JAFCO Group / 8595

COVERAGE INITIATED ON: 2020.08.26 LAST UPDATE: 2021.01.28

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. JAFCO Group/ 8595 RCoverage LAST UPDATE: 2021.01.28 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Executive summary ------3 Key financial data ------5 Recent updates ------6 Trends and outlook ------7 Quarterly results ------7 Business ------13 Business overview ------13 Business model ------23 Market and value chain------32 Scale of the VC investment market in Japan ------32 Major providers of risk capital ------32 Trends at competing companies ------34 Strengths and weaknesses ------39 Historical performance and financial statements ------41 Income statement ------41 Balance sheet ------42 Cash flow statement ------43 Historical performance ------44 Other information ------53 News and topics ------53 History ------53 ESG ------53 Corporate governance and top management ------54 Top management ------55 Dividend policy ------55 Major shareholders ------55 Employees ------55 Consolidated subsidiaries ------56 Profile ------56

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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 (55.2% of total investment amount), domestic buyout (BO) investment (16.4%), VC investment in the US (24.2%), and VC investment in Asia (excluding Japan; 4.2%) (as of FY03/20). Total commitments to JAFCO-managed funds stood at JPY433.9bn in FY03/20. Annual investment of JPY34.8bn represents a 10.5% share of the Japanese VC market. CAGR (FY03/11 to FY03/20) was 7.8% for revenue and 20.3% 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 4,015 companies (including 851 companies outside Japan), of which it supported initial public offerings (IPOs) of 1,006 companies (including 205 overseas companies) (as of the end of March 31, 2020).

◤ 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 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 50.8% of SG&A expenses (FY03/20), and SG&A expenses as a percentage of revenue (five-year average) were 16.5%. Core income (management fees minus SG&A expenses) remained negative, but management fees are expected to increase following the establishment of SV6.

◤ 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

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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.

Earnings trends

◤ In FY03/20, revenue was JPY29.9bn (+15.4% YoY), operating profit was JPY15.0bn (+22.3% YoY), recurring profit was JPY17.0bn (+27.1% YoY), and net income was JPY11.8bn (+16.5% YoY). Capital gains and success fees from funds rose due to major exits by unlisted portfolio companies in Japan and Asia (excluding Japan; the same applies hereinafter). Fund management fees also rose as the result of an increase in capital raised from outside investors for SV6, which was established in June 2019. Affected by the COVID-19 pandemic, the IPO of one company slated for April 2020 was postponed, and in Q4 (January–March 2020) JAFCO recorded its first net loss since Q2 FY03/12.

◤ 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:

◤ 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.

◤ A strong information network enables JAFCO to identify attractive deals globally.

◤ The ability to provide comprehensive, hands-on management support differentiates JAFCO from its Japanese domestic peers.

Weaknesses:

◤ Retaining talent is challenging, so that costs to pass on the company’s DNA can be high.

◤ JAFCO lacks VC brand strength to develop business overseas.

◤ JAFCO is drawn into competition to invest in innovative IT startup companies at high valuations due to concentration of capital-rich corporate-VCs.

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Key financial data

Income statement (JAFCO's interest) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) 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 YoY -9.1% 30.8% 11.5% 103.4% 38.0% -33.6% -32.3% 5.8% -12.2% 15.4% Gross profit 2,176 4,046 10,496 33,163 38,167 24,316 14,668 19,293 15,433 18,455 YoY 30.6% 85.9% 159.4% 216.0% 15.1% -36.3% -39.7% 31.5% -20.0% 19.6% Gross profit margin 14.4% 20.4% 47.6% 73.9% 61.6% 59.1% 52.7% 65.5% 59.6%61.8% Operating profit 2,847 2,086 8,007 27,302 38,419 19,226 12,324 14,252 12,239 14,970 YoY - -26.7% 283.8% 241.0% 40.7% -50.0% -35.9% 15.6% -14.1% 22.3% Operating profit margin 18.8% 10.5% 36.3% 60.8% 62.0% 46.7% 44.2% 48.4% 47.3% 50.1% Recurring profit 3,202 3,620 9,028 28,404 40,132 19,808 13,666 15,554 13,410 17,045 YoY - 13.1% 149.4% 214.6% 41.3% -50.6% -31.0% 13.8% -13.8% 27.1% Recurring profit margin 21.1% 18.3% 40.9% 63.3% 64.8% 48.1% 49.1% 52.8% 51.8% 57.1% Net income 2,329 6,106 6,583 17,292 27,707 17,018 11,073 24,235 10,162 11,839 YoY - 162.2% 7.8% 162.7% 60.2% -38.6% -34.9% 118.9% -58.1% 16.5% Net margin 15.4% 30.8% 29.8% 38.5% 44.7% 41.4% 39.7% 82.2% 39.3% 39.7% 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 EPS 137.6 137.6 148.4 389.7 624.5 383.6 249.6 687.0 328.6 382.8 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 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 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 Other assets 182 32 28 37 38 49 27 22 30 31 Investments 97,662 89,689 101,824 144,310 133,373 110,004 128,082 119,217 117,412 147,434 Operational investment securities 87,896 76,583 81,880 111,449 78,785 60,644 62,274 61,287 59,267 63,532 Listed 11,243 8,120 11,760 46,422 21,519 9,780 14,601 11,669 7,744 8,470 Unlisted 68,994 63,085 65,159 60,538 53,767 48,215 45,589 47,743 49,803 55,061 Other funds 7,658 5,377 4,960 4,488 3,498 2,648 2,084 1,874 1,719 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 Investment securities 37,929 32,807 38,787 51,649 70,345 64,536 78,140 68,281 67,646 92,131 Listed 28,482 31,588 37,593 50,470 69,364 63,568 75,743 67,412 66,650 90,514 Valued above acquisition prices 27,567 31,543 37,590 50,467 69,359 63,545 75,716 67,389 66,606 90,480 Valued below acquisition prices915453 3 52327234434 Unlisted 9,447 1,219 1,194 1,179 981 968 2,397 869 996 1,617 Total assets 133,441 135,810 164,122 220,167 239,035 214,245 237,902 191,550 184,213 222,059 Interest-bearing debt 36,582 27,579 35,551 18,220 15,361 5,702 4,320 977 365 249 Other liabilities 8,032 9,927 16,035 42,600 35,549 19,042 25,726 30,274 20,633 33,444 Net assets 88,827 98,303 112,535 159,347 188,125 189,501 207,855 160,299 163,215 188,366 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 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 Cash flows from investing activities 15 15,971 -4,623 2,550 -5,744 11,768 -1,580 24,732 213 -277 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 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% ROE 2.6% 6.5% 6.2% 12.7% 15.9% 9.0% 5.6% 13.2% 6.3% 6.7% Operating profit margin 18.8% 10.5% 36.3% 60.8% 62.0% 46.7% 44.2% 48.4% 47.3% 50.1% Equity ratio 66.3% 72.3% 68.6% 72.4% 78.7% 88.5% 87.4% 83.7% 88.6% 84.8% 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.

