.3% 29.1% 41.7% 83.1% Non-operating income 1,439 1,462 2,137 2,169 900 1,748 2,597 2,761 678 Non-operating expenses 27 131 122 94 0 7 8 18 13 Recurring profit 1,696 3,412 18,385 17,045 1,557 4,730 5,990 11,707 13,013 YoY -44.6% -53.8% 64.0% 27.1% -8.2% 38.6% -67.4% -31.3% 735.8% Recurring profit margin 75.4% 57.0% 65.8% 57.1% 35.1% 49.5% 51.3% 54.4% 87.6% Extraordinary gains 0 3 0 0 0 0 0 44,764 186 Extraordinary losses 0 0 0 0 0 0 0 0 0 Income taxes 193 370 4,931 5,206 944 2,071 2,161 17,967 3,123 Net income 1,502 3,046 13,453 11,839 613 2,659 3,829 38,504 10,076 YoY -49.7% -48.0% 54.0% 16.5% -59.2% -12.7% -71.5% 225.2% - Net margin 66.8% 50.9% 48.2% 39.7% 13.8% 27.9% 32.8% 179.0% 67.8% Earnings (quarterly) FY03/20 FY03/21 FY03/22 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Revenue 2,249 3,735 21,953 1,918 4,431 5,115 2,122 9,844 14,860 YoY -52.2% -66.2% 252.3% -50.7% 97.0% 36.9% -90.3% 413.2% 235.4% Revenue from operational investment securities 1,658 3,007 18,015 1,017 3,176 3,842 1,267 7,879 10,823 Income from partnership management 590 728 3,937 900 1,254 1,272 853 1,961 4,032 Management fees 419 418 980 769 726 716 704 725 728 Success fees 171 309 2,958 131 528 555 149 1,237 3,303 Other revenues 0 0 1 0 0 1 2 3 4 Cost of revenue 1,175 1,729 7,297 1,198 936 1,511 597 2,655 1,687 Cost of operational investment securities 1,021 1,452 4,693 1,171 791 1,364 459 2,289 1,391 Other costs 153 277 2,605 26 145 147 138 365 295 Gross profit 1,074 2,006 14,655 720 3,494 3,605 1,524 7,189 13,173 (Reversal of) provision for investment losses -194 -730 -681 1,090 2,056 337 306 -19 -213 Unrealized loss on operational investment securities -5 -2 -19 -62 -83 -6 -59 -2 0 Gross profit–net 1,273 2,738 15,355 -308 1,521 3,274 1,277 7,210 13,386 SG&A expenses 978 952 1,066 1,092 864 941 867 1,647 1,039 Operating profit 284 1,797 14,288 -1,399 658 2,332 410 5,564 12,348 YoY -86.8% -61.4% 336.4% - 131.7% 29.8% -97.1% - - Operating profit margin 12.6% 48.1% 65.1% - 14.8% 45.6% 19.3% 56.5% 83.1% Non-operating income 1,439 23 675 32 900 848 849 164 678 Non-operating expenses 27 104 -9 -28 0 7 1 10 13 Recurring profit 1,696 1,716 14,973 -1,340 1,557 3,173 1,260 5,717 13,013 Recurring profit margin 75.4% 45.9% 68.2% - 35.1% 62.0% 59.4% 58.1% 87.6% Extraordinary gains 0 3 -3 0 0 0 0 44,764 186 Extraordinary losses 0 0 0 0 0 0 0 0 0 Income taxes 193 177 4,561 275 944 1,127 90 15,806 3,123 Net income 1,502 1,544 10,407 -1,614 613 2,046 1,170 34,675 10,076 YoY -49.7% -46.3% 261.9% - -59.2% 32.5% -88.8% - - Net margin 66.8% 41.3% 47.4% - 13.8% 40.0% 55.1% 352.2% 67.8% Q1 FY03/22 results Summary
Revenue: JPY14.9bn (+235.4% YoY) Operating profit: JPY12.3bn (+1,780% YoY) Recurring profit: JPY13.0bn (+735.3% YoY) Net income*: JPY10.1bn (+1,540% YoY) Capital gains: JPY9.4bn (+295.5% YoY) IPOs: Four (two in Japan, two overseas)
*Net income attributable to owners of the parent Note: Figures may differ from company materials due to differences in rounding methods.
In Q1 FY03/22, the company reported four IPOs, two domestic and two overseas. Capital gains were JPY9.4bn (+295.5% YoY). Results were primarily driven by sales of shares associated with new, large-scale IPOs (Visional Inc.; TSE
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 7 Mothers:4194). Provision of allowance for investment losses amounted to JPY302mn, and reversal of allowances totaled JPY515m, resulting in a net reversal of JPY213mn (versus net provision of JPY2.1bn in Q1 FY03/21). Provision of allowances appear to be past their peak, but the company maintains that future circumstances remain unpredictable. In terms of income from fund management, success fees came to JPY3.3bn (+525.6% YoY), up thanks to sales of shares associated with new, large-scale IPOs.
IPOs
In Q1 FY03/22, the JAFCO Group handled two IPOs in Japan and two overseas for a total of four. There were 33 IPOs in total in Japan. The two IPOs handled by JAFCO in Japan were portfolio company Visional (TSE Mothers: 4194; listed in April 2021), and WonderPlanet Inc. (TSE Mothers: 4199; listed in June 2021). Overseas IPOs that JAFCO was involved in were PLAYSTUDIOS, Inc. (NASDAQ: MYPS) and Confluent, Inc. (NASDAQ: CFLT). The multiple of the two domestic IPOs was 68.3x (investment multiple in FY03/21 was 14.7x ), with an opening price of JPY34.1bn versus an investment of JPY498mn. Shared Research thinks this reflects the effects of the company's highly selective, intensive investment approach.
The company assumes five to six IPOs per year. Two Japanese companies were listed in Q1 FY03/22. The company expects the other IPOs in Q3 FY03/22 or later.
Capital gains
In Q1 FY03/22, capital gains amounted to JPY9.4bn (+295.5% YoY). Of this figure, capital gains on sales of shares in listed portfolio companies (IPO-related capital gains) were JPY9.5bn, while capital loss on unlisted shares was JPY31mn. Visional's opening price was JPY7,150, 43% higher than the initial offer price of JPY5,000. Visional raised JPY68.2bn, the largest sum since Softbank (TSE1: 9434), which was listed in December 2018. The company commented that Visional's listing contributed to its earnings approximately JPY11.4bn out of JPY12.2bn (capital gains of JPY9.4bn and success fee of JPY2.8bn for the SV3 Fund). The success fee of SV4 relating to the listing of WonderPlanet was JPY364mn.
ROI (sale of operational investment securities of JPY10.8bn÷cost of sales of operational investment securities of JPY1.4bn) was 7.8x versus 3.3x at end-FY03/21 and 4.0x in Q1 FY03/21, boosted by the major listing of Visional.
Income from fund management
Income from fund management was JPY4.0bn (+221.5% YoY). Management fees in Q1 FY03/22 came to JPY728mn (+0.3% YoY), and success fees were JPY3.3bn (+525.6% YoY). Success fees were up sharply YoY s a result of the Visional IPO in Q1 FY03/22. Management fees were little changed YoY. The company expects roughly JPY700mn per quarter in management fees, and JPY2.8bn for the full year.
In Q1 FY03/22, the company began disclosing a breakdown of fund management income (management fees and success fees) by fund, applying the new accounting standard for revenue recognition. Management fees of JPY728mn broke down into JPY74mn for SV4, JPY184mn for SV5, JPY310mn for SV6, JPY36mn for Jafco Asia Technology Fund VI, JPY48mn for Jafco Asia Technology Fund VII, and JPY74mn for others. Success fees of JPY3.3bn broke down into JPY2.8bn for SV3, JPY364mn for SV4, and JPY143mn for Jafco Asia Technology Fund VI.
Allowance for investment losses
Net provision of allowance for investment losses in Q1 FY03/22 amounted to JPY302mn (provision of JPY311mn, reversal of JPY9mn). At the same time, reversal of allowances came to JPY515mn, resulting in a net reversal of JPY213mn. The impact of the COVID-19 pandemic was limited in Q1 FY03/22, resulting in a smaller reversal of allowances. At end-Q1, the balance of allowance for investment losses was JPY10.7bn (-2.0% compared to end-FY03/21). The ratio of allowances against the balance of unlisted operational investment securities was 16.3%, down 1.0pp compared to end-FY03/21. Although allowances for investment losses have started to come down, the company retains a cautious stance. The company booked a COVID-19-related allowance for 18 companies in total as of end-FY03/21, and commented that there had been no change in business conditions of these companies as of Q1 FY03/22.
Core income
In Q1 FY03/22, SG&A expenses were JPY1.0bn (+20.3% YoY). Core income, which is management fees (JPY728mn) minus SG&A expenses (JPY1.0bn), was negative, but income including success fees (JPY3.3bn) turned positive.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 8 Unrealized gains
At end-Q1 FY03/22, unrealized gains on listed operational investment securities were JPY15.2bn, up from JPY14.9bn at end- March 2021. This matched the levels of end-FY03/15 (about JPY15.2bn).
Investment amounts
The total amount invested in 25 companies was JPY8.9bn (+69.7% YoY). Total investment slowed due to an ongoing surge in valuations and a continuous move toward more large-scale fundraising by 71 companies in FY03/20 and 66 companies in FY03/21. Despite this trend, total investment increased JPY3.7bn YoY in Q1 FY03/22, and the number of investee companies rose to 25, up seven from 18 a year earlier. Total investment in Japan was JPY6.7bn (+69.9% YoY), while in the United States it was JPY790mn (-5.7% YoY), and in Asia, it was JPY1.5bn (+196.9% YoY). Investment by the company progressed at a moderate pace despite the COVID-19 pandemic, considering that the company's standard investment level is JPY30-35bn per year.
The breakdown of the total JPY6.7bn investment in Japan was all in venture capital investment; there was no buyout investment. Of the JPY6.7bn (16 companies) in domestic VC investment, new venture investment (including fund LPs’ interests) totaled JPY4.9bn (10 companies). The IT services industry accounted for 81% (70% of the total number of companies). In June 2021, JAFCO also invested in manufacturers including WAKAZE, which manufactures and sells sake. Of the JPY4.9bn in new investment, 77% was in early stage and 23% was in seed stage companies.
New VC investment in Japan (including fund LPs’ interests) averaged roughly JPY490mn (investment in 10 companies), exceeding JPY400mn in FY03/21 (total investment in 19 companies in FY03/21), with the company maintaining its highly selective, intensive investment approach. Meanwhile, the stake acquired in portfolio companies averaged 14%, down 2pp from 16% in FY03/21. This does not indicate any major changes to the company's policy. While the average investment size rose as investments were skewed toward companies with relatively high valuations in FY03/20, valuations for investments in FY03/21 stabilized on the whole. However, JAFCO has said the valuations of promising startups that are garnering attention have not declined much. Fundraising also continues to expand in scale, according to the company.
The company recorded no buyout investments in Q1 FY03/22, but not due to a lack of deal flows. Buyout investment may thus begin to show in investments in Q3 onward.
Operating Assets
As of end-June 2021, operating assets (global balance of unlisted securities) amounted to JPY164.8bn (225 companies; up five compared to end-FY03/21). Of these assets, JPY104.3bn (63%) were in Japan (147 companies; up five), JPY39.9bn (24%) were in the United States (28 companies; down three), and JPY20.7bn (13%) were in Asia (50 companies; up three). Operating assets increased despite lingering impact from the COVID-19 pandemic thanks to robust investment.
The balance of global unlisted securities was JPY732mn, breaking down into JPY710mn in Japan (+JPY11mn compared to end-FY03/21), JPY1.4bn in the United States (+JPY41mn compared to end-FY03/21), and JPY414mn in Asia (+JPY5mn compared to end-FY03/21).
Fund commitments
As of end-June 2021, commitments came to JPY466.3bn (JPY451.5bn at end-March 2021), with JAFCO having a 40.8% stake in funds versus 40.4% at end-FY03/21. Of the total commitments, the amount subject to management fees (excluding capital committed by JAFCO, Icon Ventures funds, and funds under extensions) was JPY135.5bn (versus JPY132.0bn at end- FY03/21). Commitments subject to management fees increased due to the establishment of a new Asian fund.
New funds established
JAFCO Asia S-8 Fund Limited Partnership: Established in April 2021; total commitment: USD100mn
Icon Ventures VII, L.P.: Established in or before FY03/21; total commitment: USD211mn as of end-June 2021 (+USD33mn from end-FY03/21)
Cash surplus and shareholder returns
As of end-June 2021, cash and cash equivalents (including securities) totaled JPY72.5bn (JPY107.5bn at end-FY03/21). Income taxes payable accounted for JPY3.6bn of this amount, with the remainder being JPY68.9bn. Effective free cash was
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 9 JPY23.9bn, calculated by subtracting from this remainder of JPY68.9bn capital commitments to funds of JPY9.5mn, uncalled commitments to funds of JPY35.3bn, and interest-bearing debt of JPY100mn. Adding JPY63.3bn in after-tax valuation of Nomura Research Institute shares to the previously mentioned remainder of JPY68.9bn results in total cash and cash equivalents of JPY132.1bn.
According to a company release entitled “Policy on Future Shareholder Returns” (dated February 10, 2021), the company will consider conducting share buybacks if funds necessary for future investment (includes uncalled commitments to funds, interests in upcoming funds, estimated future fund expansion, other investment opportunities, and allowances for unforeseen circumstances) exceed its estimate of JPY120.0bn by a specific amount.
Share buybacks and retirement
The company acquired 3,255,900 treasury shares between April 1 and June 15, 2021, increasing its treasury stock by JPY24.8bn. In Q1 FY03/22, the company retired 5,580,000 treasury shares (17% of outstanding shares), which reduced its retained earnings and treasury stock by JPY36.9bn. Accordingly, retained earnings was down by JPY30.9bn to JPY71.6bn and treasury stock was down JPY12.1bn to JPY5.7bn as of end-Q1 FY03/22. FY03/22 company forecasts
The company does not disclose short- or medium-term forecasts because fluctuations in domestic and overseas stock markets and the IPO market affect earnings significantly year by year due to the nature of the venture capital business (VC companies gain investment returns by identifying companies with innovative technologies or business models that have yet to record revenue, and take them to IPO, M&A, or other exits).
Investment opportunities
The company expects growth in investment opportunities and investment amounts amid the emergence of young entrepreneurs and growth in the number of start-up companies that are potential targets. Startups are tending to raise larger fund amounts, meaning that fewer projects can be funded by VCs on their own. In fact, the median amount of funds raised per company in 2020 was JPY100mn, and the average was JPY328.1mn, showing a trend toward increasing size versus 2015, when the respective figures were JPY25mn and JPY147mn (source: INITIAL: Japan Startup Finance 2020). In that sense, rather than competition with rivals in the industry intensifying, investment opportunities are increasing along with growth in the VC market.
IPO and M&A markets continue to face uncertainties due to the COVID-19 pandemic
The COVID-19 pandemic affected the IPO market, with 18 companies planned for IPO from April 2020 onward announcing the postponement of their listing. From June 2020, the IPO market reopened, and the company was able to keep investment opportunities and capital gains in line with FY03/20 and ultimately in line with normal years. While the Japanese IPO market has not experienced a rapid slowdown, there remains a risk that exits of JAFCO’s portfolio companies will remain sluggish for a prolonged period due to lower IPO and M&A acquisition prices. The number of IPOs in Japan was 33 companies in April– June 2021.
Pipeline
For FY03/22, the company assumes an IPO pipeline of five or six companies, in line with historical averages. It said that it expected relatively large IPOs as well. Overseas the company has IPO plans and buyout exit candidates, and if the market environment is solid, it indicated that it may enter a major harvest period.
Establishment of new fund
The company plans to start preparing to establish a new fund in Japan in 2H FY03/22 and establish it in FY03/23. The new fund may be expanded beyond initial expectations. The company assumes a new fund to be established in Asia to be JPY15.0bn in size, but there is a risk that it may be delayed due to the difficulty in raising funds externally online. There is also a risk that fundraising for ICON VII in the US may be delayed.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 10 Medium-term outlook
The company does not disclose a medium-term business plan. The information provided below is Shared Research’s understanding of JAFCO’s medium-term outlook.
Medium-term performance
Over the medium-term, management fees and SG&A expenses break even
Annual management fees of the SV6 flagship fund (fund size of JPY80.0bn), which completed fundraising on March 2, 2020, are projected at JPY1.0bn (2% of the JPY50.9bn raised from outside investors).
Medium-term schedule for establishing funds
The final closing of the most recent flagship fund SV6 took place on March 2, 2020. For the foreseeable future, JAFCO will be focusing on identifying companies to include in its portfolio. Once the latest fund finishes investing 75% of total commitments, JAFCO will begin preparations for a successor fund. The establishment cycle is once every three years, so Shared Research expects SV6’s successor fund to appear around 2023. JAFCO Asia’s JATFVII fund was established in 2017, and the establishment of a successor fund shall come up for discussion.
Medium-term strategy
Achieve sustainable increases in fund performance
JAFCO operates in a single business segment of fund management, and its profit sources are income from fund management (management fees and success fees) and capital gains on its direct investments in funds. The company believes that enhancing the performance of funds in operation allows it to maintain and increase its business results over the medium to long term.
The total investment balance has fallen from around JPY200.0bn in FY03/10, when the company began financial restructuring and promotion of the highly selective, intensive investment strategy. It has turned upward after bottoming out at approximately JPY120.0bn in FY03/17. Shared Research believes the company has the leeway to raise its investment amount per portfolio company and the total investment balance will trend upward over the medium term.
Improve returns: main KPIs
Gross multiple: MOIC (multiple on invested capital) of 2.5x or more, calculated as “sales proceeds (including valuations of unsold portfolio companies) ÷ invested capital”
Net multiple: TVPI (total value to paid-in capital) of 2.0x or more, calculated as “(cumulative distributions + net asset value) ÷ paid-in capital”
In FY03/21, the gross multiple was 3.3x. Shared Research understands that the company has in place the investment structure necessary to meet the target. Although it is possible that the growing COVID-19 pandemic could continue to affect the IPO and VC markets, Shared Research believes investments in high-quality startups and other unlisted companies will be possible for SV6, which closed in March 2020, if valuations of unlisted companies become reasonable. This trend should help improve returns over the medium term.
Strengthen business in Asia
JAFCO aims to reinforce its business in parts of Asia with high growth potential. Previously, JAFCO’s Asian expansion centered on East Asia (China, South Korea, and Taiwan), but its focus is gradually shifting toward China, Taiwan, India, and Southeast Asia. As of the end of FY03/21, the breakdown of the total investment balance by country was China, 45%; Taiwan, 29%; Southeast Asia, 15%; India, 6%; and South Korea, 5%. All of its venture capitalists have been recruited locally and the company plans to promote further localization of its Asian offices.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 11 Business Business overview Company profile Main business: venture capital investment
JAFCO Group (“JAFCO”) raises capital from investors to provide growth capital for promising unlisted companies (two to three years after establishment) in the form of equity through the funds (investment limited partnerships) it manages. JAFCO is a long-standing member of Japan’s VC industry and the largest specialist VC company. JAFCO’s main businesses are Japanese domestic venture (VC) investment (37.9% of total investment made in FY03/21) and domestic buyout (BO) investment (27.6%). From an alternative investment point of view, JAFCO’s business is categorized as private equity investment (investing in the shares of unlisted companies).
Transition to an independent VC company
JAFCO, formerly Japan Associated Finance Co., Ltd., was established in 1973 by Nomura Securities (now Nomura Holdings [TSE1: 8604]), Sanwa Bank (now part of the Mitsubishi UFJ Financial Group [TSE1: 8306]), and Nippon Life Insurance Company. In 2017, the company acquired and cancelled all shares held by its largest and second-largest shareholders, Nomura Holdings and Nomura Research Institute (TSE1: 4307), dissolving its capital relationship with the Nomura Group to ensure independence and transparency. As a result, JAFCO shed its longstanding securities company affiliation and repositioned itself as an independent VC company. (Categories of VC company are described later in “Major providers of risk capital” in the “Market and value chain” section.)
Performance under a management team led by (current) President Fuki
Shinichi Fuki, the current CEO, was appointed president and representative director in January 2010. He was the first “home- grown” president to be appointed from within the company. In FY03/10, following the global financial crisis, Mr. Fuki began promoting highly selective, intensive investment and deeper management involvement in portfolio companies. In response to the losses posted in FY03/09 and FY03/10, he focused on downsizing operations and improving the financial position, which included reductions in the total investment balance and the workforce. As a result, the total investment balance fell from more than JPY200.0bn in FY03/09 to around JPY120.0bn in FY03/17, and the number of employees decreased by half, from 255 in FY03/09 to 132 as of end-March 2021 (on a consolidated basis).
Under President Fuki, revenue rose at a CAGR of 3.6% between FY03/11 and FY03/21. Over this same period, CAGR was 12.2% for operating profit and the operating profit margin averaged 42.4%. Average investment size (new domestic VC investment; including fund LPs’ interests) rose by 2.9x, from JPY175mn (FY03/11) to JPY504mn (average of past five years) as of FY03/21. Despite downsizing, the company successfully rebuilt its financial structure to allow stable profit generation. By contrast, operating losses were posted in four out of the eight years to FY03/10, when it was still part of the Nomura Group.
Operating performance
Source: Shared Research based on company materials
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 12 Mission
JAFCO’s stated mission is to “Commit to new business creation and jointly shape the future.” To clarify its commitment to entrepreneurs embarking on new business ventures and to fund investors (mainly institutional investors), the company introduced a partnership model in March 2018, which allows it to capitalize on individual strengths in addition to its organizational strength accumulated since inception, to enhance competitiveness. To realize its mission, JAFCO is implementing three strategies: (1) highly selective, intensive investment and management involvement, (2) sustained improvement in fund performance, and (3) organizational support for its portfolio companies by serving as a “co-founder.” Business profile Mainstay investment business
VC investment and BO investment
New Venture Creation: Entrepreneurship for the 21st Century (by Jeffry A. Timmons, published by Harvard Business School) describes venture capital (VC) as the provision of capital and other resources to the entrepreneurs of businesses (startups) with high levels of potential growth and expected returns on investment.
In other words, VC investment is provided by VC companies to startups in their launch and growth phases (purchasing equity in startups). VC companies and other investors make equity investment in instruments such as shares or convertible bonds. If invested startups grow, VC companies may earn profits by selling their equity holdings for more than they had invested.
Buyout (BO) investment, on the other hand, involves the sale of shares to ensure the succession of a business for which no successor is in place, management buyouts (MBOs), or corporate carve-outs of non-core businesses. In such cases, JAFCO acquires a majority stake in a portfolio company (more than 50% of shares). Once it obtains management rights, the company reviews the portfolio company’s strategies and implement restructuring or other measures to enhance the enterprise value (value adding activities) of the portfolio company.