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Recent updates

Highlights

On January 28, 2021, JAFCO Group Co., Ltd. (“JAFCO”) announced earnings results for Q3 FY03/21: see the results section for details.

On November 10, 2020, Shared Research updated the report following interviews with the company.

For previous releases and developments, please refer to the News and topics section.

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Trends and outlook Quarterly results

Earnings FY03/19 FY03/20 FY03/21 Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Revenue 4,705 15,755 21,987 25,878 2,249 5,984 27,937 29,855 4,431 9,546 11,668 YoY -55.3% -11.3% -5.7% -12.2% -52.2% -62.0% 27.1% 15.4% 97.0% 59.5% -58.2% Operational investment securities 3,967 14,383 20,033 23,291 1,658 4,665 22,680 23,697 3,176 7,018 8,285 Partnership management 738 1,371 1,954 2,586 590 1,318 5,255 6,155 1,254 2,526 3,379 Other ------11-13 Cost of revenue 1,794 7,069 9,237 10,444 1,175 2,904 10,201 11,399 936 2,447 3,044 Operational investment securities 1,652 6,626 8,600 9,274 1,021 2,473 7,166 8,337 791 2,155 2,614 Other 142 443 637 1,169 153 430 3,035 3,061 145 292 430 Gross profit 2,911 8,685 12,749 15,433 1,074 3,080 17,735 18,455 3,494 7,099 8,623 Provision for investment losses -225 -145 -435 -712 -194 -924 -1,605 -515 2,056 2,393 2,699 Unrealized loss on operational investment securities -69 -43 14 24 -5 -7 -26 -88 -83 -89 -148 Gross profit–net 3,205 8,873 13,170 16,121 1,273 4,011 19,366 19,058 1,521 4,795 6,072 SG&A expenses 1,055 2,073 3,097 3,882 978 1,930 2,996 4,088 864 1,805 2,672 Operating profit 2,149 6,799 10,073 12,239 284 2,081 16,369 14,970 658 2,990 3,400 YoY -65.8% -25.7% -9.2% -14.1% -86.8% -69.4% 62.5% 22.3% 131.7% 43.7% -79.2% Operating profit margin 45.7% 43.2% 45.8% 47.3% 12.6% 34.8% 58.6% 50.1% 14.8% 31.3% 29.1% Non-operating income 912 709 1,399 1,426 1,439 1,462 2,137 2,169 900 1,748 2,597 Non-operating expenses 1 120 263 255 27 131 122 94 - 7 8 Recurring profit 3,059 7,388 11,208 13,410 1,696 3,412 18,385 17,045 1,557 4,730 5,990 YoY -56.7% -26.3% -10.3% -13.8% -44.6% -53.8% 64.0% 27.1% -8.2% 38.6% -67.4% Recurring profit margin 65.0% 46.9% 51.0% 51.8% 75.4% 57.0% 65.8% 57.1% 35.1% 49.5% 51.3% Extraordinary gain 55757190- 3 - - - - - Extraordinary loss ------Income taxes - - - 3,437 193 - - 5,206 944 2,071 2,161 Net income 2,985 5,861 8,737 10,162 1,502 3,046 13,453 11,839 613 2,659 3,829 YoY -43.0% -70.3% -59.8% -58.1% -49.7% -48.0% 54.0% 16.5% -59.2% -12.7% -71.5% Net margin 63.4% 37.2% 39.7% 39.3% 66.8% 50.9% 48.2% 39.7% 13.8% 27.9% 32.8% Earnings FY03/19 FY03/20 FY03/21 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 Revenue 4,705 11,050 6,232 3,891 2,249 3,735 21,953 1,918 4,431 5,115 2,122 YoY -55.3% 52.5% 12.2% -36.8% -52.2% -66.2% 252.3% -50.7% 97.0% 36.9% -90.3% Operational investment securities 3,967 10,416 5,650 3,258 1,658 3,007 18,015 1,017 3,176 3,842 1,267 Partnership management 738 633 583 632 590 728 3,937 900 1,254 1,272 853 Management fees 436 463 412 439 419 418 980 769 726 716 704 Success fees 302 170 171 193 171 309 2,958 131 528 555 149 Other ------1---2 Cost of revenue 1,794 5,275 2,168 1,207 1,175 1,729 7,297 1,198 936 1,511 597 Operational investment securities 1,652 4,974 1,974 674 1,021 1,452 4,693 1,171 791 1,364 459 Other 142 301 194 532 153 277 2,605 26 145 147 138 Gross profit 2,911 5,774 4,064 2,684 1,074 2,006 14,655 720 3,494 3,605 1,524 Provision for investment losses -225 80 -290 -277 -194 -730 -681 1,090 2,056 337 306 Unrealized loss on operational investment securities -69 26 57 10 -5 -2 -19 -62 -83 -6 -59 Gross profit–net 3,205 5,668 4,297 2,951 1,273 2,738 15,355 -308 1,521 3,274 1,277 SG&A expenses 1,055 1,018 1,024 785 978 952 1,066 1,092 864 941 867 Operating profit 2,149 4,650 3,274 2,166 284 1,797 14,288 -1,399 658 2,332410 YoY -65.8% 62.0% 68.4% -31.5% -86.8% -61.4% 336.4% - 131.7% 29.8% -97.1% Operating profit margin 45.7% 42.1% 52.5% 55.7% 12.6% 48.1% 65.1% - 14.8% 45.6% 19.3% Non-operating income 912 -203 690 27 1,439 23 675 32 900 848 849 Non-operating expenses 1 119 143 -8 27 104 -9 -28 - 7 1 Recurring profit 3,059 4,329 3,820 2,202 1,696 1,716 14,973 -1,340 1,557 3,173 1,260 Recurring profit margin 65.0% 39.2% 61.3% 56.6% 75.4% 45.9% 68.2% - 35.1% 62.0% 59.4% Extraordinary gain 552-133-3-3---- Extraordinary loss ------Income taxes - - - 3,437 193 -193 - 5,206 944 1,127 90 Net income 2,985 2,876 2,876 1,425 1,502 1,544 10,407 -1,614 613 2,046 1,170 YoY -43.0% -80.2% 46.3% -43.3% -49.7% -46.3% 261.9% - -59.2% 32.5% -88.8% Net margin 63.4% 26.0% 46.1% 36.6% 66.8% 41.3% 47.4% - 13.8% 40.0% 55.1% Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.

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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. Capital gains were down 63.4% YoY to JPY5.7bn. Net provision of allowance for investment losses was JPY2.7bn. 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. 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.

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.

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 listed on December 15, 2020.

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). The allowance ratio against the balance of unlisted securities rose to 18.0%, up from 14.9% at end-FY03/20. As of end-Q3 FY03/21, the balance of investment in unlisted Japanese securities (including fund LPs’ interests) was JPY95.3bn.

Of the JPY2.2bn provision in Q1, 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). The company booked a JPY1mn provision for one portfolio company in Q2 and JPY26mn for one company in Q3, bringing the total to 16.

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 contributed to the rise in management fees.

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.

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Unrealized gains Unrealized gains on listed securities were JPY10.2bn, up from JPY7.1bn at end-March 2020. This exceeded the levels of end- FY03/18 (JPY9.9bn) and approached the levels of end-FY03/17 (11.7bn). 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 JPY23.3bn (-12.4% YoY). There is a slowdown apparent, despite a surge in valuations and ongoing move to larger fundraisings. 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 of the amount invested in Japan was buyout investment.

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.

Cash surplus As of end-December 2020, cash and cash equivalents (including securities) totaled JPY64.1bn (JPY72.0bn at end-FY03/20), of which JAFCO’s interests in funds were JPY6.4bn. Interest-bearing liabilities were JPY132mn, and uncalled capital owed to funds totaled JPY23.4bn. The company’s significant cash surplus demonstrates its ability to respond to future demands for cash, notably uncalled capital commitments.

Sale of Nomura Research Institute (TSE 1: 4307) shares Along with its Q3 FY03/21 results, the company announced plans to sell 15,500,000 shares of common stock it holds in Nomura Research Institute (39.3% of its total holding of 39,468,150 shares) through an off-floor transaction.

The company has viewed its Nomura Research Institute shareholding as a highly liquid asset. In recent years ongoing share-price gains have increased the holding’s weighting on the company’s balance sheet. The company thus decided to sell roughly 40% of its investment. The company expects to book the gain on sale of investment securities as an extraordinary item in FY03/21.

For details on previous quarterly and annual results, please refer to the Historical financial statements.

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Full-year 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). Below is a summary of Shared Research’s understanding of the company’s outlook.

Negative factors International Monetary Fund (IMF) downgrades growth rate projection to -4.9% On April 14, 2020, the IMF announced revisions to its economic outlook, lowering its forecast rate of growth for 2020 to minus 3.0%. Then in June 2020, it revised down the April outlook by 1.9pp to minus 4.9%, stating that the economic activities in the first half of 2020 suffered a greater-than-expected negative impact of the COVID-19 pandemic and that recovery would be more gradual than what was anticipated in the initial forecast. For 2021, the global rate of growth is projected at 5.4%. The IMF expressed concerns that economic deterioration in 2020 would outpace that of the 2009 global financial crisis and be the “worst since the Great Depression.” It predicts that the Japanese economy will contract by 5.8%, marking the largest drop since the downturn in 2009 (-5.4%). The IMF also forecasts economic growth of minus 8.0% in the US and minus 10.2% in Europe.

Stagnation in the VC market and risk of delays in raising capital for funds According to a report from CB Insights of the US, worldwide corporate-VC investment during January–March 2020 fell 13% QoQ, to USD34.0bn. The number of investments during the quarter came to 1,337 (-19% QoQ and -24% YoY). A report from CB Insights dated July 3, 2020 said that the number of VC investments in the US during April–June 2020 was expected to decline for the fourth consecutive quarter. JAFCO’s investment amount stood at JPY34.8bn in FY03/20, but the company says that it will likely reduce the amount in FY03/21. Fundraising for new funds in Asia and the US is scheduled for FY03/21, but there is a risk that outside investors may delay investment if the VC market remains sluggish.

IPO and M&A markets continue to face uncertainties due to the COVID-19 pandemic The COVID-19 pandemic is also affecting the Japanese IPO market. The 18 companies that had planned to make IPO from April 2020 onward announced the postponement of their listings. Of the 34 IPOs that debuted in the first half of 2020, the opening prices on the first day of trading started lower than the offering prices for 18 IPOs; a record high since 2009. While the Japanese IPO market has not experienced a rapid slowdown, there remains a risk that exits of JAFCO’s portfolio companies via IPO and M&A will be sluggish for a prolonged period.

Positive factors High valuations beginning to give way In a survey by the Nikkei Sangyo Shimbun (March 21–26, 2020, responses from 30 VC companies), asking VC companies how COVID-19 will impact VC investment, four companies responded “Investment will become more active,” 20 companies responded “No change,” and six responded “Take a cautious response.” As valuations had risen too high due to increased investment by large corporate-VCs, some VC companies expressed the view that the trend could reverse itself, allowing investment in attractive companies at a fair price. Shared Research understands that if investment by large corporate-VCs decreases, earning opportunities will be available for VCs.

Completion of fundraising for SV6 produced solid cash on hand On March 2, 2020, JAFCO completed fundraising for SV6, a flagship fund sized at JPY80.0bn. Cash and cash equivalents for FY03/20 were JPY72.0bn, for an equity ratio of 84.8%. Shared Research believes this leeway should allow the company to withstand crisis.

High percentage of startup and early-stage investments Investment portfolios that contain a high proportion of middle- and later-stage companies present opportunities to generate capital gains in a relatively short period of time through IPOs. Meanwhile, JAFCO’s portfolio is heavily weighted toward startup

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and early-stage investments, acquisition costs of which are considered to be relatively lower than middle- and later-stage investments. Accordingly, the company should be less affected by the risk of a cooling IPO market.

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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 FY03/20, the gross multiple was 2.8x. Shared Research understands that the company has in place the investment structure necessary to meet the target. Although it’s 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. To date, the company has concentrated on East Asia (China, South Korea, and Taiwan). In addition to Greater China (China and Taiwan), it plans to shift its focus onto India and Southeast Asia. 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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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 (55.2% of total investment made in FY03/20) and domestic buyout (BO) investment (16.4%). 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 131 as of end-March 2020 (on a consolidated basis).