One of the differences between VC investment and BO investment is in share of voting rights. With VC investments, JAFCO acquires less than 50% of voting rights, whereas the figure is usually higher than 50% for BO investments (and 100% ownership is typical) to allow it to obtain management rights and boost the enterprise value. Also, VC investment tends to target startup companies lacking stable sales or cash flows, whereas BO investment usually targets companies with steady cash flows.
For these reasons, VC investment and BO investment are altogether different businesses. From the perspective of cash flows, VC investment relies on the subjective views of venture capitalists, whereas BO investment allows investment decisions to be based to some extent on objective data.
Alternative, VC, and BO investment: Both VC and BO investments are types of private equity (PE) investing. PE investing concentrates on shares of unlisted companies. Rather than traditional investment in bonds, listed shares, and real estate, PE investing is a type of alternative investing, which has new investment targets and investing methods and includes hedge funds, project finance, and investment in natural resource development.
Categories of portfolio companies: Growth stages and funding rounds
When engaging in VC investment and BO investment, JAFCO categorizes startup and other unlisted companies into four stages of growth based on their sales, operating cash flows, and cash flow status. JAFCO focuses on startup and early-stage investment.
1. Startup: Companies yet to commercialize products or record sales (also called the “seed” stage). 2. Early stage: Companies with sales, but negative operating cash flow. 3. Middle stage: Companies with sales and positive operating cash flow, but overall cash flow is unstable. 4. Later stage: Companies with sales and positive operating cash flow, and overall cash flow is stable.
Meanwhile, the funding stages of target companies are referred to as investment rounds (the four indicated below). By this definition, JAFCO currently focuses on Series A, but has started to invest in the seed round typically funded by angel investors.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 13 1. Seed: Several JPYmn to several tens of JPYmn 2. Series A: Several hundred JPYmn in startup companies at the full-fledged business development phase 3. Series B: Several hundred JPYmn to JPY1bn in businesses that have begun to take shape 4. Series C: JPY1bn to over several JPYbn in companies making profits and starting to stabilize. Generally companies start to prepare for an IPO at the Series C round. Funding rounds need not necessarily end with Series C; funding sometimes extends to Series D, E, and so on.
The investment amount increases in line with the investment rounds (1) to (4). VC companies may opt to participate at any stage. JAFCO sometimes continues to provide funding from startup through to Series C, D, and E. In most cases, each investment round has a “lead investor” (the largest investor in that investment round) that arranges capital providers (VCs and business companies). Oftentimes, the VC company that first discovers the portfolio company is appointed as lead investor. In other words, the lead investor takes the most risk.
Growth stages and funding rounds of startup companies
Source: Shared Research
Overview of the investment business
As of end-FY03/21, capital commitments to JAFCO’s funds totaled JPY451.5bn. The total investments—primarily investments through funds (99.0% of total) and all in equity—came to JPY164.1bn, of which JAFCO’s direct investments, interests in funds, and unrealized gains combined were JPY62.9bn. Of the equity investment, 98.2% (JPY161.3bn) was in the shares of unlisted companies. In the figure below, “Uninvested capital” refers to the capital still available for investment. Note that “Cash in funds” may include cash awaiting distribution to investors.
Fund commitments and total investments (recurring revenue)
Total investments FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total commitments 433,800 463,800 494,900 420,600 433,000 434,800 348,500 359,100 433,900 451,500 Total investments ([1]+[2]) 179,156 178,721 175,167 155,176 128,839 119,596 120,879 133,424 144,227 164,146 [1] JAFCO direct investments 12,400 11,100 9,400 8,000 6,300 5,400 3,800 3,500 1,800 1,800 % of total investments 6.9% 6.2% 5.4% 5.2% 4.9% 4.5% 3.1% 2.6% 1.2% 1.1% [2] Fund investments ([3]+[4]) 166,700 167,500 165,800 147,100 122,500 114,200 117,000 130,000 142,500 162,400 % of total investments 93.0% 93.7% 94.7% 94.8% 95.1% 95.5% 96.8% 97.4% 98.8% 98.9% [3] JAFCO's interest 62,200 64,400 64,300 56,100 48,300 45,500 47,800 49,600 54,800 62,900 % of fund investments ([2]) 37.3% 38.4% 38.8% 38.1% 39.4% 39.8% 40.9% 38.2% 38.5% 38.7% [4] Other investors' interests 104,400 103,100 101,500 91,000 74,200 68,700 69,200 80,300 87,700 99,400 % of fund investments ([2]) 62.6% 61.6% 61.2% 61.9% 60.6% 60.2% 59.1% 61.8% 61.5% 61.2% Uninvested capital 81,300 115,100 118,800 80,500 53,700 91,400 72,300 56,900 104,000 98,300 JAFCO's interests ([6]+[8]) (undisclosed) (undisclosed) (undisclosed) (undisclosed) 25,200 28,800 29,600 22,100 37,700 39,400 [5] Cash in funds 48,300 58,300 64,400 45,000 19,500 33,900 23,900 21,300 15,800 21,500 [6] JAFCO's interest (undisclosed) (undisclosed) (undisclosed) (undisclosed) 7,000 9,400 8,100 7,500 5,800 7,800 [7] Uncalled commitments of funds 33,000 56,800 54,400 35,500 34,200 57,500 48,400 35,700 88,200 76,800 [8] JAFCO's interest (undisclosed) (undisclosed) (undisclosed) (undisclosed) 18,200 19,400 21,500 14,600 31,900 31,600 JAFCO's unrealized gains 1,900 6,200 37,800 14,700 6,000 11,400 9,600 6,200 7,000 14,900 Operational investment securities ([1]+ 76,500 81,700 111,500 78,800 60,600 62,300 61,300 59,300 63,500 79,500 [3]+JAFCO's unrealized gains)
Source: Shared Research based on company materials
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 14 Breakdown of total investments
Breakdown of total investments FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total investments 179,156 178,721 175,167 155,176 128,839 119,596 120,879 133,424 144,227 164,146 Equity 173,823 173,902 171,071 152,319 126,581 117,875 119,071 131,792 144,227 164,146 % of total investments 97.0% 97.3% 97.7% 98.2% 98.2% 98.6% 98.5% 98.8% 100.0% 100.0% Listed 16,607 13,723 21,741 17,131 8,194 6,559 3,129 2,288 3,196 2,811 % of total investments 9.3% 7.7% 12.4% 11.0% 6.4% 5.5% 2.6% 1.7% 2.2% 1.7% Unlisted 157,216 160,178 149,329 135,187 118,387 111,315 115,942 129,503 141,031 161,334 % of total investments 90.4% 92.1% 87.3% 88.8% 93.5% 94.4% 97.4% 98.3% 97.8% 98.3% Transferred Investments in other funds 5,332 4,819 4,095 2,857 2,257 1,720 1,807 1,632 Transferred to to inv. inv. securities % of total investments 3.0% 2.7% 2.3% 1.8% 1.8% 1.4% 1.5% 1.2% securities
Source: Shared Research based on company materials Note: From FY03/20, the company has recategorized investment in other funds from operational investment securities to investment securities, although it continues to hold these securities>
JAFCO operates in three regions: Japan, Asia, and the US. Of the JPY32.8bn in investments the company made in FY03/21 (including JPY7.6bn in new investments, 19 companies), Japan accounted for 65.5%, the US for 23.3%, and Asia for 11.2%. In the US, JAFCO has a wholly owned consolidated subsidiary, JAFCO America Ventures. (In 2015, the US investment team was rebranded Icon Ventures in the interest of strengthening its brand in the US. In FY03/19, JAFCO America was excluded from the scope of consolidation.) In Asia, JAFCO Asia and its subsidiaries conduct fund management. Of the JPY21.5bn of investments in Japan in FY03/21, VC investment accounted for 57.9% and BO investment for 42.1%.
Investments
Investments (incl. fund investors' interests) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Japan 13,714 11,280 10,806 9,019 12,195 15,180 18,057 11,379 24,883 21,491 % of total 60.5% 55.0% 51.8% 41.7% 57.0% 72.6% 59.7% 45.2% 71.6% 65.5% YoY -42.5% -17.7% -4.2% -16.5% 35.2% 24.5% 19.0% -37.0% 118.7% -13.6% Venture investments 11,700 9,029 6,392 8,518 8,742 11,051 12,166 9,039 19,177 12,450 % of Japan 85.3% 80.0% 59.2% 94.4% 71.7% 72.8% 67.4% 79.4% 77.1% 57.9% YoY -4.5% -22.8% -29.2% 33.3% 2.6% 26.4% 10.1% -25.7% 112.2% -35.1% Buyout investments 2,013 2,251 4,414 500 3,452 4,128 5,890 2,340 5,706 9,040 % of Japan 14.7% 20.0% 40.8% 5.5% 28.3% 27.2% 32.6% 20.6% 22.9% 42.1% YoY -82.6% 11.8% 96.1% -88.7% 590.4% 19.6% 42.7% -60.3% 143.8% 58.4% US 5,317 6,636 5,400 8,677 5,008 3,938 7,101 10,753 8,425 7,637 % of total 23.5% 32.4% 25.9% 40.1% 23.4% 18.8% 23.5% 42.8% 24.2% 23.3% YoY 27.9% 24.8% -18.6% 60.7% -42.3% -21.4% 80.3% 51.4% -21.6% -9.4% Icon Ventures 4,918 5,528 3,657 YoY 49.3% 12.4% -33.8% Life science investments 399 1,107 1,743 YoY -53.7% 177.4% 57.5% Asia 3,623 2,588 4,667 3,947 4,236 1,786 5,063 3,014 1,459 3,684 % of total 16.0% 12.6% 22.4% 18.2% 19.8% 8.5% 16.8% 12.0% 4.2% 11.2% YoY -13.0% -28.6% 80.3% -15.4% 7.3% -57.8% 183.5% -40.5% -51.6% 152.5% Total 22,655 20,505 20,874 21,644 21,411 20,904 30,222 25,147 34,769 32,813 YoY -29.6% -9.5% 1.8% 3.7% -1.1% -2.4% 44.6% -16.8% 38.3% -5.6%
Source: Shared Research based on company materials Note: From FY03/15, US life science investments (handled by the venture investment division in Japan) are included in “Japan.”
Investment via funds
Establishment of funds (investment limited partnerships)
JAFCO is notable for continuing to establish largest-size funds in the VC industry over a long period of time. The company currently manages four flagship funds, each with more than JPY50.0bn in total commitments, while VC funds established by peer companies tend to be smaller than JPY30.0bn, mostly less than JPY10.0bn. Only three companies operate VC funds of JPY50.0bn or more: JAFCO, SBI Investment, and WiL. JAFCO is attractive to investors because it meets their demand by constantly establishing large funds.
Funds established in Japan, by fund size and number of investment companies
Consolidation and Venture capital Growth Distressed succession JPY10bn or less 34 3 6 8 JPY10–30bn 12 4 17 2 JPY30–50bn 2 1 9 3 JPY50–100bn 3 2 5 Over JPY100bn 5 1
Source: Shared Research, based on materials from HC Asset Investment Note: As of December 2019
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 15 In the VC investment and BO investment businesses, JAFCO sets up funds (investment limited partnerships) and raises capital from investors (to be committed to VC funds). In investment limited partnerships, investors are referred to as LPs (limited partners) because investor liability is limited to the amount of their commitments. JAFCO acts as the GP (General Partner), which has unlimited liability. The rights and responsibilities of the GP and LPs are set forth in agreements. The GP carries out fund management on behalf of LPs.
As the GP, JAFCO makes investment decisions and conducts investing activities, deploying capital raised by its funds in startups and unlisted companies. Fund term is generally 10 years and can be extended by two years. The company typically raises capital from investors once every three years.
Reason for setting up investment partnerships under the Civil Code or investment limited partnerships: If investors were to invest in the shares of JAFCO, a joint stock company, the company will have to pay corporate tax on its profits, then pay dividends to the investors. Investors must also pay income taxes on the dividends they receive, which effectively amounts to double taxation. By contrast, investment partnerships that do not fall under the corporate structures defined in Japan’s Companies Act need not pay corporate tax on their profits because they are a “partnership” and not a “company.” As pass-through taxation applies, income taxes are paid only by capital providers, so that investors can reap larger returns than if they had invested in the company’s shares. (However, investing in investment partnerships involves greater liquidity risk than investing in listed companies’ shares, as investors are unable to request for refund while the fund is in operation.) The JAFCO No. 1 Investment Partnership, which was set up in 1981 and was the first investment partnership to be set up under Japan’s Civil Code, became the prototype method for establishing funds in Japan. However, investment partnerships (partnerships under the Civil Code) had subjected investors not involved in partnership’s operations to unlimited liability, exposing them to risks greater than the money they have invested. To address this situation, the “investment limited partnership” system was established in 1998 to legally limit the liability of partners not involved in the execution of business of the partnership to their investment amounts (limited liability). Since then, investment limited partnerships have been the standard vehicle when establishing funds.
Forms of capital contribution
There are two forms of capital contribution by investors: the method whereby LPs pay their entire committed capital upfront, or the method whereby investors pay their committed capital in installment in accordance with investment activity, as defined in investment partnership agreements. The second method is called “the capital call method” as the fund makes calls for capital contribution to investors on an as-needed basis. As the fund manager, JAFCO shares the same risks as investors by investing its own capital in funds. Typically, the company’s own capital accounts for around 40% of the fund size.
Overview of the investment portfolio
In Japan, JAFCO engages in VC investment and BO investment. In Asia and in the US, funds are managed independently. The company invests in overseas startups by committing capital to its Asian and US funds via flagship SV3, SV4, and SV5 funds. Of JPY161.3bn invested in unlisted shares as of FY03/21 (including fund LPs’ interests), JPY99.2bn (61.5% of the total) was in Japan, JPY42.9bn (26.6%) in the US, and JPY19.2bn (11.9%) in Asia. The total amount includes JAFCO’s interests of JPY63.1bn, 68% of which was in Japan, 18% in the US, and 14% in Asia. Around 60% of investments in unlisted shares were in the IT service sector.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 16 VC investment via a fund
Source: Shared Research, modified from company materials
Fund operating status
JAFCO currently operates 27 funds with total commitments of JPY451.5bn, of which JPY155.1bn is in funds under extension. The newly raised capital in FY03/21 amounted to JPY23.6bn.
The company has four flagship funds in operation (SV3, SV4, SV5, and SV6), which were established in and after 2007. For SV3, which has been operating more than the fund term of 10 years, the company has made steady distributions to investors with only around 2% of the fund size remaining as investment balance. The company will be receiving success fees from SV4 established in 2013, now that distributions have exceeded total commitments. The company began seeing exits from SV5 in 2020 with the Stamen IPO.
Fund operating status
Unlisted Fund size VC investments in Japan Distribution of growth stages securities (JPYmn) Established Number of investors Exited projects (JAFCO's (JAFCO's Average Shareholding Start- Early Middle Later interest) interest) investment ratio up VC in Japan: 148; BO in Japan: 10; Asian funds: SV3 2007 146,500 (58,700) 1,800 (700) 230 15.2% 13.0% 39.0% 35.0% 13.0% Visional (IPO) JATF4, JATF5; US funds: ICON3, ICON4
VC in Japan: 72; BO in I3 Systems (IPO), cononala (IPO), SV4 2013 60,000 (29,700) 34,300 (17,000) Japan: 5; Asian funds: 280 17.0% 33.0% 50.0% 11.0% 6.0% WACUL (IPO), Chariloto (M&A), JATF6; US funds: ICON5 Graniph (M&A) VC in Japan: 50; BO in SV5 2016 75,000 (32,400) 60,200 (26,000) Japan: 6; Asian funds: 530 17.3% 42.0% 48.0% 10.0% 0.0% stmn (IPO), Komine (M&A) JATF7; US funds: ICON6 VC in Japan: 33; BO in SV6 2019 80,000 (29,100) 31,500 (11,500) 550 14.6% 39.0% 58.0% 0.0% 3.0% Japan: 5
Source: Shared Research based on company materials SV4: Portfolio companies are mainly internet- and energy-related startup companies in Japan, Asia, and the US. SV5: Portfolio companies span a wide range of businesses and companies, with many involved in artificial intelligence (AI) and fintech (finance + IT). SV6: Based on investor demand, investments are limited to VC and BO investments in Japan.
Looking at the trends of funds from SV3 onward, average investment amount has increased and shareholding ratios have risen. Broken down by growth stage, investments have increasingly gravitated toward the startup stage. The proportion of startup and early stage investments increased from 52% for SV3 to 88% for SV5. Promotion of highly selective, intensive investment since FY03/10 indicates that JAFCO has intentionally increased the average investment amount per portfolio company.
SV6, which was established in 2019, completed fundraising on March 2, 2020. The fund size is JPY80.0bn, of which financial institutions committed 45%, JAFCO 37%, business companies 16%, and others 2%. Of the 75 outside investors,
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 17 more than 60% are investors of existing JAFCO funds. SV6 targets Japanese startups and unlisted companies only. JAFCO is aiming for 75% domestic VC investment (which centers on startup and early-stage companies) and 25% domestic buyout investment. As average investment amounts, JAFCO envisions JPY700–800mn per company (about a 15% stake) for VC investments and JPY2.0–4.0bn per company (over two-thirds stake) for BO investments.
SV6 is the first fund the company has established since moving to the partnership model. For this fund, therefore, in addition to JAFCO, JAFCO partners invest their own capital as GPs (unlimited liability partners). For the first time in the company’s history, employees are also allowed to invest in the fund. As the partners have skin in the game as individual investors, their interests are aligned with those of outside investors. Partners are eligible to receive success fees. The fund demonstrates JAFCO's efforts to strengthen its commitment to portfolio companies and investors by leveraging the expertise of individual venture capitalists.
Value chain
Discovery (finding)
JAFCO’s VC investment process involves discovering investment opportunities (finding or sourcing), research and analysis (due diligence), negotiating investment terms, deciding on and making investments, supporting portfolio companies (business development), and exits (IPO, M&A).
Investment process
Source: Shared Research based on company materials
The company says it uses its network of outside institutions, including existing portfolio companies in Japan, and around 40 personnel in charge of investment to gather information on companies and discover investment opportunities. It monitors around 1,000 companies each year and makes around 20 new investments each year (19 in FY03/21). JAFCO discovers 49% of its portfolio companies (VC investment) via social media, news reports, the web and other channels it has cultivated independently, and 27% are introduced by portfolio companies, investors, and other business partners. Of the remainder, 13% are found through pitches (presentations), trade shows and other events; 7% are introduced by startups themselves; and 3% are via other routes.
Investments
JAFCO concentrates on venture and buyout investments. In FY03/21, 37.9% of the amount invested (JPY32.8bn) was in domestic venture investment, 27.6% in domestic buyout investment, 23.3% in US venture investment, and 11.2% in Asia venture investment.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 18 JAFCO’s VC and BO investments
Investment Targeted Description Division Target Track record type stages Venture Investment FY03/20: 21 Provide risk capital to companies demonstrating Division (Japan, US, Investing in diverse venture new innovative and creative management, based on the Mainly Venture Asia), four offices in companies that demonstrate investments phase of growth. Support increases in enterprise Start-up and investment Japan (Tokyo, Chubu, innovative and creative in unlisted value through a deep commitment to management Early stages Kansai, and Kyushu management. securities in and business expansion. branches) Japan Mainly Companies run by sole owners Strong focus on providing support for growth; work unlisted that are facing business FY03/20: Buy-out with management to achieve capital independence companies Buyout Division succession, or subsidiaries or Three investment and corporate growth in situations such as business in the companies with business investees succession and corporate spin-out. Middle and departments to be spun off Later stages
Source: Shared Research based on company materials
JAFCO’s venture investment is focused on the seed and early stages. In FY03/21, new venture investment in Japan totaled JPY7.6bn, of which 93.3% was in seed or early-stage companies. In FY03/11, the year after the company introduced its policy of highly selective, intensive investment, this percentage was 18.0%. Since then, investment has shifted significantly toward the startup and early stages.
New investments in Japan by stage (amount, and percent of total)
New investments in Japan by stage FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (no. of companies) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Start-up 3 3 11 5 7 9 7 7 5 8 Early 15 4 7 10 12 8 7 7 15 10 Middle 9 4 2 5 2 1 2 1 1 Later 1 3 3 2 1 Total 27 12 21 21 21 18 16 15 21 19 New investments in Japan by stage FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Start-up 345 545 2,504 690 1,573 4,054 1,457 2,614 2,750 3,036 Early 3,159 1,048 2,204 2,440 4,363 3,405 3,945 2,954 13,199 4,057 Middle 3,782 1,552 923 1,771 249 450 1,925 1,000 499 Later 2,010 6,438 4,393 457 506 Total 9,296 9,583 10,024 5,358 6,185 7,909 7,327 6,568 16,499 7,600 New investments in Japan by stage FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (% of total, value) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Start-up 3.7% 5.7% 25.0% 12.9% 25.4% 51.3% 19.9% 39.8% 16.7% 39.9% Early 34.0% 10.9% 22.0% 45.5% 70.5% 43.1% 53.8% 45.0% 80.0% 53.4% Middle 40.7% 16.2% 9.2% 33.1% 4.0% 5.7% 26.3% 15.2% 3.0% Later 21.6% 67.2% 43.8% 8.5% 6.7% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Start-up and Early 37.7% 16.6% 47.0% 58.4% 96.0% 94.3% 73.7% 84.8% 96.7% 93.3%
Source: Shared Research based on company materials
A high percentage of portfolio companies are in the IT service sector. In FY03/21, IT service companies accounted for 54.1%, medical and biotech industries accounted for 25.8%, software 13.3%, and electronics 6.8% of its portfolio.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 19 New investments in Japan by industry (amount, and percent of total)
New investments in Japan by industry FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (no. of companies) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Electronics 2 1 1 2 1 2 1 1 2 Software 4 2 2 1 2 5 2 2 2 IT Services 10 4 13 14 16 12 11 9 14 11 Medical and biotechnology 3 3 2 2 1 1 3 2 4 Services 3 2 3 2 1 1 1 2 Manufacturing 1 1 2 1 Distribution, retail, and restaurants 4 Real estate and financial, other 1 1 1 Total 27 12 21 21 21 18 16 15 21 19 New investments in Japan by industry FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Electronics 164 2,251 165 758 300 668 1,001 350 514 Software 510 754 500 48 239 876 815 554 1,010 IT Services 3,674 5,125 4,084 3,200 5,397 6,533 5,543 2,705 13,145 4,114 Medical and biotechnology 528 849 415 230 100 300 1,361 1,600 1,961 Services 2,727 95 3,809 621 150 500 501 799 Manufacturing 210 7 1,050 500 Distribution, retail, and restaurants 1,181 Real estate and financial, other 299 501 1,000 Total 9,297 9,584 10,026 5,357 6,186 7,909 7,326 6,568 16,449 7,600 New investments in Japan by industry FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (% of total) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Electronics 1.8% 23.5% 1.6% 14.1% 4.8% 9.1% 15.2% 2.1% 6.8% Software 5.5% 7.9% 5.0% 0.9% 3.9% 11.1% 11.1% 3.4% 13.3% IT Services 39.5% 53.5% 40.7% 59.7% 87.2% 82.6% 75.7% 41.2% 79.9% 54.1% Medical and biotechnology 5.7% 8.9% 4.1% 4.3% 1.6% 4.1% 20.7% 9.7% 25.8% Services 29.3% 1.0% 38.0% 11.6% 2.4% 6.3% 0.0% 7.6% 4.9% Manufacturing 2.3% 0.1% 10.5% 9.3% Distribution, retail, and restaurants 12.7% Real estate and financial, other 3.2% 5.2% 15.2% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Shared Research based on company materials
Logic behind the calculation of ownership ratios: portfolio company valuation
When JAFCO and other VC companies invest in startups and unlisted companies, their logic for deciding what percentage of a portfolio company’s shares to purchase is as follows. Take for instance Company A, which was established three years ago and wants to raise JPY50mn in capital. Its current capital is JPY25mn (500 shares, JPY50,000 per share). Company A aims to list in five years and plans to deliver JPY300mn in profit at that point.