Under President Fuki, revenue rose at a CAGR of 7.8% between FY03/11 and FY03/20. Over this same period, CAGR was 20.3% for operating profit and the operating profit margin averaged 42.5%. Average investment size (new domestic VC investment; including fund LPs’ interests) rose by 4.5x, from JPY175mn (FY03/11) to JPY783mn (FY03/20). 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

(JPYbn) (JPYmn) (JPYmn) Operational investment securities Revenue Operating profit Operating profit margin (RHS) Total investments 70,000 80% 250 900 62.0% Avg. invested capital (incl. new VCs and fund investors in Japan; RHS) 60.8% 60,000 783 50.1% 60% 800 46.7% 48.4% 200 700 50,000 36.3% 47.3% 40% 27.0% 44.2% 600 40,000 18.8% 150 10.5% 20% 500 30,000 111.4 0% 98.3 93.2 458 400 100 88.2 87.9 439 438 20,000 76.6 81.9 78.8 60.6 300 62.3 61.3 59.3 63.5 -20% 10,000 270 262 267 295 200 50 230 -29.8% -40% 175 100 0 113 -43.7% 0 86 0 -10,000 -60% FY03/08 FY03/10 FY03/12 FY03/14 FY03/16 FY03/18 FY03/20 FY03/08 FY03/10 FY03/12 FY03/14 FY03/16 FY03/18 FY03/20 (year-end) Source: Shared Research based on company materials

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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. (1) Seed: Several JPYmn to several tens of JPYmn

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(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 Revenue ← Start-up → ← Early → ← Middle → ← Later →

Company growth stages

IPO M&A (size of fundraising) Series C (several bn to tens of bn) Series B (several 100mn to bn) Series A (several 100mn) Seed (several mn to several tens of mn) Time Fundraising rounds for companies Source: Shared Research Overview of the investment business As of end-FY03/20, capital commitments to JAFCO’s funds totaled JPY433.9bn. The total investments—primarily investments through funds (98.8% of total) and all in equity—came to JPY144.2bn, of which JAFCO’s direct investments, interests in funds, and unrealized gains combined were JPY63.5bn. Of the equity investment, 97.8% (JPY141.0bn) 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 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total commitments 488,600 433,800 463,800 494,900 420,600 433,000 434,800 348,500 359,100 433,900 Total investments (①+➁) 199,051 179,156 178,721 175,167 155,176 128,839 119,596 120,879 133,424 144,277 ① JAFCO direct investments 14,900 12,400 11,100 9,400 8,000 6,300 5,400 3,800 3,500 1,800 % of total investments 7.5% 6.9% 6.2% 5.4% 5.2% 4.9% 4.5% 3.1% 2.6% 1.2% ➁ Fund investments (➂+④) 184,000 166,700 167,500 165,800 147,100 122,500 114,200 117,000 130,000 142,500 % of total investments 92.4% 93.0% 93.7% 94.7% 94.8% 95.1% 95.5% 96.8% 97.4% 98.8% ➂ JAFCO's interest 69,500 62,200 64,400 64,300 56,100 48,300 45,500 47,800 49,600 54,800 % of fund investments (➁) 37.8% 37.3% 38.4% 38.8% 38.1% 39.4% 39.8% 40.9% 38.2% 38.5% ④ Other investors' interests 114,500 104,400 103,100 101,500 91,000 74,200 68,700 69,200 80,300 87,700 % of fund investments (➁) 62.2% 62.6% 61.6% 61.2% 61.9% 60.6% 60.2% 59.1% 61.8% 61.5% Uninvested capital 104,100 81,300 115,100 118,800 80,500 53,700 91,400 72,300 56,900 104,000 JAFCO's interests (➅+⑧) (undisclosed) (undisclosed) (undisclosed) (undisclosed) (undisclosed) 25,200 28,800 29,600 22,100 37,700 ➄ Cash in funds 45,600 48,300 58,300 64,400 45,000 19,500 33,900 23,900 21,300 15,800 ➅ JAFCO's interest (undisclosed) (undisclosed) (undisclosed) (undisclosed) (undisclosed) 7,000 9,400 8,100 7,500 5,800 ➆ Uncalled commitments of funds 58,500 33,000 56,800 54,400 35,500 34,200 57,500 48,400 35,700 88,200 ⑧ JAFCO's interest (undisclosed) (undisclosed) (undisclosed) (undisclosed) (undisclosed) 18,200 19,400 21,500 14,600 31,900 JAFCO's unrealized gains 3,300 1,900 6,200 37,800 14,700 6,000 11,400 9,600 6,200 7,000 O perational inv estment securities (①+➂+JA F C O 's unrealized gains) 87,700 76,500 81,700 111,500 78,800 60,600 62,300 61,300 59,300 63,500 Source: Shared Research based on company materials

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Breakdown of total investments Breakdown of total investments FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total investments 199,051 179,156 178,721 175,167 155,176 128,839 119,596 120,879 133,424 144,277 Equity 190,826 173,823 173,902 171,071 152,319 126,581 117,875 119,071 131,792 144,200 % of total investments 95.9% 97.0% 97.3% 97.7% 98.2% 98.2% 98.6% 98.5% 98.8% 99.9% Listed 18,405 16,607 13,723 21,741 17,131 8,194 6,559 3,129 2,288 3,196 % of total investments 9.2% 9.3% 7.7% 12.4% 11.0% 6.4% 5.5% 2.6% 1.7% 2.2% Unlisted 172,421 157,216 160,178 149,329 135,187 118,387 111,315 115,942 129,503 141,031 % of total investments 90.4% 90.4% 92.1% 87.3% 88.8% 93.5% 94.4% 97.4% 98.3% 97.8% Investments in other funds 8,224 5,332 4,819 4,095 2,857 2,257 1,720 1,807 1,632 Transferred to % of total investments 4.1% 3.0% 2.7% 2.3% 1.8% 1.8% 1.4% 1.5% 1.2% inv. 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 JPY34.8bn in investments the company made in FY03/20 (including JPY16.4bn in new investments), Japan accounted for 71.6%, the US for 24.2%, and Asia for 4.2%. 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 JPY24.9bn of investments in Japan in FY03/20, VC investment accounted for 77.1% and BO investment for 22.9%.

Investments

Inv est ment s (incl. fund investors' interests) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Japan 23,853 13,714 11,280 10,806 9,019 12,195 15,180 18,057 11,379 24,883 % of total 74.1% 60.5% 55.0% 51.8% 41.7% 57.0% 72.6% 59.7% 45.2% 71.6% YoY 138.5% -42.5% -17.7% -4.2% -16.5% 35.2% 24.5% 19.0% -37.0% 118.7% Venture investments 12,256 11,700 9,029 6,392 8,518 8,742 11,051 12,166 9,039 19,177 % of Japan 51.4% 85.3% 80.0% 59.2% 94.4% 71.7% 72.8% 67.4% 79.4% 77.1% YoY 159.4% -4.5% -22.8% -29.2% 33.3% 2.6% 26.4% 10.1% -25.7% 112.2% Buyout investments 11,597 2,013 2,251 4,414 500 3,452 4,128 5,890 2,340 5,706 % of Japan 48.6% 14.7% 20.0% 40.8% 5.5% 28.3% 27.2% 32.6% 20.6% 22.9% YoY 119.8% -82.6% 11.8% 96.1% -88.7% 590.4% 19.6% 42.7% -60.3% 143.8% US 4,156 5,317 6,636 5,400 8,677 5,008 3,938 7,101 10,753 8,425 % of total 12.9% 23.5% 32.4% 25.9% 40.1% 23.4% 18.8% 23.5% 42.8% 24.2% YoY -12.5% 27.9% 24.8% -18.6% 60.7% -42.3% -21.4% 80.3% 51.4% -21.6% Icon Ventures 3,2944,9185,5283,657 YoY -19.9%49.3%12.4%-33.8% Life science investments 8613991,1071,743 YoY 35.8%-53.7%177.4%57.5% Asia 4,162 3,623 2,588 4,667 3,947 4,236 1,786 5,063 3,014 1,459 % of total 12.9% 16.0% 12.6% 22.4% 18.2% 19.8% 8.5% 16.8% 12.0% 4.2% YoY 43.6% -13.0% -28.6% 80.3% -15.4% 7.3% -57.8% 183.5% -40.5% -51.6% Total 32,172 22,655 20,505 20,874 21,644 21,411 20,904 30,222 25,147 34,769 YoY 82.3% -29.6% -9.5% 1.8% 3.7% -1.1% -2.4% 44.6% -16.8% 38.3% 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 30 3 7 7 JPY10–30bn 11 4 17 1 JPY30–50bn 1 1 8 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

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

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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 JPY141.0bn invested in unlisted shares as of FY03/20 (including fund LPs’ interests), 58% was in Japan, 29% in the US, and 13% in Asia. The total amount includes JAFCO’s interests of JPY55.1bn, 67% of which was in Japan, 18% in the US, and 15% in Asia. Around 60% of investments in unlisted shares were in the IT service sector.

VC investment via a fund

Realized gain, contribution

Investment partnership Unlisted Invest IPO, M&A (fund) companies

Support

Hands on (business development activities) Contribute

Investors JAFCO (LP) (GP)

Distribute

Source: Shared Research, modified from company materials

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Fund operating status JAFCO currently operates 27 funds with total commitments of JPY433.9bn, of which JPY162.4bn is in funds under extension. The newly raised capital in FY03/20 amounted to JPY83.7bn.

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 expects to begin seeing exits from SV5 over the next one to two years.

Fund operating status Fund size Unlisted Distribution of growth stages Nu mb e r o f (JPYmn) Est'd (JAFCO's (JAFCO's Average investment Interest Start- Exited projects investors Early Middle Later interest) interest) up 146,500 3,000 Four Nines (M&A), Colopl (IPO), ZIGExN (IPO), SV3 2007 230 15.2% 13.0% 39.0% 35.0% 13.0% (58,700) (1,200) CYBERDYNE (IPO), Aiming (IPO), other 60,000 38,500 Gunosy (IPO), UUUM (IPO), Money Forward (IPO), SV4 2013 280 17.0% 33.0% 50.0% 11.0% 6.0% (29,700) (19,000) Giftee (IPO), Chatwork (IPO) VC in Japan: 50 75,000 56,000 BO in Japan: 6 SV5 2016 530 17.3% 46.0% 42.0% 12.0% 0.0% Asian funds: 18 (32,400) (24,200) US funds: 13 80,000 13,200 Venture capital: 700–800 Aprx. 15% SV6 2019 (29,100) (4,800) Buy-out: 2,000–4,000 Tgt over 2/3 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 45.3%, JAFCO 36.4%, business companies 16.1%, and others 2.2%. Of the 75 outside investors, 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).

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Investment process

Negotiation and Business Findings Due diligence Investment Exit (IPO, M&A) contract development

Studying and Negotiating Deciding on and Discovering Supporting investees conducting analysis investment conditions making investments

-Network of outside -Focused study of - Capital policy - Final decision by - Support increases institutions, including top management at proposal investment in enterprise value 3,000 domestic target company - Funding amount committee - Introduce business portfolio companies - Background studies and share price partners and alliance (1,000 on an involving local -Class of partners ongoing basis) hearings shares/investment - Attend - Around 40 - Valuation of target agreement management personnel in charge company based on - Incentive plan meetings of investment projected future - Help prepare for gathering enterprise value and listing information on an cash flows ongoing basis

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 (21 in FY03/20). 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 FY03/20, 55.2% of the amount invested was in domestic venture investment, 16.4% in domestic buyout investment, and 28.4% in overseas venture investment.

JAFCO’s VC and BO investments Investment type Description Division Target Targeted stages Track record Provide risk capit al t o companies demonstrating Venture Investment innovative and creative Invest ing in diverse Division (Japan, US, management, based on venture companies that FY03/20: 21 new A sia), four offices in Mainly Start-up and Early Venture investment the phase of growth. demonstrate innovative investments in unlisted Japan (Tokyo, Chubu, stages Support increases in and creative securities in Japan Kansai, and Kyushu enterprise value through management. branches) a deep commitment to management and business expansion. Strong focus on providing support for Companies run by sole growth; work with owners that are facing management to achieve business succession, or Mainly unlist ed FY03/20: Three Buy-out investment capital independence Buyout Division subsidiaries or companies companies in t he Middle invest ees and corporate growth in with business and Later stages situations such as departments to be spun business succession and off corporate spin-out. Source: Shared Research based on company materials

JAFCO’s venture investment is focused on the startup and early stages. In FY03/20, new venture investment totaled JPY16.4bn, of which 97% was in startup 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.

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New investments in Japan by stage (amount, and percent of total) New investments in Japan by stage FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (number of companies) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Start-up 93311579775 Early 91547101287715 Middle 11942521211 Later 51332 Total 34281423222118161521

New investments in Japan by stage FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Start-up 1,375 345 545 2,504 690 1,573 4,054 1,457 2,614 2,750 Early 1,587 3,159 1,048 2,204 2,440 4,363 3,405 3,945 2,954 13,199 Middle 1,981 3,782 1,552 923 1,771 249 450 1,925 1,000 499 Later 11,4882,0106,4384,393457 Total 16,431 9,296 9,583 10,024 5,358 6,185 7,909 7,327 6,568 16,499

New investments in Japan by stage FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (% of total, value) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.Cons. Start-up 8.4% 3.7% 5.7% 25.0% 12.9% 25.4% 51.3% 19.9% 39.8% 16.7% Early 9.7% 34.0% 10.9% 22.0% 45.5% 70.5% 43.1% 53.8% 45.0% 80.0% Middle 12.1% 40.7% 16.2% 9.2% 33.1% 4.0% 5.7% 26.3% 15.2% 3.0% Later 69.9%21.6%67.2%43.8%8.5% 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 18.0% 37.7% 16.6% 47.0% 58.4% 96.0% 94.3% 73.7% 84.8% 96.7% Source: Shared Research based on company materials

A high percentage of portfolio companies are in the IT service sector. In FY03/20, IT service companies accounted for 80.0% and companies in the medical and biotech industries accounted for 10.0% of its portfolio.