Given JPY300mn in planned profit at the time of listing and an industry price-earnings ratio (PER) of 20x, market capitalization at listing would be JPY6.0bn (JPY300mn x 20x). Five to seven years is an average investment period. Assuming IRR of 50% and a five-year investment period would yield an investment multiple of 7.59x. Dividing JPY6.0bn by the 7.59x multiple, current market capitalization would thus be JPY791mn. Accordingly, to provide Company A with its desired JPY50mn in capital, a VC company would want an interest equivalent to JPY50mn, which would be 6.3% of existing shares (JPY50mn divided by JPY791mn), or 32 shares (6.3% of 500 shares).
Sample calculation of an ownership ratio
Company A ■ In the third year of business since inception ■ Plans to raise JPY50mn ■ Aims for listing in five years, with earnings of JPY300mn ■ Has JPY25mn in capital (500 shares of stock priced at JPY50,000) Market capitalization at listing: JPY6.0bn (earnings: JPY300mn, PER 20x) With IRR at 50％, investment multiple in the fifth year is 7.59x (see table below) Current market capitalization: JPY6.0bn / 7.59 = JPY791mn Proposed interest: JPY50mn / JPY791mn = 6.3% JPY791mn / 500 shares = JPY1,582,000 (per share) 32 shares (500 shares × 6.3％) x 1,582,000 = JPY50.6mn (years) IRR 1 2 3 4 5 6 7 8 9 10 10% 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59 20% 1.20 1.44 1.73 2.07 2.49 2.99 3.58 4.30 5.16 6.19 30% 1.30 1.69 2.20 2.86 3.71 4.83 6.27 8.16 10.60 13.79 40% 1.40 1.96 2.74 3.84 5.38 7.53 10.54 14.76 20.66 28.93 50% 1.50 2.25 3.38 5.06 7.59 11.39 17.09 25.63 38.44 57.67 60% 1.60 2.56 4.10 6.55 10.49 16.78 26.84 42.95 68.72 109.95 70% 1.70 2.89 4.91 8.35 14.20 24.14 41.03 69.76 118.59 201.60 80% 1.80 3.24 5.83 10.50 18.90 34.01 61.22 110.20 198.36 357.05 90% 1.90 3.61 6.86 13.03 24.76 47.05 89.39 169.84 322.69 613.11
Source: Shared Research
As this example illustrates, when investing in startups and unlisted companies, VC companies first consider the target company’s enterprise value at the time of exit. A VC company determines how much the target company might sell for, then uses IRR to discount that figure to its enterprise value at the time of investment (enterprise value at the time of investment =
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 20 enterprise value at the time of exit÷(1+IRR)ｎ) and determines the desired ownership ratio. IRR levels differ depending on the phase of growth of a startup company. The table below outlines percentages disclosed by the American Institute of Certified Public Accountants.
VC returns
Stage of Development Plummer (*1) Scherlis and Sahlman (*2) Sahlman, Stevenson, and Bhide Startup 50–70％ 50–70％ 50–100％ First stage or "early development" 40–60％ 40–60％ 40–60％ Second stage or "expansion" 35–50％ 30–50％ 30–40％ Bridge/IPO 25–35％ 20–35％ 20–30％ *1: James L. Plummer, QED Report on Venture Capital Financial Analysis (Palo Alto, CA: QED Research, 1987) *2: Daniel R. Scherlis and William A. Sahlman, “A Method for Valuing High-Risk, Long-Term Investments: The 'Venture Capital Method,'” Harvard Business School Teaching Note 9-288-006 (Boston: Harvard Business School Publishing, 1989)
Source: Shared Research based on the AICPA practice aid “Valuation of Privately-Held-Company Equity Series Issued as Compensation”
JAFCO uses an ownership ratio of around 20% as a benchmark. However, the company takes a number of factors into consideration when determining actual ownership ratios. These include (1) the likelihood that the portfolio company’s management would prefer to keep its stake as high as possible, (2) the portfolio company management’s choice whether to obtain the capital it needs in one chunk or through multiple rounds (thereby the ownership ratio changes), and (3) difference in the valuations presented by competing VC companies. After taking these considerations into account, JAFCO says it does not always confine itself to the expected return on paper when presenting a valuation. Also, reconciling the interests of target companies and investors often involves class shares and investment agreements.
Business development (hands-on)
Logically, VC investments assume enterprise value at the time of exit, discounted according to IRR, to determine its stake in a portfolio company. The assumption is that the portfolio company’s enterprise value will increase between the time of investment and the exit. To ensure this, venture capitalists provide hands-on management support to portfolio companies.
VCs affiliated with banking and securities institutions can take advantage of strong networks and stock market familiarity, which confers expertise in valuation methods and IPOs. There are also VC companies specializing in certain industries, with which they have strong networks, and are strong in information technology. Corporate-VC companies fall under this category.
JAFCO’s hands-on approach emphasizes comprehensive management expertise. Shared Research understands this to mean the company excels at organizational and management insight and management support capabilities. Specifically, JAFCO seconds executives to portfolio companies or participates in their management by obtaining observation rights (the right to attend and observe Board of Directors meetings), and monitors the management team.
Hands-on: The hands-on approach began attracting attention as the result of new guidelines introduced by the Fair Trade Commission in August 1994. Until then, seconding executives from VC companies to portfolio companies had, in principle, been banned, as was holding joint positions. The new guidelines made it possible to second executives. JAFCO began the full-fledged secondment of executives to portfolio companies in 1999. As of 2003, it had seconded directors to 76 companies and had acquired observation rights at 216 companies. Of these, it exercised the rights at 136 companies (Source: corporate history).
JAFCO also provides financial support (providing capital, formulating capital policies, introducing investors), consulting support (introducing sales and alliance partners, introducing sales and production outsourcing options, providing information needed for business), and IPO support (selecting a managing underwriter and an audit firm, analyzing share demand/supply and bookbuilding, and assisting with IPO preparations).
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 21 JAFCO’s hands-on menu
Business development IPO consulting - Propose and execute strategies - Managing the launch and progress of IPO preparation projects - Configure governance structures (general meeting of shareholders, Board of Directors, - Cultivate and expand client sales routes corporate auditor audit, internal audits, etc.) - Introduce business and capital alliance partners and - Create numerical management systems (monthly and annual budgets, budgetary controls, support execution etc.) - Draft and support the implementation of policies for maintaining transactions with affiliated - Assist with personnel recruiting companies, executives, and major shareholders - Introduce various service providers deemed - Help to prepare securities underwriting materials and listing application materials, provide necessary to move business forward advice during review process - Support global development - Support the creation of internal control systems related to financial reporting (J-SOX) - Help North American investees enter the Japanese - Draft and support the execution of capital policies (such as stock options) and other Asian markets - Help Asian investees enter the Japanese and other Asian markets
Source: Shared Research based on company materials
JAFCO’s venture capitalists, who provide hands-on support by using their overall management capabilities as a tool, focus on evaluating the top management. It is because JAFCO decides whether or not to invest in startups and early-stage unlisted companies that are not yet generating cash flow based on the character of the top management. JAFCO explains that top management comes in two types. The first is where the business reflects the person’s life interests, values, and hobbies. This type tends to love his/her company and be reluctant to sell. The second type considers his/her business as a project. This type of person is more of a professional manager, who takes more of an arms’ length approach to the business (in a positive sense).
JAFCO’s venture capitalists pay close attention to the capabilities of an entrepreneur or the top management. An ability to evaluate people cannot be acquired by obtaining an MBA, but would require abundant experience in building insight into people and organizations. Shared Research understands that JAFCO’s hands-on approach capitalizing on its management expertise differentiates itself from competing corporate-VC companies and VC companies affiliated with financial institutions.
Exits
JAFCO provides capital to startups and unlisted companies and holds their shares in return. It seeks to earn a return by selling these shares. The main investment exits are through IPOs and M&A. If a portfolio company fails to list during the predetermined investment or harvesting period, JAFCO may sell the shares back to the portfolio company or its management (buyback), other shareholders (secondary sale), or a third party.
Exits (IPOs, trade sales, and buyouts in Japan since 2012)
Cloud/Enterprise Infrastructure Life science, Internet-related Cleantech Consumer services Business service Buyout software technology healthcare 2012 COLOPL (IPO) Four Nines (M&A) 2013 ZIGExN (IPO) N.FIELD (IPO) Bitcellar (TS), Eleven Datasection (IPO), Recruit Holdings QB Net Holdings 2014 MedPeer (IPO), gumi CYBERDYNE (IPO) Biotherapeutics FreakOut (IPO) (IPO) (M&A), Vantan (M&A) (IPO) (IPO), Sosei (TS) TRACON Aiming (IPO), LUXA sMedio (IPO), SLD Entertainment 2015 Pharmaceuticals, Inc. (TS) Aratana (IPO) (IPO) (IPO) 90 Seconds Japan 2016 (TS) Aoi Zemi (TS), HEROZ (TS), JG Meeting Biomedical Solutions Locondo (IPO), 2017 (TS), Money Forward SmartEnergy (TS) Spiber (TS) (TS), miRagen Payroll (M&A) Uniform Next(IPO) (IPO), UUUM (IPO), Therapeutics (TS) GameWith (IPO) UNICON PTE. LTD. MTG (IPO), Teno FLEXCEED (M&A), 2018 RESCHO (TS) (TS) Holdings (IPO) Megabass (M&A) Chatwork (IPO), 2019 Giftee (IPO) Bill.com Holdings Laplace System (TS) GSTV (IPO) Astamuse (TS) Chariloto (M&A) (IPO) 2020 Boqii Holding(IPO) stmn (IPO) MIRAISENS (TS) I3 Systems (IPO) Graniph (M&A) coconala (IPO), Appier Group (IPO), 2021 Kibun Foods (IPO) Komine (M&A) Visional (IPO) WACUL (IPO)
Source: Shared Research based on company materials IPO: Initial public offering, TS: Trade sale to a third party Business model Client attributes
As JAFCO receives management fees from the investors that provide capital for its funds, the investors are JAFCO’s clients. Financial institutions and business companies make up approximately 50% of total capital commitments to the funds JAFCO
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 22 operates, with JAFCO itself providing around 40%. The most recent fund, SV6, was established in June 2019 and concentrates on investing in Japanese companies. Aiming to attract more capital from institutional investors that can continue to provide funds, the company raised 45% of SV6’s total commitments from financial institutions, which is higher than for other funds. Pension funds are included in the “Other” category of SV3, but pension funds have not provided capital for SV4 or later funds.
Investor composition of JAFCO funds (including JAFCO)
Fund size Financial Business (JPYmn) Other JAFCO JAFCO's interest Investment in Japan companies companies SV3 146,500 58,700 80,000 31% 19% 10% 40% SV4 60,000 29,700 40,000 18% 32% 50% SV5 75,000 32,400 50,000 32% 22% 3% 43% SV6 80,000 29,100 80,000 45% 16% 2% 37%
Source: Shared Research based on company materials (figures as of January 20, 2020)
Looking at the investor composition (amount basis) of all funds established in Japan, including those set up by JAFCO (April 2019–March 2020), financial institutions (banks, shinkin banks, credit unions, insurers, and securities companies) account for 47.8%, business companies 26.5%, and pension funds 1.1 %.
Investor composition for all domestic funds
Amount per investor Investors by attribute No. of investors % of total Amount (JPYmn) % of total (JPYmn) General partners 43 14.9% 35,147 19.9% 817 Total Japan 240 83.0% 139,732 79.3% 582 Individuals, relatives 33 11.4% 551 0.3% 17 Other venture capital, fund of funds 3 1.0% 401 0.2% 134 Business companies 103 35.6% 46,735 26.5% 454 Banks, shinkin banks 70 24.2% 43,856 24.9% 627 Insurance companies 9 3.1% 33,088 18.8% 3,676 Securities companies 10 3.5% 7,350 4.2% 735 Pension funds 1 0.3% 2,000 1.1% 2,000 Government agencies (excl. pension funds) 1 0.3% 150 0.1% 150 College, academic organizations 4 1.4% 4,100 2.3% 1,025 Other 6 2.1% 1,500 0.9% 250 Undisclosed 0 0.0% 0 0.0% - Total overseas 6 2.1% 1,330 0.8% 222 Undisclosed 0 0.0% 0 0.0% - Total 289 100.0% 176,209 100.0% 610
Source: Shared Research, based on the Venture Enterprise Center’s “Venture White Paper 2019
Portfolio company attributes
JAFCO newly invested in 19 Japanese portfolio companies in FY03/21. Of the 19 companies, 18 were seed or early-stage investments. Looking at the profile of presidents of SV4 and SV5 portfolio companies, (1) the average age of presidents at the time of business launch was 33.8 for SV4 and 36.2 for SV5, (2) the average age of the presidents at the time of investment was 37.9 for SV4 and 39.1 for SV5, (3) the average number of years in business at the time of JAFCO’s initial investment was 4.6 for SV4 and 2.9 for SV5. Currently, a majority of portfolio companies are two to three years old.
Value to clients
JAFCO provides value to clients (investors) in the form of investment returns. Internal rate of return (IRR) is typically used to indicate VC and PE investment returns and ROI is used as a key performance indicator (KPI), but JAFCO uses investment multiple as the main KPI. Its funds target a gross multiple (MOIC, or multiple on invested capital) of 2.5x or more, calculated as “sales proceeds (including valuations of unsold portfolio companies)÷ invested capital,” and a net multiple (TVPI, or total value to paid-in capital) of 2.0x or more, calculated as “(cumulative distributions + net asset value) ÷ paid-in capital.”
IRR: This is the discount rate that makes the present value of cash flows obtained through a planned investment equal to the amount invested. If IRR is larger than the cost of capital, the investment is determined to be favorable. One advantage of IRR is that it takes the time value of cash flows into account. ROI: This percentage is used to assess planned investment based on the ratio of the average return over the years to investment amount. ROI may also be referred to as the accounting return method. ROI is calculated as (annual after-tax profit/total investment) x 100. ROI is easy to understand because it is consistent with accounting figures. One disadvantage of ROI is that it ignores the time value of cash flows.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 23 Investment multiple was 3.3x in FY03/21, achieving the company’s KPI target. The multiple was 0.7x in FY03/10, when Mr. Fuki was appointed president. The company believes this increase confirms the success of the highly selective, intensive investment strategy.
Capital gain and multiple
Capital gains and multiple FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Operational investment securities revenue [1] 15,187 17,744 38,498 56,471 32,376 20,774 23,470 23,291 23,697 16,164 Proceeds from sale of securities 14,857 17,414 38,170 55,862 30,824 20,533 23,322 23,177 23,540 16,074 Dividend and interest income 329 330 328 608 1,551 240 147 113 156 90 Operational investment securities cost of 15,448 10,738 11,469 21,904 16,687 11,973 9,848 9,274 8,337 4,903 revenue [2] Cost of securities sold 14,852 10,032 11,296 21,904 16,687 11,973 9,848 9,274 8,116 4,903 Impairment loss 596 705 172 0 0 0 0 0 221 0 Capital gains [1]-[2] -261 7,006 27,029 34,566 15,689 8,800 13,621 14,016 15,359 11,260 YoY - - 285.8% 27.9% -54.6% -43.9% 54.8% 2.9% 9.6% -26.7% Multiple [1] / [2] 1.0 1.7 3.4 2.6 1.9 1.7 2.4 2.5 2.8 3.3 Average multiple (five years) 1.1 1.0 1.5 1.9 2.1 2.3 2.4 2.2 2.3 2.6 Average multiple (ten years) 1.7 1.7 1.9 2.1 2.3
Source: Shared Research based on company materials Note: Capital gains have been retroactively adjusted to the standards in place from FY03/17 (including impairment loss and dividend and interest income).
The table below describes returns from funds in operation. Taking the commitment amount to be 1, the table provides indexed amounts of paid-in capital (PI), distributions (D; returns to investors), and residual value (R; portion that has not been distributed to investors referred to as the residual value of the fund). Final fund performance is expressed as (D+R)/PI. If this figure is greater than one, the fund value exceeds the invested capital (paid-in capital).
TThe performance index at end-March 2021 was 1.59x for SV3 (established in 2007) and 1.80x for SV4 (established in 2013). These figures are both up from end-March 2020, when they were 1.58x and 1.54x, respectively. The average D/PI for domestic funds established at the same time as SV3 and SV4 was 1.32x for those established in 2007 and 0.87x for those established in 2013 (source: “Venture White Paper 2020,” VEC). Achieving particularly high multiples were JAFCO Asia’s JATF VI, which was 2.96x at end-March 2021, and JAFCO America’s Icon IV at 2.67x.
It should be noted that mark-ups (written up valuations to indicate the amount over acquisition costs) of unlisted portfolio companies are not factored into multiples of domestic funds SV3 and SV4, while those for Asia (JATF) and the US (Icon) reflect mark-ups in accordance with local valuation standards.
Returns from funds under management
Commitment Indexed (commitment as 1.00) Net IRR Multiple Fund Established Multiple (D+R) / PI (fund size) Paid-in capital (PI) Distribution (D) Residual (R) （％） (D+R) / PI As of end-Mar. As of end-Mar. As of end-Mar. As of end-Mar. 2021 As of end-Mar. 2021 As of end-Mar. 2021 As of end-Mar. 2020 2021 2021 2021 Japan (mark-down only) JAFCO SV-3 2,007.07 1,465 1.00 1.57 0.02 9.4 1.59 1.58 JAFCO SV-4 2,013.03 600 1.00 1.34 0.46 13.6 1.80 1.54 JAFCO SV-5 2,016.08 750 0.93 0.05 0.75 - 0.87 0.82 JAFCO SV-6 2,019.06 800 0.48 0.00 0.43 - 0.89 0.90 Asia (mark-up and mark- down) JATF Ⅴ 2,010.10 130 0.95 0.64 0.11 - 0.79 0.78 JATF Ⅵ 2,013.03 150 1.00 2.12 0.84 25.2 2.96 2.76 JATF Ⅶ 2,017.04 140 0.88 0.00 0.89 0.7 1.02 0.89 US (mark-up and mark- down) Icon Ⅱ 2,006.04 108 0.96 1.32 0.05 6.4 1.34 1.35 Icon Ⅳ 2,010.02 150 1.00 2.45 0.64 12.6 2.67 1.43 Icon Ⅴ 2,012.05 260 0.99 0.41 0.69 2.2 1.09 1.08 Icon Ⅵ 2,015.12 375 0.85 0.07 0.94 7.1 1.15 1.01
Source: Shared Research based on company materials
Investment structure and channels
Global investment structure
JAFCO diversifies geographic risk by investing in three locations: Japan, Asia, and the US. As of end-March 2021, its global balance of unlisted investments was JPY161.3bn (+14.4% YoY) and portfolio companies numbered 220 (+14 YoY). Breaking down the balance, Japan accounted for JPY99.2bn (+20.5% YoY, 61.5% of the total), the US for JPY42.9bn (+5.7% YoY, 26.6%), and Asia for JPY19.2bn (+6.1% YoY, 11.9%). In Asia, JAFCO targets companies in China and other promising areas. In the US, investments are based in Silicon Valley.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 24 Global investment structure
Investment team structure Unlisted securities Number of investors Investment team Venture Business (JPYmn) YoY % of total No. of companies YoY change % of total Headcount VC Buyout partners development Japan 99,200 20.5% 61.5% 142 16 64.5% 46 31 15 14 US 42,900 5.7% 26.6% 31 -1 14.1% 6 2 2 Asia 19,200 6.1% 11.9% 47 -1 21.4% 12 2 Total 161,300 14.4% 100.0% 220 14 100.0% 64 31 15 2 18
Source: Shared Research based on company materials Notes: The number of personnel is as of April 1, 2021. Overseas life science investments (handled by the venture investment division in Japan) are included in “Japan.”
JAFCO’s domestic investment structure mainly comprises departments for investment (46 members) and business development (14 members). The company has four branches, including the head office in Tokyo. Overseas, it has consolidated subsidiaries, including JAFCO Asia. JAFCO Asia has 12 members on its investment team (up three YoY); JAFCO America’s investment team (Icon Ventures) has six.
Earnings structure
In FY03/21, revenue was JPY21.5bn. Of this figure, capital gains on the company’s own investments were JPY11.3bn, and income from fund management came to JPY5.3bn. The latter figure breaks down further into management fees of JPY2.9bn and success fees of JPY2.5bn. Of total revenue, therefore, 52.3% came from capital gains on the company’s own investment portion.
Capital gains
Capital gains are revenues from operational investment securities minus the cost of operational investment securities. Capital gains include gains on the sale of shares in portfolio companies that have gone public and capital gains on unlisted shares. The company provides around 40% of its own capital for the funds it manages. Accordingly, JAFCO’s capital gains grow in line with fund returns. Distributions to investors (LPs) are capital gains minus success fees paid to JAFCO (GP), and are paid in proportion to investment percentage.
Capital gains
Capital gains FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Capital gains -261 7,006 27,029 34,566 15,689 8,800 13,621 14,016 15,359 11,260 Listed 2,975 7,225 27,245 31,747 9,989 6,499 11,281 5,264 2,627 7,567 Realized gains 3,205 7,444 27,536 32,069 10,775 6,531 11,492 5,327 2,848 7,567 Realized losses -230 -218 -291 -322 -785 -31 -211 -62 -221 - Unlisted -3,236 -219 -216 2,818 5,699 2,301 2,340 8,751 12,732 3,693 Realized gains 3,340 3,090 3,606 10,303 10,586 5,893 6,750 11,069 16,726 4,435 Realized losses -6,576 -3,309 -3,823 -7,485 -4,887 -3,592 -4,410 -2,317 -3,994 -742
Source: Shared Research based on company materials Note: Capital gains have been retroactively adjusted to the standards in place from FY03/17 (including impairment loss and dividend and interest income).