New investments in Japan by industry (amount, and percent of total) New investments in Japan by industry FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (no. of companies) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Electronics 221121 211 Software 24221252 2 IT Services 13 10 4 13 14 16 12 11 9 14 Medical and biotechnology 1 3 3 2 2 1 1 3 2 Services 8323211 12 Manufacturing 51121 Distribution, retail, and restaurants 34 Real estate and financial, other 11 1 Total 34281423222118161521

New investments in Japan by industry FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Electronics 700 164 2,251 165 758 300 668 1,001 350 Software 201 510 754 500 48 239 876 815 554 IT Services 2,503 3,674 5,125 4,084 3,200 5,397 6,533 5,543 2,705 13,145 Medical and biotechnology 29 528 849 415 230 100 300 1,361 1,600 Services 6,025 2,727 95 3,809 621 150 500 501 799 Manufacturing 6,23121071,050500 Distribution, retail, and restaurants 7421,181 Real estate and financial, other 299501 1,000 Total 16,433 9,297 9,584 10,026 5,357 6,186 7,909 7,326 6,568 16,499 New investments in Japan by industry FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (% of total) Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons. Electronics 4.3% 1.8% 23.5% 1.6% 14.1% 4.8% 9.1% 15.2% 2.1% Software 1.2% 5.5% 7.9% 5.0% 0.9% 3.9% 11.1% 11.1% 3.4% IT Services 15.2% 39.5% 53.5% 40.7% 59.7% 87.2% 82.6% 75.7% 41.2% 79.7% Medical and biotechnology 0.2% 5.7% 8.9% 4.1% 4.3% 1.6% 4.1% 20.7% 9.7% Services 36.7% 29.3% 1.0% 38.0% 11.6% 2.4% 6.3% 0.0% 7.6% 4.8% Manufacturing 37.9%2.3%0.1%10.5%9.3% Distribution, retail, and restaurants 4.5%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.

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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) W ith 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 = JPY50.0bn (years) IRR12345678 910 10%1.101.211.331.461.611.771.952.142.362.59 20%1.201.441.732.072.492.993.584.305.166.19 30%1.301.692.202.863.714.836.278.1610.6013.79 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 = 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

Sahlman, Stevenson, and Stage of Development Plummer (*1) Scherlis and Sahlman (*2) 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 W illiam A. Sahlman, “A Met hod 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.

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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’s hands-on menu

Business development IPO consult ing

- Propose and execute strategies - Managing the launch and progress of IPO preparation projects - Configure governance structures (general meeting of shareholders, - Cultivate and expand client sales routes Board of Directors, corporate auditor audit, internal audits, etc.) - Create numerical management systems (monthly and annual budgets, - Introduce business and capital alliance partners and support execution budgetary controls, etc.) - Draft and support the implementation of policies for maintaining - Assist with personnel recruiting t ransact ions w it h affiliat ed companies, executives, and major shareholders - Introduce various service providers deemed necessary to move business - Help to prepare securities underwriting materials and listing applicat ion forward materials, provide advice during review process - Support the creation of internal control systems related to financial - Support global development reporting (J-SOX) - Help North American investees enter the Japanese and other Asian - Draft and support the execution of capital policies (such as stock markets options) - 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.

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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), MedPeer Datasection (IPO), Eleven Biotherapeutics QB Net Holdings (M&A), 2014 CYBERDYNE (IPO) Recruit Holdings (IPO) (IPO), gumi (IPO) FreakOut (IPO) (IPO), Sosei (TS) Vantan (M&A) TRACON sMedio (IPO), Aratana 2015 Aiming (IPO), LUXA (TS) SLD Entertainment (IPO) Pharmaceuticals, Inc. (IPO) (IPO) 2016 90 Seconds Japan (TS) Aoi Zemi (TS), HEROZ (TS), JG Meeting (TS), Biomedical Solutions Locondo (IPO), Uniform 2017 Money Forward (IPO), SmartEnergy (TS) Spiber (TS) (TS), miRagen Payroll (M&A) Next(IPO) UUUM (IPO), GameWith Therapeutics (TS) (IPO) MTG (IPO), Teno Holdings FLEXCEED (M&A), 2018 UNICON PTE. LTD. (TS) RESCHO (TS) (IPO) Megabass (M&A) 2019 Giftee (IPO) Chatwork (IPO) Laplace System (TS) GSTV (IPO) Astamuse (TS) Chariloto (M&A) 2020 MIRAISENS (TS) Graniph (M&A) 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 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, financial institutions (banks, shinkin banks, credit unions, insurers, and securities companies) account for 44.6%, business companies 36.8%, and pension funds 2.5%.

Investor composition for all domestic funds No . o f in v e s t o r s Amount (JPY mn) Amount per Investors by attribute % of total % of total investor General partners 37 17.1% 10,386 5.6% 281 Total Japan 174 80.2% 172,111 92.1% 989 Individuals, relatives 5 2.3% 400 0.2% 80 Other venture capital, fund of funds 2 0.9% 300 0.2% 150 Business companies 79 36.4% 68,840 36.8% 871 Banks, shinkin banks 52 24.0% 54,487 29.2% 1,048 Insurance companies 8 3.7% 26,000 13.9% 3,250 Securities companies 4 1.8% 2,900 1.6% 725 Pension funds 4 1.8% 4,700 2.5% 1,175 Government agencies (excl. pension funds) 2 0.9% 6,000 3.2% 3,000 College, academic organizations 2 0.9% 2,500 1.3% 1,250 Other 16 7.4% 5,984 3.2% 374 Undisclosed 0 0.0% 0 0.0% - Total overseas 6 2.8% 4,400 2.4% 733 Undisclosed 0 0.0% 0 0.0% - Total 217 100.0% 186,896 100.0% 861 Source: Shared Research, based on the Venture Enterprise Center’s “Venture White Paper 2019”

Portfolio company attributes JAFCO newly invested in 21 Japanese portfolio companies in FY03/20. Of the 21 companies, 20 were startup 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

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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.

Investment multiple was 2.8x in FY03/20, 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 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Operational investment securities revenue ① 10,077 15,187 17,744 38,498 56,471 32,376 20,774 23,470 23,291 23,697 Proceeds from sale of securities 9,657 14,857 17,414 38,170 55,862 30,824 20,533 23,322 23,177 23,540 Dividend and interest income 420 329 330 328 608 1,551 240 147 113 156 Operat ional invest ment securit ies cost of revenue ➁ 12,726 15,448 10,738 11,469 21,904 16,687 11,973 9,848 9,274 8,337 Cost of securities sold 12,346 14,852 10,032 11,296 21,904 16,687 11,973 9,848 9,274 8,116 Impairment loss 379 596 705 172 0 0 0 0 0 221 Capital gains ①-➁ -2,648 -261 7,006 27,029 34,566 15,689 8,800 13,621 14,016 15,359 YoY - - - 285.8% 27.9% -54.6% -43.9% 54.8% 2.9% 9.6% Multiple ① / ➁ 0.8 1.0 1.7 3.4 2.6 1.9 1.7 2.4 2.5 2.8 Average multiple (five years) 1.1 1.0 1.5 1.9 2.1 2.3 2.4 2.2 2.3 Average multiple (ten years) 1.7 1.7 1.9 2.1 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).

The performance index at end-March 2020 was 1.58x for SV3 (established in 2007) and 1.54x for SV4 (established in 2013). These figures are both up from end-March 2019, when they were 1.56x and 1.26x, respectively. The average for domestic funds established at the same time as SV3 and SV4 was 1.34x for those established in 2007 and 1.37x for those established in 2013 (source: “Venture White Paper 2019,” VEC). Achieving particularly high multiples were JAFCO Asia’s JATF VI, which was 2.76x at end-March 2020, and JAFCO America’s Icon 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.

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Returns from funds under management Commitment Indexed (commitment as 1.00) Net IRR Mu lt ip le Fund Est'd Multiple (D+R) / PI (fund size) Paid-in capital (PI) Distribution (D) Residual (R) （％） (D+R) / PI (as of; month-end) Mar 2020 Mar 2020 Mar 2020 Mar 2020 Mar 2020 Mar 2019 Mar 2019 Japan (mark-down only) JAFCO SV-3 Jul 2007 1,465 1.00 1.57 0.01 9.4 1.58 1.56 JAFCO SV-4 Mar 2013 600 1.00 1.11 0.44 11.0 1.54 1.26 JAFCO SV-5 Aug 2016 750 0.85 0.00 0.70 - 0.82 0.89 JAFCO SV-6 Jun 2019 800 0.20 0.00 0.18 - 0.90 - Asia (mark-up and mark-down) JATF Ⅴ Oct 2010 130 0.95 0.59 0.14 - 0.78 0.80 JATF Ⅵ Mar 2013 150 1.00 2.01 0.75 25.1 2.76 2.76 JATF Ⅶ Apr 2017 140 0.70 0.00 0.62 - 0.89 0.97 US (mark-up and mark-down) Icon Jul 2003 113 1.00 3.08 0.01 12.7 2.67 2.67 Icon Ⅱ Apr 2006 108 0.96 1.32 0.05 6.5 1.35 1.35 Icon Ⅳ Feb 2010 150 1.00 0.21 1.32 4.8 1.43 0.99 Icon Ⅴ May 2012 260 0.99 0.37 0.71 2.3 1.08 1.07 Icon Ⅵ Dec 2015 375 0.65 0.07 0.59 0.5 1.01 1.03 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 2020, its global balance of unlisted investments was JPY141.0bn and portfolio companies numbered 206. Breaking down the balance, Japan accounted for JPY82.3bn (58.4%), the US for JPY40.6bn (28.8%), and Asia for JPY18.1bn (12.8%). In Asia, JAFCO targets companies in China and other promising areas. In the US, investments are based in Silicon Valley.

Global investment structure Investment team structure Unlisted securities No. of investees Investment team Venture Business (JPYmn) % of total No. of companies % of total Headcount VC Buyout partners development Japan 82,300 58.4% 126 61.2% 47 34 13 13 US 40,600 28.8% 32 15.5% 6 4 2 Asia 18,100 12.8% 48 23.3% 9 1 Total 141,000 100.0% 206 100.0% 62 34 13 4 16 Source: Shared Research based on company materials Notes: The number of personnel is as of April 1, 2019. 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 (47 members) and business development (13 members). The company has four branches, including the head office in Tokyo. Overseas, it has consolidated subsidiaries, including JAFCO Asia. JAFCO Asia has nine members on its investment team; JAFCO America’s investment team (Icon Ventures) has six.

Earnings structure In FY03/20, revenue was JPY29.9bn. Of this figure, capital gains on the company’s own investments were JPY15.4bn, and income from fund management came to JPY6.2bn. The latter figure breaks down further into management fees of JPY2.6bn and success fees of JPY3.6bn. Of total revenue, therefore, 51.4% 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. In FY03/20, capital gains on unlisted shares pushed up overall capital gains.

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Capital gains Capital gains FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Capital gains -2,648 -261 7,006 27,029 34,566 15,689 8,800 13,621 14,016 15,359 Listed 3,169 2,975 7,225 27,245 31,747 9,989 6,499 11,281 5,264 2,627 Realized gains 3,797 3,205 7,444 27,536 32,069 10,775 6,531 11,492 5,327 2,848 Realized losses -628 -230 -218 -291 -322 -785 -31 -211 -62 -221 Unlisted -5,818 -3,236 -219 -216 2,818 5,699 2,301 2,340 8,751 12,732 Realized gains 1,565 3,340 3,090 3,606 10,303 10,586 5,893 6,750 11,069 16,726 Realized losses -7,383 -6,576 -3,309 -3,823 -7,485 -4,887 -3,592 -4,410 -2,317 -3,994 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 FY03/20, the amount subject to management fees was JPY129.0bn.