Management fees
As the GP, JAFCO receives an annual management fee of around 2% of total commitments in exchange for handling investment, operational, and administrative tasks, such as selecting portfolio companies and managing the fund’s cash and other assets. By this calculation, on average a JPY40.0bn fund would generate management fees of JPY800mn per year. Management fees provide steady revenue throughout the life of a fund. However, the amount subject to management fees decreases once a fund has been established over time. Because the company itself provides around 40% of the fund size, it receives management fees on the remaining 60%. In FY03/21, the amount subject to management fees was JPY132.0bn.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 25 Management fees and success fees
Fund FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 management (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Funds subject to management fees 75,700 75,500 129,000 132,000 Income from partnership management 4,485 4,225 6,279 5,218 8,688 7,062 5,987 2,586 6,155 5,340 Management fees 4,399 4,140 5,097 4,598 3,812 3,494 3,551 1,750 2,586 2,871 Success fees 85 85 1,182 619 4,875 3,567 2,435 836 3,569 2,469 Retroactive corrections to management fees per FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 changes in revenue recognition standards (JPYmn) (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Management fees (before) 4,399 4,140 5,097 4,598 3,812 3,494 3,551 3,200 Success fees 85 85 1,182 619 4,875 3,567 2,435 836 SG&A expenses (before) 4,361 4,475 5,784 5,710 5,689 5,476 6,017 5,700 [1] Core income (management fees - SG&A) 38 -335 -687 -1,112 -1,877 -1,982 -2,466 -2,500 [2] Core income (management fees + success fees 123 -250 495 -493 2,998 1,585 -31 -1,664 - SG&A） Management fees (after) - 3,700 3,900 3,600 2,800 2,500 2,500 1,750 2,586 2,871 Success fees 85 85 1,182 619 4,875 3,567 2,435 836 3,569 2,469 SG&A expenses (after) - 3,700 4,200 4,300 4,300 4,200 4,600 3,882 4,088 4,319 [1] Core income (management fees - SG&A) - 0 -300 -700 -1,500 -1,700 -2,100 -2,132 -1,502 -1,448 [2] Core income (management fees + success fees - 85 882 -81 3,375 1,867 335 -1,296 2,067 1,021 - SG&A）
Source: Shared Research based on company materials
Also, in FY03/19 the Accounting Standard for Revenue Recognition was applied in advance, changing the way the company records the management fees that JAFCO America (excluded from the scope of consolidation in the same year) receives. Specifically, under the new standard JAFCO America’s management fees were netted, offsetting SG&A expenses. As a result, revenue for FY03/19 was JPY1.4bn lower than it would have been under the previous standard, cost of revenue was JPY512mn higher, and SG&A expenses were JPY1.9bn lower.
Success fees
Minimum fees needed to cover necessary expenses would not provide incentives for a GP to maximize a fund’s returns. Success fees are in place for this reason. The success fees are set at around 20% of the cumulative amount distributed to investors in excess of their paid-in capital contributions (no hurdle rate). For instance, if the value of a fund’s assets increases from JPY40.0bn to JPY60.0bn in the course of fund management, the GP would receive JPY4.0bn in success fees (20% of the JPY20.0bn in capital gains after returning committed capital of JPY40.0bn to investors). The remaining JPY16.0bn would be distributed to investors. As JAFCO provides around 40% of a fund’s total size using its own capital, it receives success fees on the remaining 60%.
Core income
JAFCO refers to the amount of management fees minus SG&A expenses as core income, because it places importance on the degree to which SG&A expenses are covered by management fees. Since FY03/16, the core income has been negative. The core income generally turns positive by adding success fees. Further additions of dividends received on listed company securities (mainly shares in Nomura Research Institute) allow costs to be covered.
Core income
Core FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 income (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Management fees [1] 4,399 4,140 5,097 4,598 3,812 3,494 3,551 1,750 2,586 2,871 Success fees [2] 85 85 1,182 619 4,875 3,567 2,435 836 3,569 2,469 SG&A expenses [3] - 3,700 4,200 4,300 4,300 4,200 4,600 3,882 4,088 4,319 Core income Management fees - SG&A expenses - 440 897 298 -488 -706 -1,049 -2,132 -1,502 -1,448 Management fees + Success fees - SG&A - 525 2,079 917 4,387 2,861 1,386 -1,296 2,067 1,021 expenses (Ref.) Dividends from listed securities 1,772 951 1,112 1,087 1,380 1,407 1,461 1,410 2,149 1,478
Source: Shared Research based on company materials Note: Revised revenue recognition standards, which were put in place early in FY03/19, have been retroactively applied to SG&A expenses for figures prior to FY03/19.
Shared Research understands that the size of capital gains and success fees reflect the amount of value JAFCO adds through its business of investing in startup and early-stage unlisted companies. Shared Research deems the core income acceptable if fixed costs are covered to a certain extent.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 26 Cost structure and allowance for investment loss
Cost of revenue and SG&A expenses
For JAFCO, the cost of revenue is acquisition cost of investment securities in which it invests using its own capital (operational investment securities). The cost of operational investment securities comprises the cost of securities sold and impairment losses. Revenues from operational investment securities deducted by cost of operational investment securities yield capital gains.
In FY03/21, the SG&A to revenue ratio was 20.1%. However, this ratio fluctuates significantly as revenue levels change drastically in line with the size of capital gains. Personnel expenses account for 44.9% of SG&A expenses (50.8% in FY03/20).
SG&A expenses
SG&A expenses (consolidated) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. SG&A expenses 4,361 4,475 5,784 5,710 5,689 5,476 6,017 3,882 4,088 4,319 SG&A ratio 22.0% 20.3% 12.9% 9.2% 13.8% 19.7% 20.4% 15.0% 13.7% 20.1% Directors' compensations 319 297 267 240 272 259 245 207 201 199 Provision for directors' bonuses 128 153 168 192 165 156 127 89 89 84 Employees' salaries 1,566 1,702 2,444 2,060 2,120 1,994 2,140 1,161 1,249 1,181 Employees' bonuses 324 354 593 660 555 472 491 426 446 392 Retirement benefit expenses 80 136 105 99 166 78 84 -22 90 83 Real estate expenses 438 429 445 458 470 449 471 313 197 189 Dues and taxes 489 784 572 592 1,192
Source: Shared Research based on company materials
Allowance for investment losses
Losses on the sale of unlisted securities are generally covered by the reversal of allowance for investment losses. In FY03/21, the allowance of JPY803mn fully covered such losses on sale (JPY742mn). In FY03/21, the allowance for investment losses stood at JPY10.9bn, or a relatively low 17.3% of the JPY63.1bn balance of unlisted investments.
The standards for posting allowance for investment losses differ between company-by-company allowance and general allowance. Company-by-company allowance is an allowance against expected returns of less than 70% of the acquisition cost. General allowance is provided for portfolio companies that are not subject to company-by-company allowance. As the number of portfolio companies has decreased, JAFCO has become better able to ascertain the details of individual portfolio companies. For this reason, it stopped posting general allowance on investments made later than January 2017.
Allowance for investment loss
Provision for investment loss FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Unlisted securities 68,462 70,119 65,026 57,265 50,863 47,673 49,617 51,522 55,061 63,102 Provision for investment loss [1] 1,702 2,033 3,224 3,443 3,098 1,905 2,283 1,687 3,084 3,483 Company-by-company 1,524 1,684 3,730 4,129 3,370 2,006 3,817 2,541 3,731 3,541 General (reversal) 178 349 -506 -686 -272 -101 -1,534 -854 -647 -58 Reversal of provision for investment loss [2] 7,033 2,900 3,302 6,531 3,673 4,741 3,148 2,399 3,599 803 Provision for investment loss–net (reversal) [1]- -5,331 -866 -77 -3,087 -574 -2,835 -865 -712 -514 2,679 [2] Allowance for investment loss 19,701 18,843 18,788 15,757 15,176 12,332 10,351 9,501 8,229 10,917 Company-by-company 15,222 14,034 14,488 12,143 11,834 9,091 8,644 8,651 8,026 10,772 General 4,479 4,809 4,300 3,614 3,342 3,241 1,707 850 203 145 Ratio of allowance to unlisted securities 28.8% 26.9% 28.9% 27.5% 29.8% 25.9% 20.9% 18.4% 14.9% 17.3%
Source: Shared Research based on company materials Note: Other funds are excluded from FY03/20.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 27 Losses on the sale of unlisted securities and reversal of allowance for investment loss
Realized losses and reversal of allowance for FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 investment loss (JPYmn) (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Capital gains -261 7,006 27,029 34,566 15,689 8,800 13,621 14,016 15,359 11,260 Listed 2,975 7,225 27,245 31,747 9,989 6,499 11,281 5,264 2,627 7,567 Realized gains 3,205 7,444 27,536 32,069 10,775 6,531 11,492 5,327 2,848 7,567 Realized losses -230 -218 -291 -322 -785 -31 -211 -62 -221 - Unlisted -3,236 -219 -216 2,818 5,699 2,301 2,340 8,751 12,732 3,693 Realized gains 3,340 3,090 3,606 10,303 10,586 5,893 6,750 11,069 16,726 4,435 Realized losses (A) -6,576 -3,309 -3,823 -7,485 -4,887 -3,592 -4,410 -2,317 -3,994 -742 Coverage ratio for realized losses (A)/(B) -98.1% -148.1% -127.8% -115.7% -138.4% -76.4% -119.6% -82.1% -103.0% -85.4% Impairment losses for unlisted securities 586 547 0 Reversal of investment losses 7,033 2,900 3,302 6,531 3,673 4,741 3,148 2,399 3,599 803 Realized losses excl. forex effects below (B) 6,703 2,234 2,992 6,472 3,531 4,700 3,686 2,822 3,876 869 Forex difference between allowance and realized 0 0 0 0 0 0 -584 -485 -323 -223 losses Impairment loss 264 544 0 0 0 0 0 0 Other 66 121 309 58 141 41 45 61 45 157
Source: Shared Research based on company materials Note: Capital gains have been retroactively adjusted to the standards in place from FY03/17 (including impairment losses and dividend and interest income). Investment strategy Highly selective, intensive investment
The company began focusing on highly selective, intensive investment in FY03/10. The average investment amount per company has risen from JPY175mn in FY03/11 to JPY400mn in FY03/21.
Increase in the average investment amount
New venture investments in Japan including FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 fund investors (JPYmn) (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Average invested capital 270.0 262.0 267.0 230.0 294.6 439.4 457.9 437.9 783.3 400.0 Average shareholding ratio 24% 25% 17% 15% 20% 24% 17% 16% 15% 16% Number of companies 27 12 21 21 21 18 16 15 21 19
Source: Shared Research based on company materials
Since January 2015, JAFCO has rebranded its US investment arm from JAFCO America to Icon Ventures. Icon Ventures’ investment amounts have also been rising. In 2019, its average deal size was 4x that of the average immediately after the global financial crisis.
Deal size at Icon Ventures
Source: Shared Research based on data from CB Insights
In tandem with the rising valuations of unlisted shares in Japan and overseas, JAFCO’s average investment amount has also increased. Shared Research assumes this is because the company concentrates investments on stocks it expects to grow substantially, regardless of their relatively high valuation.
Since adopting its highly selective, intensive investment approach in FY03/10, JAFCO has stopped pursuing IPOs by number of deals. At one time, the company supported between 20–30% of all IPOs in Japan. In FY03/21, it was involved in just five out of 86 domestic IPOs.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 28 Investment multiples indicate the success of JAFCO’s highly selective, intensive investment approach. In FY03/10, the multiple obtained by dividing portfolio companies’ market value at IPO (opening price-basis) by the invested capital was 1.1x. This figure rose to 11.5x in FY03/18, 7.9x in FY03/19, 10.4x in FY03/20, and 14.7x in FY03/21.
Number of IPOs and investment multiples
IPO track record in Japan (JPYmn) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Number of IPOs in Japan (companies) 36 52 53 86 94 87 79 95 92 86 Number of IPOs: JAFCO (companies) 18 20 19 21 8 6 7 2 3 5 Invested capital (A) 5,401 3,717 12,859 9,361 2,610 5,212 2,025 900 1,293 2,388 First price-based market cap (B) 5,511 10,540 77,077 49,492 8,273 20,727 23,343 7,128 13,396 35,210 First-price based capital gains (B)-(A) 110 6,823 64,218 40,131 5,663 15,515 21,318 6,228 12,103 32,822 Multiple (B)/(A) 1.0 2.8 6.0 5.3 3.2 4.0 11.5 7.9 10.4 14.7
Source: Shared Research based on company materials
JAFCO continues to carefully vet startup and early-stage companies, concentrating investments on those with growth potential to achieve market capitalization of JPY20.0–30.0bn at IPO.
A balance between the organization and individuals: the partnership model
In March 2018, JAFCO introduced a system of partners, transitioning from a corporate to a partnership VC model. The six members selected as partners were chosen on the basis of performance, disregarding age and background. (They put their own names forward, were voted on by employees, and their selection was formalized by resolution of the Board of Directors.)
Partners: The company has six partners, Keisuke Miyoshi (concurrent director), Naoki Sato (in charge of branches and business development), Ko Minamikurosawa (in charge of business investments), Atsushi Fujii, Shozo Isaka, and Tomotake Kitazawa (names and number of partners are as of April 1, 2021). The six partners first resigned from the company and then joined again as one-year fixed-term employees. As their employment agreements and responsibilities as partners are tied together, stepping down from the position of partner means also leaving their positions as employees.
Partners invest their own capital (tens to hundreds of JPYmn) in JAFCO’s funds and are eligible to receive success fees. As partners play a key role in investment decisions, partners and President Fuki (totaling seven members) convene an investment committee meeting once each week. A single-layered decision-making allows swift decision-making (the former investment group system had three decision-making layers). Investment requires unanimous agreement by the seven members; an investment is not made if there is any dissenting vote. Partners are not assigned to take charge of any specific industries.
JAFCO introduced the partnership model in the belief that, for VC investments which involve subjective decisions rather than assessing risks objectively, it could deepen involvement in the management of startups and unlisted companies if partners worked closely with entrepreneurs. An increase in high-quality entrepreneurs has resulted in more requests from entrepreneurs for a specific venture capitalist or level of commitment. Who invests and who raises value have taken on new importance. Further, Shared Research understands that as partners have skin in the game, they share the same incentives with investors to seek higher investment returns, thus boosting client value.
Venture capitalists attracting attention as individuals: Each year, Forbes announces “The Midas List” (a ranking of the world’s top 100 venture capitalists). In the ranking announced April 2021, Alfred Lin, the founding managing partner of Sequoia Capital China, topped the ranking. Of companies included in the ranking, Sequoia Capital had the most people (9), followed by US firms Andreessen Horowitz (5) and Accel (7). Every year, Forbes Japan announces its ranking of Japan’s most influential venture investors. Venture capitalists at JAFCO topped the ranking in 2021 and held second and third rankings in 2020. In 2017, JAFCO members ranked second, third, and fourth.
JAFCO explains that when it was a member of the Nomura Group, it concentrated on increasing the number of IPOs, not all of which were profitable. This pursuit of an organizational-type VC model has contributed to the development of the VC investment business in Japan, but failed to ensure business repeatability and performance stability. As the conventional organizational-type VC model failed to suffice entrepreneurs’ changing needs, it became necessary for VC companies to
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 29 showcase the individual’s risk-taking ability to differentiate itself from competitors. Added text has just disappeared. But it does not occur twice when you repeat the action.
In terms of risk control, JAFCO’s unique “tacit knowledge” shared by its partners and venture capitalists will serve as its strength. Most of its partners and venture capitalists joined the company right out of university and developed their careers in-house. JAFCO’s venture capitalists share a common image of an entrepreneur and learn first-hand from successful investment experience. JAFCO also maintains strong organizational networks between startups and unlisted companies. One- on-one relationship between a venture capitalist and an entrepreneur could be disrupted by job changes and internal transfers, but JAFCO’s track record of deals with around 1,000 startup and unlisted companies is retained as a positive legacy of an organization-based VC model.
A more robust Asia strategy
JAFCO conducts business in Asia via JAFCO Asia (Singapore), a wholly owned consolidated subsidiary. JAFCO Asia was formerly Nomura/JAFCO Investment (Asia) Ltd. and turned into a wholly-owned subsidiary in 1999. The company established a representative office JAFCO Investment (Hong Kong) Ltd. in Beijing in September 2002, followed by one in Shanghai in November 2008. It has developed business in Asia via JAFCO Asia and the above offices in China. In August 2017, the company established JAFCO Asia (Shanghai) Equity Investment Management Co., Ltd. (a Chinese subsidiary).
Previously, JAFCO’s Asian expansion centered on East Asia (China, South Korea, and Taiwan), but its focus is gradually shifting toward China, Taiwan, India, and Southeast Asia. The company has always hired its venture capitalists locally, and plans are to localize operations further by establishing funds in each region.
In March 2019, JAFCO Asia reorganized its Taipei branch into a local subsidiary, JAFCO Taiwan Capital Management Consulting Corp., to localize its Taiwan operations further. The final closing of a new fund managed by this subsidiary, JAFCO Taiwan I Venture Capital Limited Partnership, took place on April 27, 2020 (fund size: NTD2.0bn [approx. JPY7.2bn], investment targets: technology startup companies). This is JAFCO Asia’s first fund denominated in new Taiwan dollars.
JAFCO says that rather than Asia, domestic and US investments have driven performance to date. However, in the first nine months of FY03/20, the company generated capital gains of JPY16.6bn on the sale of unlisted shares, outstripping JPY11.1bn recorded for the whole of FY03/19. The major contribution was from the trade sale of an e-commerce company in China. JAFCO says this was one of its five most successful deals to date and its biggest so far in Asia.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 30 Investment trends at overseas bases
JAFCO JAPAN JAFCO ASIA Icon Ventures Established 1973 1990 2003 Regional coverage Japan Asia Pacific San Francisco, Silicon Valley Type of investors PE, VC VC VC Target stages Seed, Early, Middle, Later Early, Middle Early, Middle 161,300/220 companies Unlisted securities (JPYmn; end-Mar 2020) 99,200 19,200 42,900 Unlisted investees 142 48 31 New investments (FY03/21; JPYmn) 32,813(66) Investees (companies) 35 13 18 Invested capital (JPYmn) 21,491 3,684 7,637 YoY 86.4% 252.4% 90.6% Venture investments 12,450 Buyout investments 9,040 Businesses invested AI/Data Analytics 27 (3) Buyout investment 47 (34) Fintech 11 (1) Medical/Biotech 28 (3) Market place 19 (3) Media and Entertainment 22 (9) Mobile 21 (9) Other 38 (23) SaaS 21 (10) Sales and Marketing 20 (7) Science and Engineering 10 (1) Sustainability 5 (1) Social/Consumer internet 5 Cloud/Enterprise software 10 Clean-tech 13 Industrial technology Consumer products & services 21 Life science/Healthcare Business products & services Mobile 30 3 Security 4 Technology/Devices 118 Medical & Healthcare 14 Others 3 Buyout investments 18 (8)
Source: Shared Research based on company materials Note: Figures in parentheses indicate the number of exits through IPOs or exits via M&A. Buyout investments are exits through M&A deals. Figures for JAFCO Asia and Icon Ventures include only active investments.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 31 Market and value chain Scale of the VC investment market in Japan Provision of risk capital
Of the capital provided in Japan, loans account for the largest amount, at around JPY30tn. Next in line are funds raised through corporate bonds (approx. JPY9tn) and the stock market (approx. JPY2tn). The total amount provided by PE/ VC firms and public–private funds comes to around JPY1tn (source: materials from the secretariat of the sixth meeting of the Industrial Structure Council, Ministry of Economy, Trade and Industry).
Capital raised by Japanese startup companies
According to Japan Venture Research’s “Japan Startup Finance Report 2020,” capital raised by startups in Japan amounted to JPY461.6bn in 2020. While there was expected to be some disruption in the market due to the COVID-19 pandemic, it actually fell just 10% YoY and surpassed the level of JPY459.8bn in 2018. However, the number of companies raising funds totaled 1,537 (including those for whom amounts were unclear) down by 547 from 2,084 in 2019. Average capital raised per domestic startup was JPY328.1mn, with JPY100mn being the median amount. By comparison, in 2013 the mean and median amounts of capital raised per company were JPY98.3mn and JPY20.0mn, respectively, indicating that these figures increased by more than 3x in the seven years to 2020.
VC investments and JAFCO’s market share
JAFCO’s market share for VC investment (excluding BO investment): 10.2% (FY2019)
In FY03/20, Japanese domestic VC investments amounted to JPY217.2bn, while overseas investments amounted to JPY66.7bn (total of JPY283.9bn). JAFCO’s annual VC investment amount (excluding BO investment) was JPY29.1bn over the same period, or 10.2% of the total.
VC investment trends in Japan
(JPYmn) 2,015 2,016 2,017 2,018 2,019 Venture investments: Overseas 41,900 42,900 61,400 107,200 66,700 YoY - 2.4% 43.1% 74.6% -37.8% Venture investments: Japan 87,400 109,200 136,200 170,600 217,200 YoY - 24.9% 24.7% 25.3% 27.3% Total (excluding INCJ) [1] 129,300 152,100 197,600 277,800 283,900 YoY - 17.6% 29.9% 40.6% 2.2% No. of investments: Japan 954 1,108 1,344 1,483 1,490 No. of investments: Overseas 180 254 225 269 258 Total number of investments 1,134 1,362 1,569 1,752 1,748 Investment per company: Japan 92 99 101 115 146 Investment per company: Overseas 233 169 273 399 259 Investment per company: Total 114 112 126 159 162 JAFCO's annual investments [1] 17,959 16,776 24,332 22,807 29,063 JAFCO market share ([1] / [2]) 13.9% 11.0% 12.3% 8.2% 10.2%
Source: Shared Research, based on the Venture Enterprise Center’s “Venture White Paper 2019” Notes: INCJ is short for Innovation Network Corporation of Japan. JAFCO’s annual investment amount excludes buyout investments.
Size of the VC investment market: international comparison
In FY2019, VC investment markets in four regions (US, Europe, China, and Japan) totaled JPY18.7tn. The US market alone accounted for JPY14.5tn, down 5.9% YoY. The Chinese market accounted for JPY2.5tn (-25.5% YoY) and Europe for JPY1.3tn (+18.9%). The Japanese market was worth JPY0.3tn, up 4.1% YoY, making the US market 50x larger. (Source: “Venture White Paper 2020,” Venture Enterprise Center)
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 32 Major providers of risk capital
Major providers of risk capital
In addition to JAFCO and other VC companies, major providers of risk capital include corporate venture capital (corporate- VC) companies, public–private funds, buyout funds, and other narrow-range private equity (PE) funds. Public–private funds include the Innovation Network Corporation of Japan (INCJ) and the Cool Japan Fund Inc. PE funds include such names as Carlyle and KKR.
Roles and investment targets of major providers of risk capital
Source: Shared Research, based on The Practice of Private Equity Investment (Edited by Hiroto Koda, published by Chuokeizai-sha) Note: “CVC” is short for corporate venture capital.
Increasing investment in startups by corporate-VCs and business companies
In recent years, the expansion of corporate-VCs has been noteworthy. Backed by the capital strength of large business companies, corporate-VCs are established for R&D purposes to give business companies an edge in developing new technology or providing access to information. The 2010s marked the start of Japan’s second corporate-VC boom. Establishment of corporate-VCs has remained. They accounted for 5.4% of venture capital in 2011 and 11.6% in 2020.
Amount and share of providers of venture capital by type
(JPYmn) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 CAGR VC: Independent 20,100 7,400 23,700 30,800 26,600 35,200 45,500 57,300 82,000 66,000 31.5% VC: Financial groups 7,200 3,600 8,200 10,500 16,300 32,100 31,300 54,100 63,600 34,300 32.5% CVC 1,900 3,000 5,300 6,700 9,500 14,200 12,500 20,100 21,400 23,300 29.2% VC: Overseas 2,700 1,000 4,600 7,100 10,700 12,500 15,600 20,600 39,400 38,900 58.0% VC: Government, municipalities 2,400 4,000 10,000 13,100 10,400 11,600 22,500 13,500 12,400 15,900 18.8% VC: Universities 0 300 800 2,400 3,900 5,400 5,700 9,000 11,900 11,400 57.6% Other 700 2,400 600 800 1,500 3,500 6,000 6,500 8,500 11,200 21.2% Total 34,900 21,800 53,200 71,400 78,900 114,500 139,100 181,000 239,300 201,000 32.0% % of total 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 VC: Independent 57.6% 33.9% 44.5% 43.1% 33.7% 30.7% 32.7% 31.7% 34.3% 32.8% VC: Financial groups 20.6% 16.5% 15.4% 14.7% 20.7% 28.0% 22.5% 29.9% 26.6% 17.1% CVC 5.4% 13.8% 10.0% 9.4% 12.0% 12.4% 9.0% 11.1% 8.9% 11.6% VC: Overseas 7.7% 4.6% 8.6% 9.9% 13.6% 10.9% 11.2% 11.4% 16.5% 19.4% VC: Government, municipalities 6.9% 18.3% 18.8% 18.3% 13.2% 10.1% 16.2% 7.5% 5.2% 7.9% VC: Universities 0.0% 1.4% 1.5% 3.4% 4.9% 4.7% 4.1% 5.0% 5.0% 5.7% Other 2.0% 11.0% 1.1% 1.1% 1.9% 3.1% 4.3% 3.6% 3.6% 5.6% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Shared Research based on the “Japan Startup Finance Report 2020”
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 33 Trends at competing companies Competing companies
In addition to JAFCO, listed venture capital firms include Japan Asia Investment (TSE1: 8518) and Future Venture Capital (TSE JASDAQ: 8462). Below, we also include unlisted VC companies that have established funds on a similar scale to JAFCO’s, with which JAFCO may compete for investors.
Globis Capital Partners (independent VC, unlisted)
Globis Capital Partners (GCP) is part of the Globis Group, which operates a graduate school of management and publishes books on management expertise. GCP was set up in 1996 as a truly hands-on, independent VC company. With a cumulative total of more than JPY100.0bn in funds under management, GCP has invested in more than 150 companies to date. It has exited 36 investments via IPO and 18 through M&A.
GCP operates six funds. Its sixth fund is the largest, with a fund size of JPY40.0bn. GCP’s investments range from seed-stage to later-stage investments (just prior to listing). It invests up to JPY5.0bn in a portfolio company with the aim of creating “unicorn startups” (valued at more than USD1.0bn) in Japan.
GCP’s hands-on support includes personnel and expertise, as well as money. Its strength lies in support in the fields of so- called “4R” (IR, PR, HR, EngineeR), including IR-related consulting by staff hailing from securities companies, PR leveraging Globis’ own brand, HR support by external headhunters, and engineer-related recruiting support.
GCP’s track record in IPOs includes Lifenet Insurance Company (TSE Mothers: 7157), an online life insurer; GREE, Inc. (TSE1: 3632), a social media company; Mercari, Inc. (TSE Mothers: 4385), an operator of a smartphone-based C2C flea market app; and Lancers, Inc. (TSE Mothers: 4484), a provider of platforms to support freelancers. In 2020, its IPO record extended to the listing of Yappli (TSE Mothers: 4168), a provider of cloud-based software for app development, operation, and analysis and CREEMA (TSE Mothers: 4017).
Overview of Globis Funds
Fund Est'd Description Fund No.1 Globis Incubation Fund 1996 Fund established solely by Globis. Total amount of JPY540mn, 13 portfolio companies, six IPOs. Fund set up jointly with Apax. Total amount of JPY20.0bn, 47 portfolio companies, eight IPOs. Set up Apax Globis Partners as a joint venture with Pax Group of the UK, which has more than 30 years of Fund No.2 Apax Globis Japan Fund 1999 investment experience in Europe and the US. Investment in IT, technology, and service companies at the initial establishment through the growth stages. Fund established solely by Globis. Total amount of JPY18.0bn, 44 portfolio companies, 15 IPOs (as Fund No.3 Globis Fund Ⅲ 2006 of end-December 2019). Fund established solely by Globis. Total amount of JPY11.5bn, 23 portfolio companies, four IPOs (as of end-December 2019). Notably aiming to produce Japanese “unicorns” (unlisted companies with Fund No.4 Globis Fund Ⅳ 2013 market capitalization of more than USD1bn). Portfolio companies for the No. 4 fund include Japanese unicorns Mercari and SmartNews. Mercari listed on TSE Mothers in June 2017 with an initial valuation of JPY676.7bn. Fund established solely by Globis. Total amount of JPY16.0bn, 29 portfolio companies, one IPO (as Fund No.5 Globis Fund Ⅴ 2016 of end-March 2020). Fund established solely by Globis. Total amount of JPY40.0bn, 14 portfolio companies (as of end- Fund No.6 Globis Fund Ⅵ 2019 March 2020). The largest fund formed by Globis.
Source: Shared Research based on materials from Globis
SBI Holdings (TSE1: 8473)
SBI Holdings has four business segments: Financial Services, Asset Management, Biotechnology-Related, and Other. The VC business belongs to the Asset Management segment, which is spearheaded by a subsidiary, SBI Investment. SBI-HIKARI P.E. (a joint venture with Hikari Tsushin, Inc.) and SBI VEN CAPITAL also invest in other companies.
SBI Investment establishes funds for specific industries, and raises capital from financial institutions, investors, and business companies to invest in portfolio companies. Its distinguishing characteristic is that multiple SBI Group companies, including SBI Investment, SBI Securities, and SBI Capital, make joint investment in a company and provide group-wide support. For an IPO, SBI Securities serves as the lead underwriter and provides listing support.
SBI Investment has invested JPY482.1bn (as of April 1, 2021) in 995 companies (803 in Japan and 192 overseas). SBI Investment has established SBI BB Mobile Investment Limited Partnership and 12 other major funds. The SBI AI & Blockchain
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 34 Fund, established in June 2018, has a fund size of JPY60.0bn and in April 2020 it established the JPY100.0bn SBI 4+5 Fund.
Global Brain Corporation (independent VC)
This independent VC was established in 1998 with the aim of being fully hands-on and creating global startups. Its track record in exits include 21 IPOs and 51 M&As. Its contributions range from JPY30mn to JPY1.0bn, and the company invests at the seed through post-IPO stages.
Global Brain (GB) jointly operates corporate-VC funds, supporting business companies’ capital contribution and investment in startup companies. Seeing that the assets of a large corporation and the expertise of a VC company make for an optimal combination, GB has collaborated in the establishment of funds with KDDI Corporation (TSE1: 9433) and Mitsui Fudosan Co., Ltd. (TSE1: 8801). It also has a JPY20.0bn equity fund.
For the corporate-VC funds it manages, GB selects portfolio companies based on two perspectives: creating new business for investors and maximizing investment returns. Its equity funds, on the other hand, seek only to maximize investment returns. GB regards the combination of corporate-VC and equity funds an excellent business model, as companies that do not meet the investment criteria of its corporate-VC funds can be potential investment candidates of the equity funds.
Overview of Global Brain funds
Fund GP LP Term Fund size Investment target Aimed at leveraging the broad knowledge in financial services of the Sony Financial Group (which includes insurance companies and bank) and Global Brain’s network and Sony Financial SFV/GB Partnership LLP Global Brain 10 years JPY5bn ascertaining eye for discovering and cultivating promising venture companies. In Ventures addition to financial returns, intended to strengthen Sony Financial Group’s existing businesses and create new businesses. Growth-stage venture company. Key areas of investment aimed at leveraging Mitsui 31VENTURES–Global Brain–Growth I Mitsui Fudosan, Fudosan’s assets and resources: real estate tech, IoT, cyber-security, sharing economy, 10 years JPY30bn Project Global Brain e-commerce, fintech, energy and the environment, robotics, AI and big data, and healthcare. Centered on Japan and with investments in venture companies in North America, Europe, Israel, and Asian countries. Aims for the early-stage discovery, cultivation, and support of promising venture companies in business categories having strong synergies 31VENTURES Global Innovation Fund Global Brain Mitsui Fudosan 10 years JPY5bn with the Mitsui Fudosan group. Aimed at leveraging the Mitsui Fudosan group’s broad range of businesses and Global Brain’s expertise in supporting ventures in Japan and overseas to promote open innovation. Centered on Japan and with investments in venture companies in North America, South Cool Japan Fund, Korea, Southeast Asia, Israel, India, and Europe. Strategic LP investors include Cool Global Brain Limited Partnership JTB, Sumitomo Japan Fund, Inc.; JTB Corporation, and Sumitomo Mitsui Banking Corporation. Aimed at Global Brain 10 years JPY20bn No.6 Mitsui Banking boosting Japan’s international competitiveness by contributing to more competitive Corp., other tourism and inbound industries in preparation for the 2,020 Tokyo Olympic and Paralympic Games. JPY10bn Investments target IT-oriented venture companies in Japan and overseas that partner 10 years (JPY5bn for with KDDI. In addition to collaboration with the broad-ranging networks of KDDI’s KDDI Open Innovation Fund (KOIF) Global Brain (through each of No. 1 numerous companies, its marketing capabilities, and au SmartPass and other services, Jan 2022) and No.2 the fund is aimed at leveraging Global Brain’s management support program to funds) implement effective growth strategies. Investment targets are innovative IT venture companies with traction in the global Global Brain Limited Partnership Through market. Through collaboration between INCJ (strong industry networks) and Global Global Brain INCJ JPY15bn No.5 Dec 2023 Brain (hands-on, global, CVC track record), this hands-on venture capital fund is aimed at creating and nurturing IT ventures that will drive next-generation national wealth.
Source: Shared Research based on materials from Global Brain
Incubate Fund (independent VC)
This independent VC company was established in 2010. Incubate Fund is run by four joint partners who have been private investors in their own right, including former JAFCO (current JAFCO Group) employee Tohru Akaura. Communicating with entrepreneurs before they launch companies has led to such IPOs as Sansan, Inc. (TSE Mothers: 4443) and GameWith, Inc. (TSE1: 6552). Incubate Fund supports companies at the seed stage and has investments in more than 100 companies in Japan and overseas.
The company hosts a training camp program called Incubate Camp, attended both by entrepreneurs seeking capital and venture capitalists, including from Incubate Fund. Through business plans, the program aims to foster communications between these two groups and help them find new partners.
In July 2020, the company established the JPY25bn Fund No. 5, its largest ever, primarily aimed at institutional investors, bringing its total funds to over JPY62bn.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 35 Overview of Incubate Fund’s funds
Fund GP LP Established Fund size Target Toru Akaura, Masahiko Companies that foster innovation based on open systems in such areas as social Incubate Fund No. 1 Homma, Keisuke DeNA 2010–2017 JPY3bn applications, related services, and social media. Companies targeting global (as well as Wada, Yusuke domestic) expansion and are capable of operating globally. Murata Toru Akaura, Infocom, Sega, Masahiko SMRJ, D2C, Incubate Fund No. 2 Homma, Keisuke 2013 JPY2bn Investing in 100 seed startup companies. Nissay Capital, Wada, Yusuke mixi, others Murata Toru Akaura, Masahiko INCJ, Yahoo!, Areas of investment include next-generation media, entertainment, games, commerce, Incubate Fund No. 3 Homma, Keisuke SMBC, DBJ, TBS 2015 JPY11bn logistics, healthcare, finance, real estate, automotive, and housing-related innovation. Wada, Yusuke Holdings, others Murata Toru Akaura, Business Masahiko corporations, Companies that support changes in existing industries through such areas as fintech, Incubate Fund No. 4 Homma, Keisuke government and 2017 JPY10bn electric power systems, sharing, space, drones, and mixed reality. Wada, Yusuke financial Murata institutions Toru Akaura, Pension funds, Masahiko financial Completed the first round of fundraising on July 10, 2020. Aims for a fund size of Incubate Fund No. 5 Homma, Keisuke institutions, and 2020 JPY25bn JPY25bn. Fund No. 5 will be able to invest up to approx. JPY3bn per company, and will Wada, Yusuke government comprehensively support startups from their inception phase to pre-IPO. Murata agencies
Source: Shared Research based on materials from Incubate Fund Reference companies: Japan Advantage Partners (PE)
Advantage Partners, established in 1992, pioneered PE investing in Japan. As well as investing, Advantage Partners works closely with portfolio companies on corporate governance to help boost enterprise value. In recent years, the company has leveraged its expertise cultivated in Japan to launch an Asian fund, which invests in companies in Asia. Its portfolio companies to date include Daiei (of which it is a major shareholder, along with Marubeni Corporation [TSE1: 8002] and Aeon Co., Ltd. [TSE1: 8267]), Pokka Corporation, Rex Holdings (delisted through an MBO, currently Reins International), and Tokyo Star Bank (the first listed bank to be delisted as the result of a TOB). Advantage Partners also takes part in large-scale projects through financing and investing jointly with global institutional investors.
Overview of Advantage Partners funds
Fund Fund Size (JPYmn) No. of investees Acquisition by investees No. of exits Japan (buyout) MBI Fund Ⅰ Oct 1997 JPY3bn 5 0 5 MBI Fund Ⅱ Jan 2000 18,000 9 2 9 MBI Fund Ⅲ Aug. 2003 46,500 11 8 11 Advantage Partners Fund Ⅳ Dec 2006 215,600 14 18 14 Advantage Partners Fund Ⅳ-S Dec 2012 JPY20bn 11 2 5 Advantage Partners Fund V Oct 2015 60,600 13 4 1 Advantage Partners Fund V Apr 2020 85,000 3 Asia Asia Fund Ⅰ Jan 2016 USD370mn 7 1 0 Japan (listed minorities) InfleXion Ⅰ May 2008 26,500 10 13 10 InfleXion Ⅱ Jan 2018 10,700 14 4 3 Advantage Advisers Growth Support Dec 2019 23,100 1 Fund
Source: Shared Research based on materials from Advantage Partners Reference companies: US Sequoia Capital (world’s largest VC)
Sequoia Capital of the US has invested in numerous companies, including Apple, Cisco, and Oracle. Based in Silicon Valley, it is one of the world’s most prominent VC companies. It invests in startups and unlisted companies mainly in energy, finance, enterprise, healthcare, internet, and mobile sectors.
Benchmark
Established in 1995. When other companies were developing their businesses globally in the 2000s, Benchmark spun off its high-performing UK fund, Balderton Capital, and continued to focus solely on the US market. Since the early 2010s, while other VC companies were specializing in seed-stage investments, Benchmark has remained focused on Series A rounds
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 36 rather than compete with angel investors. Benchmark is a VC company operating as a small team of elite professionals with an unwavering investment philosophy. It typically makes initial investments of around USD3mn to USD5mn per company, with total investments per company ranging from USD5mn to USD15mn throughout the investment period.
Accel
This company was established in 1983 by Arthur Patterson and Jim Swartz. Total funds under management amount to USD9.1bn (JPY910.0bn). Portfolio companies total 1,396 (of which, lead investor in 525), and has exited 288. Notable portfolio companies include Atlassian, Cloudera, Dropbox, Etsy, Facebook, Flipkart, Qualtrics, Slack, and Spotify. Accel is a global firm with bases in the US, UK, and India.
Trends at reference companies
Sequoia Capital Benchmark Accel Greylock Partners Established 1972 1995 1983 1965 Silicon Valley, West Silicon Valley, West Silicon Valley, West Location West Coast, Western US Coast Coast Coast Type of VC VC VC VC investors Target stages Early, Later, Seed Early Early, Later, Seed Early, Later Targeted regions US, China, India, Israel US US, Europe, India US No. of employees 501–1,000 11-50 101–250 1-10 No. of investments 1,494 614 1,577 749
No. of lead investments 553 201 611 188 No. of funds 30 6 29 7 Exits (companies) 319 162 314 219 No. of companies in the portfolio 143 73 130 97
Source: Shared Research, based on individual companies’ websites and data from Crunchbase.com Note: For ease of comparison, the range of employee numbers and the number of investments and exits were taken from Crunchbase.com. (Figures may differ from those on company websites due to differences in time periods.) The number of companies in the portfolio and businesses invested are taken from each companies’ websites, using the number of active companies. (For Accel, however, a cumulative figure is given. Accel’s figures also represent totals for Consumer and Enterprise.) Benchmark does not disclose the data of businesses invested on its website. Strengths and weaknesses Strengths
JAFCO has built its reputation as a financial institution, backed by a track record of VC investments in more than 4,000 companies and over 1,000 IPOs. Established in 1973, JAFCO is a long standing and largest specialist VC firm in Japan. To date, it has invested in more than 4,000 companies and achieved over 1,000 IPO exits. JAFCO has set the standards for VC investment in Japan by establishing Japan’s first investment limited partnership in 1982, pioneering the investment use of bonds with detachable stock warrants, and commencing buyout investments in 1998. Stakeholder trust is essential to sustained growth in the financial industry. Indeed, JAFCO’s latest fund SV6, in which the company’s partners co-invest (and therefore having skin in the game), became a sizable fund with JPY80.0bn in commitments (JPY50.9bn from LPs). Shared Research believes this ability to steadily raise capital for large-scale funds attests to the trust investors place in the company.
A strong information network enables the company to find attractive opportunities globally. Each year, JAFCO monitors around 1,000 startups and unlisted companies (flow basis). In addition, it has business transactions with around 3,000 companies (stock basis). Over a history spanning more than 40 years, JAFCO has built up a broad information network by leveraging its company-to-company relationships with startups and unlisted companies. This network helps JAFCO identify investment opportunities. JAFCO, JAFCO Asia, and Icon Ventures invested in 142, 47, and 31 unlisted companies, respectively, in FY03/21. By comparison, Globis Capital Partners, which establishes comparatively large funds (JPY40.0bn in size), invested in 104. Among leading global VC companies, Sequoia Capital invested in 143 portfolio companies. In terms of investment numbers, JAFCO is on par with the top US VC firms and is relatively strong in the Japanese VC market.
The ability to provide comprehensive, hands-on management support differentiates JAFCO from its Japanese domestic peers. JAFCO has rich experience and a track record in hands-on management support, seconding executives to portfolio companies and obtaining observation rights (the right to attend and observe Board of Directors meetings). Shared Research believes that JAFCO’s strength lies in its comprehensive management expertise, in other words, its insight into organization and management and hands-on capabilities. Competing VC firms affiliated with financial institutions and industry-specific corporate-VCs have specialized expertise and strong ties to capital and stock markets.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 37 However, the areas of expertise that startups and unlisted companies require from venture capitalists cannot be acquired without developing personnel and organizational insights and building up a track record. We believe the ability to provide hands-support by leveraging its management expertise differentiates JAFCO from competing VC companies affiliated with financial institutions and corporate-VCs. Weaknesses
Retaining talent is challenging, thus costs to sustain the company’s DNA tend to be high. The role of JAFCO’s venture capitalists is to invest in seed and early-stage startup companies that are not yet generating cash flows. Their job cannot be stereotyped as they rely on subjective decisions and experiences to bet on entrepreneurs as people. For that reason, the company has adopted the approach of cultivating personnel through internal apprenticeships, which it says has helped it maintain the leading industry position. MBAs do not guarantee such skills. Its members share strong “tacit knowledge,” which sets high standards for evaluating entrepreneurs, company growth, and the morale in the VC industry. Personnel with such “tacit knowledge” or high standards as a venture capitalist are hard to find and cannot be replaced easily. Therefore, costs to sustain the company’s DNA tend to be high because the company must incur high costs on developing young personnel and retaining top talents.
Overseas business development is hampered by low brand strength as a VC. The company has rebranded JAFCO America’s VC investment arm as Icon Ventures. In addition to success by JAFCO America in attracting capital from outside investors in the US, limits to business growth under the JAFCO America brand must have been a factor behind the rebrand. As can be seen from the company’s experience in withdrawing from UK and European markets, VC investment requires individual capabilities and local information networks. In Asia, where JAFCO is focusing on, it competes with Chinese VC companies that have dominated the global VC market. Being no longer able to rely on the Nomura brand, which must have been stronger than its own, we believe it will take time for the company to develop its own brand strength in Asia.
Concentration of large corporate-VCs on innovative startup companies in the IT industry has led to intense competition at high valuations. In recent years, a number of large business companies have set up corporate-VCs, and investments that disregard valuations are growing. This trend is notable in the pharmaceutical, software, telecommunications, semiconductor, and media industries. Because business companies are motivated to internalize technologies and ideas from startups through corporate VC, their incentive to achieve successful exits is low. This sort of capital-rich corporate-VC behavior has forced JAFCO, whose majority of investments are in the IT sector, to compete for investment at high valuations, and this may impact its future profits.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 38 Historical performance and financial statements Income statement
Income statement (JAFCO's interest) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Revenue 19,804 22,072 44,890 61,945 41,155 27,857 29,470 25,878 29,855 21,512 Revenue from operational investment 15,187 17,744 38,498 56,471 32,376 20,774 23,470 23,291 23,697 16,164 securities Income from partnership management 4,485 4,225 6,279 5,218 8,688 7,062 5,987 2,586 6,155 5,340 Other revenues 131 102 112 256 90 20 12 0 1 6 Cost of revenue 15,757 11,576 11,727 23,778 16,839 13,188 10,176 10,444 11,399 5,699 Cost of operational investment securities 15,448 10,738 11,469 21,904 16,687 11,973 9,848 9,274 8,337 4,903 Other costs 308 838 258 1,873 151 1,215 328 1,169 3,061 795 Gross profit 4,046 10,496 33,163 38,167 24,316 14,668 19,293 15,433 18,455 15,812 (Reversal of) provision for investment losses -5,331 -866 -77 -3,087 -574 -2,835 -865 -712 -514 2,679 Unrealized losses (gains) on operational 438 -1,101 203 -607 -15 -157 -105 24 -88 -150 investment securities (Reversal of) Provision for performance fee 2,491 -18 -50 -2,267 -10 -140 -6 refunds Gross profit–net 6,447 12,482 33,087 44,129 24,916 17,801 20,269 16,121 19,059 13,284 Gross profit margin–net 32.6% 56.6% 73.7% 71.2% 60.5% 63.9% 68.8% 62.3% 63.8% 61.8% SG&A expenses 4,361 4,475 5,784 5,710 5,689 5,476 6,017 3,882 4,088 4,319 Operating profit 2,086 8,007 27,302 38,419 19,226 12,324 14,252 12,239 14,970 8,964 Non-operating income 2,070 1,501 1,416 1,895 1,382 1,520 1,482 1,426 2,169 2,761 Interest income 66 101 102 100 75 34 76 152 109 69 Dividend income 1,707 871 1,005 991 1,285 1,373 1,383 1,258 2,040 1,409 Miscellaneous income 219 52 165 94 21 53 22 16 19 21 Other 77 475 143 709 0 59 0 0 0 1,261 Non-operating expenses 536 480 314 182 800 178 180 255 94 18 Interest expenses 460 422 301 170 114 48 23 3 1 1 Loss on valuation of investment securities 5 58 Seconded personnel expenses 659 146 229 76 Office relation expenses 5 35 Miscellaneous losses 75 58 12 11 20 71 10 3 5 0 Contribution to an investee 18 11 11 Recurring profit 3,620 9,028 28,404 40,132 19,808 13,666 15,554 13,410 17,045 11,707 Extraordinary gains 10,243 25 2 2,122 513 19,718 190 - 44,764 Gain on liquidating dividend of subsidiaries 24 and affiliates Gain on sale of investment securities 9,989 25 2 2,098 19,718 190 - 44,764 Gain on reversal of subscription rights for 253 shares Compensation for forced relocation Gain on recovery of written-off receivables 513 Extraordinary losses 4,649 15 3 506 Loss on retirement of fixed assets 6 Loss on valuation of investment securities 4,649 9 3 403 Accumulated foreign currency translation 4,101 adjustments Relocation expenses 103 Business restructuring expenses Loss on valuation of memberships Pre-tax profit 9,215 9,037 28,406 42,252 19,808 14,180 34,766 13,600 17,045 56,471 Income taxes 205 1,423 11,549 13,454 3,539 2,865 10,500 3,105 5,214 18,076 Deferred income taxes 2,904 1,036 -434 1,090 -748 240 30 332 -7 -108 Total income taxes 3,110 2,459 11,114 14,544 2,790 3,106 10,530 3,437 5,206 17,967 Implied tax rate 33.8% 27.2% 39.1% 34.4% 14.1% 21.9% 30.3% 25.3% 30.5% 31.8% Pre-tax profit attributable to minority interests 6,104 6,577 17,292 27,707 17,018 11,073 24,235 10,162 11,839 38,504 Net income attributable to non-controlling -1 -5 0 interests Net income attributable to owners of the parent 6,106 6,583 17,292 27,707 17,018 11,073 24,235 10,162 11,839 38,504 YoY 162.2% 7.8% 162.7% 60.2% -38.6% -34.9% 118.9% -58.1% 16.5% 225.2% Net margin 30.8% 29.8% 38.5% 44.7% 41.4% 39.7% 82.2% 39.3% 39.7% 179.0%
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 39 Balance sheet
Balance sheet (JAFCO's interest) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Assets Cash and deposits 14,063 20,752 21,736 28,711 18,431 88,179 67,586 61,378 69,540 107,517 Operational investment securities 76,583 81,880 111,449 78,785 60,644 62,274 61,287 59,267 63,532 79,547 Allowance for investment losses -19,701 -18,843 -18,788 -15,757 -15,176 -12,332 -10,351 -9,501 -8,229 -10,917 Securities 28,964 38,811 50,554 73,184 80,870 19,000 2,500 2,500 2,500 0 Deferred tax assets 788 52 446 42 50 Other 1,126 1,254 1,833 2,456 3,556 1,376 816 1,991 1,078 1,307 Allowance for doubtful assets -156 -31 -34 -11 Total current assets 101,668 123,875 167,198 167,369 148,370 158,549 121,839 115,636 128,421 177,455 Buildings–net 141 131 177 153 122 97 180 190 332 295 Vehicles–net 6 2 1 Furniture and fixtures–net 157 154 113 92 219 170 116 122 102 75 Total tangible assets 306 289 292 245 342 268 296 312 435 370 Software 158 204 156 137 99 74 74 188 222 228 Other 4 4 4 4 4 3 0 0 Total intangible assets 162 208 160 141 103 78 74 188 222 228 Investment securities 32,807 38,787 51,649 70,345 64,536 78,140 68,281 67,646 92,131 83,578 Investments in capital 25 127 31 36 34 32 32 17 0 0 Long-term loans receivable 215 195 183 173 166 143 139 7 117 162 Deferred tax assets 96 110 130 167 133 146 245 7 334 193 Other 527 527 521 555 559 543 640 397 396 394 Investments and other assets 33,672 39,748 52,516 71,279 65,430 79,006 69,339 68,076 92,980 84,329 Total fixed assets 34,141 40,246 52,969 71,666 65,875 79,352 69,710 68,577 93,637 84,928 Total assets 135,810 164,122 220,167 239,035 214,245 237,902 191,550 184,213 222,059 262,383 Liabilities Short-term debt 8,434 18,915 4,100 11,060 1,724 3,343 795 116 234 15 Income taxes payable 197 1,264 10,552 8,371 200 1,860 9,350 1,193 4,344 17,124 Deferred tax liabilities 2,601 13,101 5,438 564 2,143 Provision for bonuses 208 235 383 425 346 324 309 194 226 257 Provision for directors' bonuses 128 153 168 192 165 156 127 89 89 86 Provision for performance fee refunds 2,491 2,473 2,423 156 146 6 Other 842 1,120 2,240 2,317 1,703 1,537 1,044 881 2,688 2,867 Total current liabilities 12,303 26,763 32,971 27,962 4,850 9,371 11,625 2,475 7,582 20,351 Long-term debt 19,145 16,636 14,120 4,301 3,978 977 182 249 15 100 Retirement benefit liability 509 580 582 580 616 453 434 427 Deferred tax liabilities 5,573 7,666 13,176 18,023 15,290 19,074 18,809 17,779 25,528 26,148 Other 56 42 42 42 42 42 17 42 132 119 Total fixed liabilities 25,203 24,822 27,848 22,948 19,893 20,675 19,625 18,523 26,110 26,794 Total liabilities 37,506 51,586 60,820 50,910 24,744 30,046 31,251 20,998 33,693 47,145 Net assets 98,303 112,535 159,347 188,125 189,501 207,855 160,299 163,215 188,366 215,237 Shareholders' equity 86,573 91,897 108,136 134,734 147,313 153,949 112,477 117,739 126,113 150,813 Capital stock 33,251 33,251 33,251 33,251 33,251 33,251 33,251 33,251 33,251 33,251 Capital surplus 32,806 32,806 32,806 32,806 32,806 32,806 32,806 32,806 32,806 32,806 Retained earnings 40,590 45,915 62,156 88,755 101,336 107,973 54,005 59,268 67,643 102,497 Treasury stock -20,075 -20,075 -20,077 -20,078 -20,080 -20,081 -7,585 -7,586 -7,587 -17,741 Accumulated other comprehensive income 11,658 20,635 51,211 53,391 42,186 53,906 47,821 45,475 62,252 64,423 Valuation difference on marketable securities 14,799 22,619 52,098 52,672 41,989 53,771 47,961 44,719 61,529 63,688 Foreign currency translation adjustments -3,141 -1,984 -879 751 193 136 -132 755 723 735 Remeasurements of defined benefit plans -8 -32 4 -1 -6 Share subscription rights Non-controlling interests 72 3 Total net assets 98,303 112,535 159,347 188,125 189,501 207,855 160,299 163,215 188,366 215,237 Total liabilities and net assets 135,810 164,122 220,167 239,035 214,245 237,902 191,550 184,213 222,059 262,383 Total interest-bearing debt 27,579 35,551 18,220 15,361 5,702 4,320 977 365 249 115 Net debt 13,516 14,799 -3,516 -13,350 -12,729 -83,859 -66,609 -61,013 -69,291 -107,402
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 40 Cash flow statement
Cash flow statement (JAFCO's interest) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 6,859 8,476 30,153 28,822 12,788 15,117 7,425 -1,350 12,177 8 Pre-tax profit 9,215 9,037 28,406 42,252 19,808 14,180 34,766 13,600 17,045 56,471 Depreciation 209 161 166 136 136 160 225 116 189 192 Increase in allowance for investment loss -8,455 -866 -77 -3,087 -574 -2,835 -865 -712 -514 2,679 Increase in allowance for doubtful accounts -27 -123 3 -23 -11 30 Increase in provision for bonuses 10 26 148 41 -79 -21 -15 -114 31 30 Increase in provision for directors' bonuses 45 25 15 23 -26 -8 -29 -38 0 -2 Increase in allowance for performance fee 2,491 -18 -50 -2,267 -10 -140 -6 refunds Increase in provision for retirement benefits 9 49 Remeasurements of defined benefit liability 19 35 56 -10 26 -155 -18 -7 Unrealized losses (gains) on operational 438 -1,101 203 -607 -15 -157 -105 24 -88 -150 investment securities Relocation expenses 103 Interest and dividend income -1,773 -972 -1,107 -1,091 -1,361 -1,407 -1,460 -1,410 -2,149 -1,478 Interest expenses 460 422 301 170 114 48 23 3 1 1 Loss on retirement of fixed assets 6 Gain on reversal of subscription rights for -253 shares Loss on disposal of memberships 0 Accumulated foreign currency translation 145 9 adjustments Loss on foreign exchange -632 -572 -321 -1,299 1,346 -227 373 449 151 -500 Loss on sale of investment securities -9,989 -25 -2 -2,098 -19,718 -190 0 -44,764 Loss on valuation of investment securities 547 9 5 58 Loss on valuation of investment securities 0 3 403 (extraordinary loss) Decrease in operational investment securities 13,630 2,045 3,171 11,892 6,124 3,229 -4,773 -2,264 -5,340 -7,881 Decrease in consumption taxes refund 25 -20 -57 -407 -107 326 41 -201 receivable Increase in consumption taxes payable 10 -10 181 122 -259 -45 207 -207 Decrease in other current assets 513 -298 -295 -192 -293 936 549 -848 Decrease in other current liabilities -1,020 -3 930 -1,029 -875 222 -828 829 Other 138 345 -13 343 -314 41 28 -241 2,324 -514 SUM 5,738 8,116 31,623 42,892 23,663 14,350 8,945 8,640 11,632 4,107 Interest and dividend income 1,772 951 1,112 1,087 1,380 1,407 1,461 1,410 2,149 1,478 Dividends paid -454 -386 -320 -177 -155 -50 -36 -3 -1 -1 Income taxes paid -195 -204 -2,261 -14,980 -12,101 -1,570 -2,944 -11,397 -2,396 -5,576 Cash flows from investing activities (2) 15,971 -4,623 2,550 -5,744 11,768 -1,580 24,732 213 -277 49,154 Collection of short-term loans receivable Acquisition of securities -2,000 -6,500 -6,000 -15,000 -15,000 Redemption of securities 2,000 8,500 7,000 12,000 15,000 Acquisition of tangible fixed assets -79 -74 -98 -16 -175 -40 -239 -119 -88 -55 Acquisition of intangible assets -102 -112 -17 -39 -25 -28 -50 -169 -84 -72 Acquisition of investment securities -500 -1,500 Proceeds from sale of investment securities 18,184 553 2 2,267 2 25,165 383 41 48,253 Payments of long-term loans receivable -22 -12 0 -27 -26 -14 -128 -62 Collection of long-term loans receivable 16 41 17 46 27 37 0 18 17 Increase in investments and other assets -48 -36 -32 -114 -70 -50 -182 -68 -41 -50 Decrease in investments and other assets 23 18 178 87 39 13 40 187 5 5 Decrease in other fixed assets Free cash flow (1+2) 22,830 3,853 32,703 23,078 24,556 13,537 32,157 -1,137 11,900 49,162 Cash flows from financing activities -10,119 6,816 -18,442 -3,970 -14,092 -5,817 -69,046 -3,923 -3,581 -13,944 Net increase in short-term borrowings Net increase in long-term borrowings -9,003 -2,028 -2,331 -2,859 -1,659 -1,382 -1,343 -612 -116 -134 Proceeds from issuance and redemption of 0 9,957 0 0 -8,000 0 -2,000 0 0 0 bonds Acquisition of treasury stock 0 0 -1 -1 -1 -61,270 0 -1 -10,160 Increase in cash and cash equivalents 13,108 12,052 15,228 21,605 9,406 7,877 -37,093 -5,277 8,162 35,476
Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Cash flows from operating, investing, and financing activities
In FY03/21, net cash provided by operating activities came to JPY8mn (net cash provided by operating activities of JPY12.2bn in FY03/20). Inflows from the sale of investment securities totaled JPY44.8bn. Net cash provided by investing activities was JPY49.2bn (compared to JPY277mn in net cash used in FY03/20). This was mainly JPY48.3bn in proceeds from the sale of investment securities (shares in Nomura Research Institute). Net cash used in financing activities was JPY13.9bn (compared to JPY3.6bn in net cash used in FY03/20). The company spent JPY10.1bn buying back shares.
As of end-FY03/21, cash and cash equivalents were JPY107.5bn, up JPY35.5bn YoY. Of this amount, JPY7.8bn was in interests in funds. As of this date, JAFCO’s uncalled commitments to JAFCO-managed funds were JPY31.6bn (JPY31.9bn at end- FY03/20). Historical performance
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 41 Full-year FY03/21 results Summary
Revenue: JPY21.5bn (-27.9% YoY) Operating profit: JPY9.0bn (-40.1% YoY) Recurring profit: JPY11.7bn (-31.3% YoY) Net income*: JPY38.5bn (+225.2% YoY) Capital gains: JPY11.3bn (-26.7% YoY) IPOs: Six (five in Japan, one overseas)
In FY03/21, there were six new JAFCO-backed IPO exits: five in Japan and one overseas. There was one exit from a buyout investment through M&A. The number of IPOs was in line with other years despite a series of IPO postponements at the start of the year due to the COVID-19 pandemic. Capital gains were down 26.7% YoY to JPY11.3bn. Net provision of allowance for investment losses was JPY2.7bn, roughly JPY1.7bn (covering 18 companies) of which was related to COVID-19. Provisions declined from Q2 onward. It may appear that the peak in provisioning has passed, but the company continues to view the situation as unpredictable. With regard to income from fund management, there were increases in management fees from JAFCO SV6 Fund Series (SV6) and JAFCO Taiwan I Venture Capital Limited Partnership (Taiwan fund, had final closing), both newly established in FY03/20.
The company decided upon and executed the sale of 15,500,000 of the common shares it held in Nomura Research Institute, Ltd. (NRI) for pure investment purposes (39.3% of the 39,468,150 shares that the company held in NRI) and recorded JPY44.8bn in gains on sale of investment securities (extraordinary gains).
Capital gains
In FY03/21, capital gains amounted to JPY11.3bn (-26.7% YoY). Of this figure, capital gains on sale of shares in listed portfolio companies (IPO-related capital gains) increased 188.0% YoY to JPY7.6bn, while capital gains on unlisted shares were JPY3.7bn (-71.0% YoY). The bulk of capital gains came from the sale of the company’s shareholdings in domestic IPOs and holdings from previous IPOs. There was one exit from a buyout investment through M&A. The investment multiple for JAFCO’s interest came to 3.30x (JPY16.2bn revenue from operational investment securities divided by JPY4.9bn cost of operational investment securities). In FY03/20, the company had a large exit deal involving a portfolio company in China (invested capital: JPY886mn; market value at IPO [opening price-basis]: JPY13.9bn; investment multiple: 15.7x), which led to a reactionary decline in capital gains for FY03/21.
IPOs
There were six IPOs backed by JAFCO in FY03/21: five in Japan and one overseas. In Japan, portfolio company i3 Systems (TSE Mothers: 4495) listed on July 15, 2020, Asian portfolio company Boqii Holding Limited (NYSE: BQ) listed on September 30, 2020, Stamen (TSE Mothers: 4019) listed on December 15, 2020, WACUL (TSE Mothers: 4173) listed on February 19, 2021, Coconala (TSE Mothers: 4176) listed on March 19, 2021 and Appier Group (TSE Mothers: 4180) listed on March 30, 2021. Stamen was the first exit deal from the SV5 fund.
For the five domestic IPOs, the invested capital was JPY2.4bn and the market value at IPO (opening price-basis) was JPY35.2bn, putting the investment multiple at 14.7x, up from 10.4x in FY03/20. Shared Research believes that the company’s highly selective, intensive investment has been effective.
Income from fund management
Management fees in FY03/21 came to JPY2.9bn (+11.0% YoY), and success fees were JPY2.5bn (-30.8% YoY). SV6 established in June 2019 and the final closing of the Taiwan fund contributed to the rise in management fees. The company expected roughly JPY700mn per quarter in management fees, and JPY2.8bn for the full year, so results were in line with plan. The bulk of the success fees came from SV4, whose cumulative distributions to investors exceeded total fund commitments.
Allowance for investment losses
Net provision of allowance for investment losses in FY03/21 amounted to JPY2.7bn (provision of JPY3.5bn, reversal of JPY803mn). Of this amount roughly JPY1.7bn was COVID-19 related provisions for 18 portfolio companies. The ratio of allowances (JPY10.9bn; the total of company-by-company allowance and general allowance) against the balance of unlisted securities (JPY63.1bn; JAFCO’s interest only; acquisition cost basis) rose to 17.3% from 14.9% at end-FY03/20.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 42 In response to the COVID-19-induced changes in the operating environment of JAFCO’s portfolio companies, which caused their sales to decline and made fundraising difficult, the company posted a JPY1.5bn provision in Q1 FY03/21 to cover investment losses in 14 portfolio companies. This amount represented 68.2% of the total JPY2.2bn provision for Q1. Of the 14 companies, eight were in Japan (provision of JPY1.2bn), three were in Asia (JPY170mn), and three were in the US (JPY150mn). The company booked a JPY1mn provision for one portfolio company in Q2, JPY26mn for one company in Q3, and JPY200mn for two companies in Q4, bringing the total to 18 companies. After peaking in Q1, COVID-19 related provisions declined significantly from Q2 onward.
It is necessary to check on conditions at portfolio companies one by one, but roughly 70% of them appear to have posted monthly sales growth YoY over December 2020–February 2021. The company said that the current environment is a tailwind for earnings at some of its portfolio companies. It may appear that the peak in provisioning has passed, but the company continues to view the situation as unpredictable.
The ratio of allowances (JPY10.9bn; the total of company-by-company allowance and general allowance) against the balance of unlisted securities (JPY63.1bn; JAFCO’s interest only; acquisition cost basis) rose to 17.3% from 14.9% at end-FY03/20, although still below 20%, which the company regards as the normal level. By region, the balance of unlisted securities was JPY42.6bn in Japan, JPY11.4bn in the US, and JPY9.1bn in Asia. Their corresponding allowance ratios were 18.3%, 9.6%, and 22.5%.
Core income
In FY03/21, SG&A expenses were JPY4.3bn (+5.7% YoY). Core income, which is management fees minus SG&A expenses, was negative, but income including success fees turned positive. Note: Of the JPY4.3bn in SG&A expenses, business and consumption taxes totaling JPY600mn arose from the sale of NRI shares. Subtracting this leaves JPY3.7bn, representing a reduction of roughly JPY400mn in expenses YoY from JPY4.1bn in FY03/20.
Unrealized gains
At end-FY03/21, unrealized gains on listed securities were JPY14.9bn, up from JPY7.1bn at end-March 2020. Five IPOs in Japan and one exit from a buyout investment through M&A contributed. This matched the levels of end-FY03/15 (about JPY15.2bn). JAFCO carried forward unrealized gains on its shareholdings, partly due to few post-IPO share sales in light of stock price performance following listing.
Investment amounts
The total amount invested was JPY32.8bn (-5.6% YoY) in 66 companies. Despite the coronavirus pandemic, the company invested roughly the same amount as in FY03/20 (JPY34.8bn in 71 companies). There is a slowdown apparent, despite a surge in valuations and ongoing move to larger fundraisings. JPY21.5bn (-13.6% YoY) was invested in Japan in 35 companies (including four buyout investments: JPY9.0bn; 35 companies in FY03/20 [including three buyout investments]), JPY7.6bn in the US in 18 companies (-9.4% YoY; 24 companies in FY03/20) , and JPY3.7bn in Asia in 13 companies (+152.5% YoY; 12 companies in FY03/20).
Investments in Japan fell 67.2% YoY to JPY3.9bn in Q1, but rose 27.0% YoY to JPY6.1bn in Q2, outstripping the year-earlier growth. In Q3, they were largely flat YoY at JPY4.3bn (-1.1% YoY). They totaled JPY7.1bn (+92.6% YoY) in Q4 bringing the total invested in Japan to JPY21.5bn. The company invested JPY7.6bn in the US and JPY3.7bn in Asia, for an aggregate of JPY32.8bn. JAFCO targeted an investment amount of JPY30–35bn over the full year, so its investment activity was at cruising speed despite the coronavirus pandemic.
The breakdown of the JPY21.5bn invested in Japan consists of JPY12.5bn in venture capital investment and JPY9.0bn in buyout investment. Of the JPY12.5bn (31 companies) in domestic VC investment, new venture investment (including fund LPs’ interests) totaled JPY7.6bn (19 companies). The medical and biotech industries accounted for 26% (21% of the total number of companies), a higher share than normal. This was attributable in part to JAFCO’s investment in a startup that possesses advanced genome editing and synthesis technology. Of the JPY7.6bn in new investment, 53% was in early stage and 40% was in seed stage companies.
Buyout investments came to JPY9.0bn (including Shu’s selection Co., Ltd. and, Progress Technologies Inc.), up from JPY5.7bn in FY03/20.
New VC investment in Japan (including fund LPs’ interests) averaged roughly JPY400mn (investment in 19 companies), about half of the JPY780mn in FY03/20, but comparable to the JPY440mn in FY03/19. Meanwhile, the stake acquired in portfolio companies averaged 16%, up from 15% in FY03/20. The company maintained its highly selective, intensive investment
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 43 approach. While the average investment size rose as investments were skewed toward companies with relatively high valuations in FY03/20, valuations for investments in FY03/21 stabilized on the whole. However, JAFCO has said the valuations of promising startups that are garnering attention have not declined much. Fundraising also continues to expand in scale, according to the company.
Fund commitments
As of end-March 2021, commitments came to JPY451.5bn (JPY433.9bn at end-March 2020), of which the amount subject to management fees (excluding capital committed by JAFCO, Icon Ventures funds, and funds under extensions) was JPY132.0bn.
Cash surplus and shareholder returns
As of end-March 2021, cash and cash equivalents (including securities) totaled JPY107.5bn (JPY72.0bn at end-FY03/20). Of this, JPY24.8bn was earmarked for the share buyback, JPY17.1bn for income tax payable, and JPY4.1bn for planned dividends, leaving roughly JPY61.5bn in cash and cash equivalents. With the addition of Nomura Research Institute shares (after-tax valuation: JPY59.1bn), the company has cash and cash equivalents of JPY120.6bn. This is in line with fund requirements the company indicated in its February 10, 2021 release “Policy on Future Shareholder Returns”, including the amount of uncalled capital commitments to funds and interests in upcoming funds, growth in future fund size, other investment opportunities, and unforeseen circumstances. The company said that if the sum of cash and cash equivalents and the after-tax mark-to-market valuation of NRI shares exceeds JPY120.0bn by a certain amount, it would consider buying back shares. Q3 FY03/21 results Summary
Revenue: JPY11.7bn (-58.2% YoY) Operating profit: JPY3.4bn (-79.2% YoY) Recurring profit: JPY6.0bn (-67.4% YoY) Net income*: JPY3.8bn (-71.5% YoY) Capital gains: JPY5.7bn (-63.4% YoY) IPOs: Three (two in Japan, one overseas)
*Net income attributable to owners of the parent Note: Figures may differ from company materials due to differences in rounding methods.
In cumulative Q3 FY03/21, there were three new JAFCO-backed IPO exits: two in Japan and one overseas. Revenue broke down into JPY5.7bn in capital gains (-63.4% YoY) and JPY3.4bn in income from fund management (-35.7% YoY). With regard to income from fund management, there were increases in management fees from JAFCO SV6 Fund Series (SV6) and JAFCO Taiwan I Venture Capital Limited Partnership (Taiwan fund, had final closing), both newly established in FY03/20. Operating profit was down 79.2% YoY to JPY3.4bn. The provision of allowance for investment losses (expense item) rose 133.3% versus FY03/21 to JPY3.1bn. Net income fell YoY largely due to the application of a higher tax rate in 1H amid increase in allowance for investment losses that are not deductible for income tax purposes.
Net provision of allowance for investment losses was JPY2.7bn (provision of JPY3.1bn, reversal of JPY384mn). Of this, provisions to cover investment losses due to COVID-19 amounted to JPY1.5bn in Q1 (14 portfolio companies), JPY1mn in Q2 (one), and JPY26mn in Q3 (one). It may appear that the peak in provisioning has passed, but the company continues to view the situation as unpredictable.
Capital gains
In cumulative Q3 FY03/21, capital gains amounted to JPY5.7bn (-63.4% YoY). Of this figure, capital gains on sale of shares in listed portfolio companies (IPO-related capital gains) increased 119.7% YoY to JPY5.1bn, while capital gains on unlisted shares were JPY542mn. The bulk of the capital gains came from one domestic company IPO (i3 Systems [TSE Mothers: 4495]) and from sales of shares in portfolio companies that went public through FY03/20. The investment multiple for JAFCO’s interest (revenue from operational investment securities divided by cost of operational investment securities) came to 3.17x. In Q3 FY03/20, the company had a large exit deal involving a portfolio company in China (invested capital: JPY886mn; market value at IPO [opening price-basis]: JPY13.8bn; investment multiple: 15.7x), which led to a reactionary decline in capital gains for cumulative Q3 FY03/21.
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 44 Unrealized gains
Unrealized gains on listed securities (securities for which the market value exceeds the acquisition value) were JPY10.2bn, up from JPY7.1bn at end-March 2020. JAFCO carried forward unrealized gains on its shareholdings, partly due to few post-IPO share sales in light of stock price performance following listing.
IPOs
There were three IPOs backed by JAFCO in cumulative Q3 FY03/21: two in Japan and one overseas. In Japan, portfolio company i3 Systems listed on July 15, 2020, Asian portfolio company Boqii Holding Limited listed on September 30, 2020 and Stamen (TSE Mothers: 4019) listed on December 15, 2020. Stamen is the first exit deal from the SV5 fund (fund size of JPY75.0bn; JAFCO interest: 43% stake), and the company expects more exits from SV5 in the near future.
For the two domestic IPOs, the invested capital was JPY740mn and the market value at IPO (opening price-basis) was JPY11.3bn, putting the investment multiple at 15.2x (= JPY11.3bn / JPY740mn), up from 10.3x in Q3 FY03/20. Shared Research believes that the company’s highly selective, intensive investment has been effective.
Income from fund management
Management fees in cumulative Q3 FY03/21 came to JPY2.1bn (+18.1% YoY), and success fees were JPY1.2bn (-64.2% YoY). SV6 established in June 2019 and the final closing of the Taiwan fund resulted in an increase in the amount subject to management fees from JPY129.0bn at end-FY03/20 to JPY131.5bn at end-Q3 FY03/21, contributing to the rise in management fees. JAFCO targets quarterly management fees of roughly JPY700mn and annual management fees of JPY2.8bn. Progress versus full-year plan for management fee of JPY2.1bn was 76.6%. If the new fund set up by consolidated subsidiary JAFCO Asia raises capital from outside investors during FY03/21, the corresponding fees will be added. The bulk of the success fees came from SV4, whose cumulative distributions to investors exceeded total fund commitments.
Allowance for investment losses
Net provision of allowance for investment losses in cumulative Q3 FY03/21 amounted to JPY2.7bn (provision of JPY3.1bn, reversal of JPY384mn). In Q3, the net provision was JPY306mn (JPY2.7bn minus the JPY2.4bn provision in 1H).
In response to the COVID-19-induced changes in the operating environment of JAFCO’s portfolio companies, which caused their sales to decline and made fundraising difficult, the company posted a JPY1.5bn provision in Q1 FY03/21 to cover investment losses in 14 portfolio companies. This amount represented 68.2% of the total JPY2.2bn provision for Q1. Of the 14 companies, eight were in Japan (provision of JPY1.2bn), three were in Asia (JPY170mn), and three were in the US (JPY150mn). The company booked a JPY1mn provision for one portfolio company in Q2 and JPY26mn for one company in Q3, bringing the total to 16 companies. The provision for COVID-19-related mark-downs peaked in Q1 FY03/21, and declined substantially from Q2 onward.
Although there is a need to check on each portfolio company individually, it appears that about 70% of the portfolio companies have achieved higher Q3 sales YoY. It may appear that the peak in provisioning has passed, but the company understands that the situation is unpredictable.
The ratio of allowances (JPY10.9bn; the total of company-by-company allowance and general allowance) against the balance of unlisted securities (JPY60.6bn; JAFCO’s interest only; acquisition cost basis) rose to 18.0% from 14.9% at end-FY03/20, although still below 20%, which the company regards as the normal level. By region, the balance of unlisted securities was JPY41.2bn in Japan, JPY10.5bn in the US, and JPY8.9bn in Asia. Their corresponding allowance ratios were 18.5%, 12.2%, and 22.7%.
Core income
In cumulative Q3 FY03/21, SG&A expenses were JPY2.7bn (-10.8% YoY). Core income, which is management fees minus SG&A expenses, was negative, but income including success fees turned positive. The company says SG&A expenses are trending below normal levels due to impact of a transition to remote work amid the COVID-19 pandemic. With management fees of JPY2.1bn and SG&A expenses of JPY2.7bn, the management fee-to-SG&A expense ratio for cumulative Q3 FY03/21 came in at 80.3% (60.6% in cumulative Q3 FY03/20).
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 45 Investment amounts
The total amount invested was JPY23.3bn (-12.4% YoY). There is a slowdown apparent, despite a surge in valuations and the continued move toward larger fundraisings in FY03/20. JPY14.3bn (-32.2% YoY) was invested in Japan, JPY6.1bn (+36.4% YoY) in the US, and JPY2.8bn (+211.2% YoY) in Asia. JPY6.9bn (-32.2% YoY) of the amount invested in Japan was buyout investment.
Investments in Japan fell 67.2% YoY to JPY3.9bn in Q1, but rose 27.0% YoY to JPY6.1bn in Q2, outstripping the year-earlier growth. In Q3, they were largely flat YoY at JPY4.3bn (-1.1% YoY). On a global basis, JAFCO targets an investment amount of JPY30.0–35.0bn over the full year, assuming normal investment progress. While it was forced to scale back investments in Q1, investments reached JPY14.6bn—nearly half of the annual target—in 1H. In cumulative Q3, investments reached 70–80% of target at JPY23.3bn. The company believes it may be able to reach the JPY30.0bn mark in FY03/21.
The breakdown of the JPY14.3bn invested in Japan consists of JPY7.4bn in venture capital investment and JPY6.9bn in buyout investment. Of the JPY7.4bn in domestic VC investment (19 companies) in cumulative Q3 (new investment, including fund LPs’ interests, value basis), new venture investment totaled JPY4.7bn (12 companies). The medical and biotech industries accounted for 24% (17% of the total number of companies), a share that was higher than normal. This was attributable in part to JAFCO’s investment in a startup that possesses advanced genome editing and synthesis technology. Of the JPY4.7bn in new investment, 53% was in early stage and 47% was in seed stage companies.
BO investments came to JPY6.9bn (three companies: Shu’s selection Co., Ltd., Progress Technologies Inc., etc.), up from JPY5.2bn a year earlier.
New VC investment in Japan (including fund LPs’ interests) averaged roughly JPY390mn (investment in 12 companies in cumulative Q3), about half of the JPY780mn in FY03/20, but comparable to the JPY440mn invested in FY03/19 considering the nine-month comparison period for cumulative Q3 FY03/21. Meanwhile, the stake acquired in portfolio companies averaged 17%, up from 15% in FY03/20. The company maintained its highly selective, intensive investment approach. While the average investment size rose as investments were skewed toward companies with relatively high valuations in FY03/20, valuations for investments in cumulative Q3 FY03/21 stabilized on the whole. However, JAFCO has said the valuations of promising startups that are garnering attention have not declined much. Fundraising also continues to expand in scale, according to the company.
Fund commitments
As of end-December 2020, total commitments came to JPY427.4bn (JPY433.9bn at end-March 2020), of which the amount subject to management fees (excluding capital committed by JAFCO, Icon Ventures funds, and funds under extensions) was JPY131.5bn.
Asset structure and cash surplus
JAFCO’s investment account of JPY208.4bn at end-December 2020 stood below its net assets of JPY228.0bn. Of the JPY208.4bn, listed (liquid) shares totaled JPY157.3bn (JPY145.7bn in investment securities of listed companies + JPY11.6bn in operational investment securities of listed companies), making up 75.5% of the total. Unlisted (illiquid) shares, which included JPY1.4bn in investment securities of unlisted companies positioned as strategic investment, totaled JPY51.1bn (JPY49.7bn [calculated as JPY60.6bn in operational investment securities of unlisted companies [acquisition cost] minus JPY10.9bn in allowance for investment loss] + JPY1.4bn), making up 24.5% of JAFCO’s investment account of JPY208.4bn. Cash and deposits came to JPY64.1bn, of which cash in funds making up JPY6.4bn. If excluding the JPY23.4bn in uncalled capital owed to funds and income taxes payable, real free cash flow came to JPY33.5bn. This is the amount the company will commit to funds over the next few years in line with progress in investment.
JAFCO has started fundraising for its flagship funds in the US and Asia, to which it plans to commit a minimum of JPY20.0bn in own cash, although the details have yet to be finalized. This amount falls within the range of the aforementioned real free cash flow. Even if the COVID-19 pandemic drags on, the company does not foresee any difficulties in connection with its own fund commitments.
Sale of Nomura Research Institute (TSE 1: 4307) shares
On the same day of its Q3 earnings announcement (January 28, 2020), the company sold 15,500,000 of the ordinary shares that it held in Nomura Research Institute, Ltd. (39.3% of the 39,468,150 shares that the company held in Nomura Research Institute, Ltd.) and expects to record JPY44.8bn in gains on sale of investment securities (extraordinary gains) in FY03/21.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 46 The company has viewed its Nomura Research Institute shareholding as a highly liquid asset as it had originally planned to sell it to fund future investments. In recent years ongoing share-price gains have increased the holding’s weighting on the company’s balance sheet. The company has decided to continue to hold its remaining shareholding in Nomura Research Institute, Ltd. (23,968,150 shares) as assets for future investment.
On February 10, 2021, the company resolved to allocate the JPY35bn in after-tax proceeds from the sale to buy back its own shares as follows.
Type of stock: Common stock
Number of shares: 7,000,000 shares (upper limit) (22.6% of the number of issued shares excluding treasury shares)
Total acquisition price: JPY35bn (upper limit)
Acquisition period: From February 12, 2021 to February 11, 2022
Cancellation of treasury stock: The company plans to cancel treasury stock as appropriate so that treasury shares held will be maintained at 3% of the total number of issued shares (including treasury shares).
According to JAFCO, the amount of funds that it requires for future investment is currently about JPY120bn. It stated that if the sum of cash and deposits and mark-to-market valuation (after tax) of Nomura Research Institute, Ltd. shares exceeds this level by a certain amount, it will consider buying back its shares. 1H FY03/21 results Summary
Revenue: JPY9.5bn (+59.5% YoY) Operating profit: JPY3.0bn (+43.7% YoY) Recurring profit: JPY4.7bn (+38.6% YoY) Net income*: JPY2.7bn (-12.7% YoY) Capital gains: JPY4.9bn (+121.9% YoY) IPOs: Two (one in Japan, one overseas) *Net income attributable to owners of the parent
In 1H FY03/21, there were two new JAFCO-backed IPO exits: one in Japan and one overseas. Revenue broke down into JPY4.9bn in capital gains (+121.9% YoY) and JPY2.5bn in income from fund management (+91.7% YoY). Operating profit was up 43.7% YoY, but the provision of allowance for investment losses (expense item) rose 289.8% YoY to JPY2.6bn. Net income fell YoY largely due to the increase in allowance for investment losses subject to taxable depreciation treatment, which resulted in the application of a higher tax rate.
Net provision of allowance for investment losses was JPY2.4bn. Of this, JPY1.5bn was provision to cover investment losses due to COVID-19 in 14 portfolio companies in Q1, and JPY1mn for one company in Q2. It may appear that the peak in provisioning has passed, but the company understands that the situation is unpredictable. With regard to income from fund management, there were increases in management fees from JAFCO SV6 Fund Series (SV6) and JAFCO Taiwan I Venture Capital Limited Partnership (Taiwan fund), both newly established in FY03/20.
Capital gains
In 1H FY03/21, capital gains amounted to JPY4.9bn (+121.9% YoY). Of this figure, capital gains on sale of shares in listed portfolio companies (such as IPO-related capital gains) increased 104.5% YoY to JPY4.6bn, while capital gains on unlisted shares were JPY266mn. The bulk of the capital gains came from one domestic company IPO (i3 Systems [TSE Mothers: 4495]) and from sales of shares in portfolio companies that went public through FY03/20. The investment multiple for JAFCO’s interest (revenue from operational investment securities divided by cost of operational investment securities) came to 3.26x.
Unrealized gains
Unrealized gains on listed securities (securities for which the market value exceeds the acquisition value) were JPY9.7bn, up from JPY7.1bn at end-March 2020. While not particularly high, this approached the levels of end-FY03/18. JAFCO carried
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 47 forward unrealized gains on its shareholdings, partly due to few post-IPO share sales in light of stock price performance following listing.
IPOs
There were two IPOs backed by JAFCO in 1H FY03/21: one in Japan and one overseas. In Japan, portfolio company i3 Systems listed on July 15, 2020, and Asian portfolio company Boqii Holding Limited (NYSE: BQ) listed on September 30, 2020.
Income from fund management
Management fees in 1H FY03/21 came to JPY1.4bn (+72.3% YoY), and success fees were JPY1.1bn (+125.6% YoY). SV6 established in June 2019 and the final closing of the Taiwan fund contributed to the rise in management fees. JAFCO targets quarterly management fees of roughly JPY700mn and annual management fees of JPY2.8bn. If the new fund set up by consolidated subsidiary JAFCO Asia raises capital from outside investors during FY03/21, the corresponding fees will be added. The bulk of the success fees came from SV4, whose cumulative distributions to investors exceeded total fund commitments.
Allowance for investment losses
Net provision of allowance for investment losses in 1H FY03/21 amounted to JPY2.4bn (provision of JPY2.6bn, reversal of JPY164mn). In Q2, the net provision was JPY336mn (JPY2.4bn minus the JPY2.1bn provision in Q1). The allowance for COVID-19-related mark-downs peaked in Q1 FY03/21, and declined substantially in Q2.
In response to the pandemic-induced changes in the operating environment of JAFCO’s portfolio companies, which caused their sales to decline and made fundraising difficult, JAFCO posted a JPY1.5bn provision to cover investment losses in 14 portfolio companies in Q1. This amount represented 68.2% of the total JPY2.2bn provision for the quarter. Of the 14 companies, eight were in Japan (provision of JPY1.2bn), three were in Asia (JPY170mn), and three were in the US (JPY150mn). In Q2, the company booked a JPY1mn provision for one portfolio company in the US.
As a result, the ratio of allowances (JPY10.6bn; the total of company-by-company allowance and general allowance) against the balance of unlisted securities (JPY58.2bn; JAFCO’s interest only; acquisition cost basis) rose to 18.2% from 14.9% at end- FY03/20. The ratio of 18.2% was below 20%, which the company regards as the normal level. By region, the balance of unlisted securities was JPY39.8bn in Japan, JPY9.6bn in the US, and JPY8.8bn in Asia. Their corresponding allowance ratios were 18.9%, 13.4%, and 20.8%.
JAFCO has indicated the allowance for investment losses may turn upward again depending on how the COVID-19 pandemic unfolds going forward. It understands the impact of the pandemic on its domestic portfolio companies to be substantial, citing for reference that while 65% of these companies saw a YoY increase in monthly sales (in June–August, after the nationwide state of emergency was lifted), 35% (in the retail and other industries) registered a YoY decline.
Core income
In 1H FY03/21, SG&A expenses were JPY1.8bn (-6.5% YoY). Core income, which is management fees minus SG&A expenses, was negative, but income including success fees turned positive. The company says SG&A expenses are trending below normal levels due to impact of a transition to remote work in 1H.
Investment amounts
The total amount invested was JPY14.6bn (-29.7% YoY). JPY10.0bn (-40.4% YoY) was invested in Japan, JPY3.0bn (-6.7% YoY) in the US, and JPY1.6bn (+103.8% YoY) in Asia.
Investments in Japan fell 67.2% YoY to JPY3.9bn in Q1, but rose 27.0% YoY to JPY6.1bn in Q2, outstripping the year-earlier growth. JAFCO targets an investment amount of JPY30.0–35.0bn over the full year, assuming normal investment progress. While it was forced to scale back investments in Q1, investment reached JPY14.6bn—nearly half of the annual target—in 1H.
Of the JPY4.8bn in domestic VC investment in 1H (new + additional investment, including fund LPs’ interests, value basis), the medical and biotech industries accounted for 23% (17% of the total number of companies), a share that was higher than normal. This was attributable in part to JAFCO’s investment in a startup that possesses advanced genome editing and synthesis technology. BO investments came to JPY5.3bn (two companies: Shu’s selection Co., Ltd. and Progress Technologies Inc.) and were on par with the year-earlier level.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 48 New VC investment in Japan (including fund LPs’ interests) averaged roughly JPY430mn (investment in nine companies during 1H), down from roughly JPY780mn in FY03/20. Meanwhile, the stake acquired in portfolio companies averaged 18%, up from 15% in FY03/20. The company maintained its highly selective, intensive investment approach. While investments were skewed toward companies with relatively high valuations in FY03/20, valuations for investments in 1H FY03/21 stabilized on the whole. However, JAFCO has said the valuations of promising startups that are garnering attention have not declined much. Fundraising also continues to expand in scale, according to the company.
Fund commitments
As of end-September 2020, total commitments came to JPY428.6bn (JPY433.9bn at end-March 2020), of which the amount subject to management fees (excluding capital committed by JAFCO, Icon Ventures funds, and funds under extensions) was JPY131.6bn.
Asset structure and cash surplus
JAFCO’s investment account of JPY182.3bn at end-September 2020 stood below its net assets of JPY210.5bn. Of the JPY182.3bn, listed (liquid) shares totaled JPY133.1bn (JPY122.1bn in investment securities of listed companies + JPY11.0bn in operational investment securities of listed companies), making up 73% of the total. Unlisted (illiquid) shares, which included JPY1.6bn in investment securities of unlisted companies positioned as strategic investment, totaled JPY49.2bn (JPY47.6bn [calculated as
JPY58.2bn in operational investment securities of unlisted companies [acquisition cost] minus JPY10.6bn in allowance for investment loss] + JPY1.6bn), making up 27% of the total. Cash and deposits came to JPY67.4bn, of which cash in funds making up JPY5.6bn. If excluding the JPY28.6bn in uncalled capital owed to funds and income taxes payable, real free cash flow came to JPY29.9bn. This is the amount the company will commit to funds over the next few years in line with progress in investment.
Changes to company name, logo, and website (applicable to Japanese branding only)
On October 1, 2020, JAFCO changed its company name to JAFCO Group Co., Ltd. and revamped its corporate logo and website. The homepage of its website now displays interviews with the CEOs of portfolio companies. The aim of the website overhaul is to convey the idea that “entrepreneurs are the driving force of companies, while JAFCO is the partner that supports their endeavors.” The new black-and-white logo embodies the idea that “JAFCO has no specific color of its own, but rather adjusts its color based on the needs of its portfolio companies.”
New corporate logo
Source: Taken from corporate website
The company has launched the business content media website & JAFCO POST geared toward entrepreneurs. The website introduces past and recent portfolio companies, disseminates information to entrepreneurs, and promotes the company’s achievements and values.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 49 Interviews with portfolio company CEOs posted on homepage of corporate website
Source: Corporate website
& JAFCO POST
Source: Corporate website Q1 FY03/21 results Summary
Revenue: JPY4.4bn (+97.0% YoY) Operating profit: JPY658mn (+131.7% YoY) Recurring profit: JPY1.6bn (-8.2% YoY) Net income*: JPY613mn (-59.2% YoY) Capital gains: JPY2.4bn (+274.4% YoY) IPOs: None (none in Japan, none overseas) *Net income attributable to owners of the parent Note: Figures may differ from company materials due to differences in rounding methods.
In Q1 FY03/21, there were no new JAFCO-backed IPO exits in Japan or overseas, but capital gains were up 274.4% YoY on the sale of shares in listed portfolio companies. Meanwhile, due to the impact of the COVID-19 pandemic among other factors, the company increased its provision of allowance for investment losses (including allowance for COVID-19-related mark-downs of JPY1.5bn in Q1). Net income fell YoY due to a greater tax burden.
Although the allowance for investment losses against the balance of unlisted securities (JAFCO’s interest only) increased primarily due to mark-downs associated with COVID-19, the allowance ratio remained at 18.3%, trending below the historical average of around 20%. Shared Research understands that JAFCO’s investment portfolio has not suffered a major damage. The investment amount fell YoY but 18 new investments were made in Q1, which is a substantial number. The stake acquired in portfolio companies averaged 16%, indicating that JAFCO has maintained its highly selective, intensive investment
JAFCO Group/ 8595
Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 50 approach. According to the company, the prolonged trend of investments at high valuation began showing signs of a slowdown in Q1. With regard to income from fund management, there were increases in management fees from JAFCO SV6 Fund Series (SV6) and JAFCO Taiwan I Venture Capital Limited Partnership (Taiwan fund), both newly established in FY03/20.
Capital gains
In Q1 FY03/21, capital gains amounted to JPY2.4bn (+274.4% YoY). Of this figure, capital gains on sale of shares in listed portfolio companies (IPO-related capital gains) increased 400.6% YoY to JPY2.4bn, while capital losses on unlisted shares were JPY58mn. The IPO-related capital gains came from the sale of shares in portfolio companies such as Giftee (TSE Mothers: 4449; listed on September 20, 2019) and Chatwork (TSE Mothers: 4448) that went public during FY03/20. The investment multiple for JAFCO’s interest (revenue from operational investment securities divided by cost of operational investment securities) came to 4.02x.
IPOs
There were seven IPOs in Japan between April and June 2020 (Q1 FY03/21), but none were backed by JAFCO. There was also no IPO activity among JAFCO’s overseas portfolio companies. While the company had anticipated an IPO exit of i3 Systems (TSE Mothers: 4495; SV4 portfolio company) in April, the listing was postponed until July 15, 2020 due to the COVID-19 pandemic.
Allowance for investment losses
Net provision of allowance for investment losses amounted to JPY2.1bn (provision of JPY2.2bn, reversal of JPY157mn). Of the JPY2.2bn provision, a total of JPY1.5bn was for mark-downs associated with the COVID-19 pandemic. In response to the pandemic-induced changes in the operating environment of JAFCO’s portfolio companies, which caused their sales to decline and made fundraising difficult, the company posted the JPY1.5bn provision to cover investment losses in 14 portfolio companies. This amount represented 68.2% of the total JPY2.2bn provision for Q1. Of the 14 companies, eight were in Japan (provision of JPY1.2bn), three were in Asia (JPY170mn), and three were in the US (JPY150mn).
As a result, the allowance ratio against the balance of unlisted securities (JPY56.3bn; JAFCO’s interest only) rose to 18.3% from 14.9% at end-FY03/20. By region, the balance of unlisted securities was JPY38.1bn in Japan, JPY9.6bn in the US, and JPY8.5bn in Asia. Their allowance ratios were 19.0%, 12.6%, and 21.4%, respectively.
Income from fund management
Management fees in Q1 FY03/21 came to JPY726mn (+73.3% YoY), and success fees were JPY528mn (+208.8% YoY). SV6 established in June 2019 and the final closing of the Taiwan fund contributed to the rise in management fees.
Management fees
Total commitments subject to management fees as of end-June 2020 were JPY131.6bn, up JPY2.6bn from end-March 2020 and up JPY56.1bn from end-March 2019. For SV6 established in June 2019 (fund size of JPY80.0bn), commitments from external investors (after deducting JAFCO’s 37% interest, etc.) amounting to JPY50.9bn are subject to management fees. Further, around 70% of total commitments to JAFCO’s Taiwan fund (fund size: NTD2.0bn [approx. JPY7.2bn]) that had its final closing on April 24, 2020 is subject to management fees. The company estimates around JPY2.8bn in management fees (JPY131.6bn x 2% plus) for full-year FY03/21.
Success fees
Q1 success fees of JPY528mn were up 208.8% YoY. The company expects to recognize success fees from the IPO of i3 Systems (TSE Mothers: 4495), an SV4 portfolio company that listed on July 15, 2020. i3 Systems’ listing was originally scheduled for April 2020 but the timing was postponed due to the COVID-19 pandemic.
Core income
In Q1 FY03/21, SG&A expenses were JPY864mn (-11.7% YoY). Core income, which is management fees minus SG&A expenses, was negative, but income including success fees turned positive.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 51 Unrealized gains
Unrealized gains on listed securities were JPY7.0bn, down from JPY7.1bn at end-March 2020. This level is not particularly high. While JAFCO made progress in the sale of shares in listed portfolio companies, unrealized gains were kept largely in line with the March 2020 level since stock prices recovered from March onward.
Investment amounts
Due in part to the impact of COVID-19, investments in Japan, the US, and Asia (including fund LPs’ interests) were somewhat restrained overall. The amount invested in Japan fell 67.2% YoY to JPY3.9bn, of which JPY1.6bn was venture capital investment (-82.6% YoY) and JPY2.3bn was buyout investment (-10.7% YoY).
The amount invested in the US dropped 69.7% YoY to JPY838mn but investments in Asia were up 205.0% YoY to JPY491mn, likely because the impact of the pandemic was more severe in Europe and the Americas compared to Asia.
The total investment amount in Q1 FY03/21 dropped significantly YoY. However, the total number of new investments in Japan, the US, and Asia combined came to 18 companies, which we think is a substantial number albeit short of the total of 24 companies in Q1 FY03/20.
Fund commitments
As of end-June 2020, total commitments came to JPY437.0bn (JPY433.9bn at end-March 2020), of which the amount subject to management fees (excluding capital committed by JAFCO, Icon Ventures funds, and funds under extensions) was JPY131.6bn.
Cash surplus
As of end-June 2020, cash and cash equivalents (including securities) totaled JPY66.0bn (JPY72.0bn at end-FY03/20), of which JAFCO’s interests in funds were JPY8.0bn. Interest-bearing liabilities were JPY249mn, and uncalled capital owed to funds totaled JPY29.7bn. The company’s significant cash surplus demonstrates its ability to respond to future demands for cash, notably uncalled capital commitments.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 52 Other information History
Date Description April 1973 Japan Associated Finance Co., Ltd. established in Chuo, Tokyo April 1982 Established JAFCO Investment Partnership No.1, the first investment partnership in Japan May Made an investment using the scheme of detachable warrant, the first in Japan June 1987 Registered shares with the Japan Securities Dealers Association for over-the-counter trading February 1996 Relocated the head office to Chiyoda, Tokyo August 1997 Renamed as JAFCO Co., Ltd. May 1998 Established business investment group specializing in buyout investments January 2001 Listed shares on the First Section of the Tokyo Stock Exchange June 2015 Transitioned to the governance structure of Company with Audit & Supervisory Board July 2017 Acquired and cancelled all shares held by Nomura Holdings, Inc. and Nomura Research Institute, Ltd. February 2018 Relocated the head office to Minato, Tokyo March 2018 Introduced a partnership model to the company's business structure March 2019 Established a Taiwan subsidiary JAFCO Taiwan Capital Management Consulting Corp. October 2020 Renamed as JAFCO Group Co., Ltd.
Source: Shared Research based on company data Note: The company was established in 1973 as a joint venture between Nomura Securities Co., Ltd., Nippon Life Insurance Company, and Sanwa Bank, Limited (now MUFJ Bank). Strategies to fulfill mission Mission: "Commit to new business creation and jointly shape the future"
Since its founding, the company's mission has been to jointly shape the future with stakeholders by creating new businesses needed by society.
Policies and strategies to fulfill mission
The company aims to make its mission a reality through venture investments and buyout investments via its funds. To clarify its commitment to entrepreneurs embarking on new business ventures and to fund investors (mainly institutional investors), the company introduced a partnership model focused on individuals to boost its competitiveness and supplement the organizational capabilities built up since its founding.
Furthermore, to realize its mission, the company works closely with start-up companies (acting as a kind of co-founder) to build new businesses, and is promoting company growth through highly selective, intensive investment and management involvement. It hopes this will lead to a sustained improvement in portfolio performance as it builds up a quality portfolio.
The essence of the company's management policy and investment activities aligns closely with sustainable investment approaches. The company identifies and invests in promising companies; engages in dialogue and supports growth; and makes portfolio companies socially impactful. ESG Sustainable investment activities
JAFCO's stated mission is to "commit to new business creation and jointly shape the future." The company aims to identify new technologies and services that are in high demand and commercialize them as new businesses with entrepreneurs with the aim of realizing a better society. The company supports the growth of start-ups that aim to solve social issues through its investment activities, and contributes to the development of companies that will have a significant social impact in the future.
The company's sustainable investment activities comprise three steps. Step one: initiatives in the investment phase; step two: initiatives in the growth support phase following investment; step three: initiatives in the further growth phase.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 53 Step one: Initiatives in the investment phase
Focus on the positive aspects of the start-up company investment candidates, such as business potential and social needs, and make bold investments.
Due diligence entails checking on compliance arrangements, relationships with customers and employees, and company management structure. It also analyses companies from the perspective of how they tie into the UN's 17 Sustainable Development Goals (SDGs). If negative elements are found after examining the company from an ESG, SDG, and commonsense perspective, the company will exercise investment discipline and exclude the candidate.
Step two: initiatives in the growth support phase following investment
Governance is becoming increasingly important as startups account for the majority of portfolio companies. For the portfolio companies grow to play a bigger role in society, it is necessary to build an organization and management structure commensurate with business growth. JAFCO helps startups adopt cloud-based services and advises them on developing internal systems so that they can manage sales and capital appropriately even with limited human resources.
Business growth by startups requires support in recruitment and organization building. In 2018, the company acquired a free employment placement business license, and provides proactive support to portfolio companies' recruitment activities. The company also assists in the development of organizational structures during the growth phase, including organizational charts and internal regulations and setting decision-making authority.
JAFCO is active in returning its venture capital expertise to large companies through seminars and participating in new business development programs. It is helping to develop an ecosystem where venture capital, large companies, and startups complement each other by sharing its expertise on venture capital valuation methods, investment conditions, and capital management policies.
Once a year, the company checks all of its portfolio companies for violations of laws and regulations, whether they have appropriate permits and licenses to carry out their businesses, and capital management. It aims to reduce compliance risk among its portfolio companies.
Step three: initiatives in the further growth phase
After JAFCO exits as a shareholder, portfolio companies need to have a platform to continue growing smoothly so they can have an impact on society. The company has constant discussions with portfolio company management on what form they want their company to take as it moves to the next stage through IPO or M&A. The company sells its shares during an IPO in a way that does not interfere with stock price formation after listing, and transfers shares to quality institutional investors who can be expected to support the company as stable shareholders.
Human resources strategy
Development of individual ability and personnel diversification
The company has introduced a complete flextime system, allowing each member to choose their working hours.
Cloud/mobile IT systems allow members to work remotely.
The company has improved work efficiency and reduced unnecessary time spent at work, enabling employees to use free time for self-improvement and outside activities. The company also encourages members to have side businesses.
In addition to conventional career advancement through on-the-job training, the company also recruits mid-career personnel from different industries and uses outside professionals to deal with increasingly complex specialties.
Governance
Composition and operation of the Board of Directors, business execution structure
JAFCO is a “company with an audit and supervisory committee.”
Over half the members of the Board of Directors are independent directors.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 54 The nomination and remuneration committee deliberates on the selection, dismissal, and remuneration of directors, which the Board of Directors decides upon.
The company has introduced the corporate officer system to strengthen and accelerate business execution.
The company is proactive in selecting diverse human resources as officers regardless of gender or nationality as long as they are appropriate for the role.
Handling of conflict of interest in fund management
The company pledges (1) not to establish industry-specific funds, (2) not to establish investor-specific funds, and (3) not to engage in businesses other than fund management
Based on the policies outlined above, the company preserves discipline and transparency.
In principle, the company does not make direct investments using its own capital. JAFCO invests its own capital in funds that it manages as a GP, thereby investing indirectly.
In principle, no transactions are made between JAFCO and its funds in operation or between JAFCO funds.
Investment risk management
In March 2018, JAFCO adopted a partnership model and appointed six partners to make investment decisions.
The investment committee comprises the partners and the president. Investment decisions are made based on the unanimous consent of its members.
JAFCO strives to enhance the enterprise value of portfolio companies through rigorous screening, a decent shareholding, and deep involvement in management. Corporate governance and top management
Form of organization and capital structure Form of organization Company with Audit & Supervisory Board Controlling shareholder and parent company None Directors and Audit & Supervisory Board members Number of directors under Articles of Incorporation 16 Number of directors 7 Directors' terms under Articles of Incorporation 1 Chairman of the Board of Directors President Number of outside directors 4 Number of independent outside directors 4 Number of members of Audit & Supervisory Board 4 Number of outside members of Audit & Supervisory Board 4 Other Participation in electronic voting platform Yes Providing convocation notice in English Yes Implementation of measures regarding director incentives None Eligible for stock option None Disclosure of individual director's compensation None Policy on determining amount of compensation and calculation methodology In place Corporate takeover defenses None
Source: Shared Research based on company data
The company is engaged in risky VC and buyout investments, and has been aware of the need to enhance governance. It aims to improve governance each year in stages. Since 2016, it has been tackling initiatives around the themes of management independence, a balance of shareholder returns and ample shareholders' equity, and transition to a partnership model.
FY03/16: Adopted a Company with Audit & Supervisory Board structure
FY03/17: Disclosed dividend policy. Independent outside directors comprised more than one third of the total.
FY03/18: Acquired and cancelled all shares held by the Nomura group and dissolved capital alliance. Introduced partnership model.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 55 FY03/19: Appointed a female director
FY03/20: Independent outside directors became majority on board. Established a nomination and remuneration committee
FY03/21: Disclosed shareholder returns policy Top management Shinichi Fuki
Born November 1, 1961; hails from Kagoshima Prefecture
Graduate of Waseda University School of Law
Joined JAFCO in April 1985. Assigned to JAFCO America Ventures Inc. in 1988. Assigned to the listed company division in 1990. In 1993, assigned to JAFCO Asia Investment Services. In 1996, appointed manager of the domestic venture investment team. In April 2002, appointed officer of Investment Group II. In June 2003, appointed director in charge of Investment Group II, Kansai Branch, and Planning & Administration. In February 2005, became managing director in charge of Finance, Investment Group II, Kansai Branch, and VA Department III. In March 2007, appointed executive managing director in charge of Finance, Structured Investment, Kansai Branch, and VA Department III. In January 2010, appointed president & CEO (representative director). Shareholder returns and dividend policy Approach to shareholder returns
In order to maintain a financial base enabling it to continue investment activity under any environment, JAFCO regards cash and equivalents and NRI shares together as funds for future investment.
The company estimates that funds needed for future investment are about JPY120.0bn. The company said this includes uncalled capital commitments to funds under operation and interests in upcoming funds, and takes into account expanding fund size in future and provides for other investment opportunities and unforeseen circumstances.
The company said that if the sum of cash and equivalents and mark-to-market valuation (after tax) of NRI shares exceeds JPY120.0bn by a certain amount, it would consider buying back shares. It said that if the share price falls below net assets per share, it would consider a share buyback more seriously. In the event of a share buyback, the company plans to cancel treasury stock in a timely manner so that treasury stock holdings are maintained at 3% of the total number of issued shares. Dividend policy
JIn line with the policy disclosed on March 8, 2017, JAFCO targets dividends equivalent to 3% of average shareholders’ equity per share (based on the starting and ending amount of equity for the fiscal year). The company’s fundamental policy is to pay dividends from retained earnings annually, at fiscal year-end. In accordance with the provisions of Article 459-1 of the Companies Act, the Articles of Incorporation provide that dividends from retained earnings may be decided by the Board of Directors. For FY03/21, the company set total dividends of JPY4.1bn, or JPY138 per share (determined as of April 2021). Major shareholders
Top shareholders Shares held ('000) Shareholding ratio The Master Trust Bank of Japan, Ltd. (Trust account) 3,142 10.7% Custody Bank of Japan, Ltd. (Trust account) 2,584 8.8% Hikari Tsushin, Inc. 1,405 4.8% STATE STREET BANK AND TRUST COMPANY 505,001 1,183 4.0% MSIP CLIENT SECURITIES 1,165 4.0% SSBTC CLIENT OMNIBUS ACCOUNT 714 2.4% STATE STREET BANK AND TRUST COMPANY 505,103 576 2.0% Custody Bank of Japan, Ltd. (Trust account 5) 466 1.6% JP MORGAN CHASE BANK 385,781 419 1.4% Custody Bank of Japan, Ltd. (Trust account 6) 412 1.4% SUM 11,624 37.6%
Source: Shared Research based on company data Note: As of end-March 2021
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 56 Employees
Employees (as of end-FY03/21): 132 on a consolidated basis, 103 on a non-consolidated basis
Average age: 44 years, 3 months
Average tenure: 17 years, 1 months
Average annual salary: JPY12.2mn
Employees (consolidated basis)
Source: Shared Research based on company data Consolidated subsidiaries
Company Location Acquired/established Capital Business Voting rights (%) JAFCO Investment (Asia Pacific) Ltd. Singapore Mar 1999 SGD15mn Fund management 100 JAFCO Investment (Hong Kong) Ltd. Hong Kong Mar 1999 USD6.5mn Fund management 100 (Indirect: 100) JAFCO Asia (Shanghai) Equity Investment Shanghai, China Aug 2017 USD1mn Fund management 100 (Indirect: 100) Management Co., Ltd. JAFCO Taiwan Capital Management Taiwan Mar 2019 NTD15mn Fund management 100 (Indirect: 100) Consulting Corp. Eight other companies
Source: Shared Research based on company data
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 57 News and topics Sale of its shares in Visional Inc.
2021-04-22
On April 22, 2021, the company announced the sale of its shares in Visional Inc.
The company sold shares of Visional Inc. held by the JAFCO Super V3 Shared Investment Limited Partnership (SV3), which the company manages as a general partner.
Details of the sale and outlook:
JAFCO sold 4,680,000 shares held by SV3 through a share offering conducted as part of the listing of Visional common stock on the Mothers market of the Tokyo Stock Exchange. The company expects to record a gain of JPY11.4bn in Q1 FY03/22 from the sale, consisting of a gain on sales of operating investment securities related to JAFCO’s interest in SV3 and success fees from SV3.
The company intends to promptly disclose gains on sales of unlisted portfolio company shares, if the gain on the sale of a single company is equivalent to 10% or more of the balance of unlisted operational investment securities (before provisions) as of the end of the previous fiscal year.
Earnings results for full-year FY03/21
2021-04-21
On April 21, 2021, JAFCO Group Co., Ltd. ("JAFCO") announced earnings results for full-year FY03/21; see the results section for details.
On the same day, the company announced the cancellation of treasury shares.
The company's shareholder returns policy is to cancel treasury shares in a timely manner following a buyback so that treasury shareholdings will be maintained at 3% of the total number of issued shares.
Number of shares (common stock) to be cancelled: 2,250,000
Percentage of total number of issued shares prior to cancellation: 6.9%
Cancellation date: May 7, 2021
Q3 FY03/21 Report Update
2021-02-26
On February 26, 2021, Shared Research updated the report following interviews with JAFCO Group Co., Ltd. (“JAFCO”).
Policy on future shareholder returns / Resolution regarding a share buyback
2021-02-10
On February 10, 2021, the company announced its policy on future shareholder returns, as well as a resolution regarding a share buyback.
On January 28, 2020, the company sold 15,500,000 of the ordinary shares that it held in Nomura Research Institute, Ltd. (39.3% of the 39,468,150 shares that the company held in Nomura Research Institute, Ltd.) and expects to record JPY44.8bn in sale of investment securities (extraordinary gains) in FY03/21. The company has decided to continue to hold its remaining shareholding in Nomura Research Institute, Ltd. (23,968,150 shares) as assets for future investment.
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 58 On February 10, 2020, the company resolved to allocate the JPY35bn in after-tax sales proceeds to buy back its own shares. Details of the share buyback follow.
Type of stock: Common stock
Number of shares: 7,000,000 shares (upper limit) (22.6% of the number of issued shares excluding treasury shares)
Total acquisition price: JPY35bn (upper limit)
Acquisition period: From February 12, 2021 to February 11, 2022
Cancellation of treasury stock: The company plans to cancel treasury stock as appropriate so that treasury shares held will be maintained at 3% of the total number of issued shares (including treasury shares).
The company stated that the amount of funds that it requires for future investment is currently about JPY120bn. It stated that if the sum of cash and deposits and mark-to-market valuation (after tax) of Nomura Research Institute, Ltd. shares exceeds this level by a certain amount, it will consider buying back its shares.
Results for Q3 FY03/21
2021-01-28
On January 28, 2021, JAFCO Group Co., Ltd. (“JAFCO”) announced earnings results for Q3 FY03/21: see the results section for details.
1H FY03/21 Report Update
2020-11-10
On November 10, 2020, Shared Research updated the report following interviews with JAFCO Group Co., Ltd.
Change in its logo accompanying its corporate name change and establishment of owned media & JAFCO POST
2020-10-01
On October 1, 2020, the company announced a change in its logo accompanying its corporate name change and establishment of owned media & JAFCO POST.
Corporate name: changed from JAFCO Co., Ltd. to JAFCO Group Co., Ltd.
New logo: embraces the new slogan, “Your closest partner JAFCO”
Establishment of owned media: & JAFCO POST
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 59 Profile
Company Name Head Office JAFCO Group Co., Ltd. 1-23-1 Toranomon, Minato-ku, Tokyo, Japan
Phone Listed On 050-3734-2025 The First Section of the Tokyo Stock Exchange
Established Exchange Listing 1973-04-05 1987-06-03
Website Fiscal Year-End https://www.jafco.co.jp/ Mar
IR Contact IR Web ir@jafco.co.jp https://www.jafco.co.jp/english/ir/
IR Phone IR Email +81-50-3734-2025 -
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 60 About Shared Research Inc.
We offer corporate clients comprehensive report coverage, a service that allows them to better inform investors and other stakeholders by presenting a continuously updated third-party view of business fundamentals, independent of investment biases. Shared Research can be found on the web at https://sharedresearch.jp. Contact Details
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Research Coverage Report by Shared Research Inc. | pdf.summary.company_website 61