Management fees and success fees Fund management FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Funds subject to management fees 75,700 75,500 129,000 Partnership management income 4,921 4,485 4,225 6,279 5,218 8,688 7,062 5,987 2,586 6,155 Management fees 4,848 4,399 4,140 5,097 4,598 3,812 3,494 3,551 1,750 2,586 Success fees 73 85 85 1,182 619 4,875 3,567 2,435 836 3,569 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY 03/ 20 Retroactive corrections to management fees per changes in revenue recognition standards (JPYmn) Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons. Management fees (before) 4,848 4,399 4,140 5,097 4,598 3,812 3,494 3,551 3,200 Success fees 73 85 85 1,182 619 4,875 3,567 2,435 836 SG&A expenses (before) 4,635 4,361 4,475 5,784 5,710 5,689 5,476 6,017 5,700 ① Core income (management fees - SG&A) 213 38 -335 -687 -1,112 -1,877 -1,982 -2,466 -2,500 ➁ Core income (mgt fees + success fees - SG&A） 286 123 -250 495 -493 2,998 1,585 -31 -1,664 Management fees (after) - - 3,700 3,900 3,600 2,800 2,500 2,500 1,750 2,586 Success fees 73 85 85 1,182 619 4,875 3,567 2,435 836 3,569 SG&A expenses (after) - - 3,700 4,200 4,300 4,300 4,200 4,600 3,882 4,088 ① Core income (management fees - SG&A) --0-300 -700 -1,500 -1,700 -2,100 -2,132 -1,502 ➁ Core income (mgt fees + success fees - SG&A） - - 85 882 -81 3,375 1,867 335 -1,296 2,067 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.

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Core income Core income FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Management fees・・・① 4,848 4,399 4,140 5,097 4,598 3,812 3,494 3,551 1,750 2,586 Success fees・・・➁ 73 85 85 1,182 619 4,875 3,567 2,435 836 3,569 SG&A expenses・・・➂ - - 3,700 4,200 4,300 4,300 4,200 4,600 3,882 4,088 Basic balance Management fees - SG&A expenses - - 440 897 298 -488 -706 -1,049 -2,132 -1,502 Management fees + Success fees - SG&A expenses - - 525 2,079 917 4,387 2,861 1,386 -1,296 2,067 (Ref.) Dividends from listed securities 1,002 1,772 951 1,112 1,087 1,380 1,407 1,461 1,410 2,149 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.

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 FY03/20, the SG&A to revenue ratio was 13.7%. However, this ratio fluctuates significantly as revenue levels change drastically in line with the size of capital gains. Personnel expenses account for more than 50% of SG&A expenses.

SG&A expenses SG&A expenses FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. SG&A expenses 4,635 4,361 4,475 5,784 5,710 5,689 5,476 6,017 3,882 4,088 SG&A ratio 30.6% 22.0% 20.3% 12.9% 9.2% 13.8% 19.7% 20.4% 15.0% 13.7% Directors' compensations 310 319 297 267 240 272 259 245 207 201 Provision for directors' bonuses 83 128 153 168 192 165 156 127 89 89 Employees' salaries 1,638 1,566 1,702 2,444 2,060 2,120 1,994 2,140 1,1611,249 Employees' bonuses 326 324 354 593 660 555 472 491 426 446 Retirement benefit expenses 139 80 136 105 99 166 78 84 -22 90 Real estate expenses 608 438 429 445 458 470 449 471 313 197 Dues and taxes 489784572592 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 FY03/20, the allowance fully covered such losses on sale. In FY03/20, the allowance for investment losses stood at JPY8.2bn, or a relatively low 14.9% of the JPY55.1bn 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 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Unlisted securities 76,652 68,462 70,119 65,026 57,265 50,863 47,673 49,617 51,522 55,061 Provision for investment loss ① 2,278 1,702 2,033 3,224 3,443 3,098 1,905 2,283 1,687 3,084 Company-by-company 1,804 1,524 1,684 3,730 4,129 3,370 2,006 3,817 2,541 3,731 General (reversal) 474 178 349 -506 -686 -272 -101 -1,534 -854 -647 Reversal of provision for investment loss ➁ 7,512 7,033 2,900 3,302 6,531 3,673 4,741 3,148 2,399 3,599 Provision for investment loss–net (reversal) ①-➁ -5,233 -5,331 -866 -77 -3,087 -574 -2,835 -865 -712 -514 Allowance for investment loss 28,163 19,701 18,843 18,788 15,757 15,176 12,332 10,351 9,501 8,229 Company-by-company 23,862 15,222 14,034 14,488 12,143 11,834 9,091 8,644 8,651 8,026 General 4,301 4,479 4,809 4,300 3,614 3,342 3,241 1,707 850 203 Ratio of allowance to unlisted securities 36.7% 28.8% 26.9% 28.9% 27.5% 29.8% 25.9% 20.9% 18.4% 14.9% Source: Shared Research based on company materials Note: Other funds are excluded from FY03/20.

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Losses on the sale of unlisted securities and reversal of allowance for investment loss Realized losses and reversal of allowance FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY 03/ 20 for inv e s t me nt los s (JPY mn) Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons.Cons. Capital gains -2,648 -261 7,006 27,029 34,566 15,689 8,800 13,621 14,016 15,359 Listed 3,169 2,975 7,225 27,245 31,747 9,989 6,499 11,281 5,264 2,627 Realized gains 3,797 3,205 7,444 27,536 32,069 10,775 6,531 11,492 5,327 2,848 Realized losses -628 -230 -218 -291 -322 -785 -31 -211 -62 -221 Unlisted -5,818 -3,236 -219 -216 2,818 5,699 2,301 2,340 8,751 12,732 Realized gains 1,565 3,340 3,090 3,606 10,303 10,586 5,893 6,750 11,069 16,726 Realized losses ・・・(A) -7,383 -6,576 -3,309 -3,823 -7,485 -4,887 -3,592 -4,410 -2,317 -3,994 Coverage ratio for realized losses・・・(A)/(B) -99.2% -98.1% -148.1% -127.8% -115.7% -138.4% -76.4% -119.6% -82.1% -103.0% Impairment losses for unlisted securities65865470 Reversal of investment losses 7,512 7,033 2,900 3,302 6,531 3,673 4,741 3,148 2,399 3,599 Realized losses excl. forex effects below・・・(B) 7,439 6,703 2,234 2,992 6,472 3,531 4,700 3,686 2,822 3,876 Forex difference between allowance and realized losses 0000000-584 -485 -323 Impairment losses 6264544000000 Other 66661213095814141456145 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).

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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 JPY783mn in FY03/20.

Increase in the average investment amount New venture investments in Japan including FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY 03/ 20 fund investors (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Average invested capital 175.0 270.0 262.0 267.0 230.0 294.6 439.4 457.9 437.9 783.0 Average shareholding ratio 20% 24% 25% 17% 15% 20% 24% 17% 16% 15% Number of companies 31 27 12 21 21 21 18 16 15 21 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

(USDmn) 60 Size of deals (average) Size of deals (median) 50

40

30

20

10

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 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 FY03/20, it was involved in just three out of 92 domestic IPOs.

Investment multiples indicate the success of JAFCO’s highly selective, intensive investment approach. In FY03/10, the multiple obtained by dividing portfolio companies’ market capitalization 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, and 10.4x in FY03/20.

Number of IPOs and investment multiples

IPO track record in Japan (JPYmn) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY 03/ 20 Number of IPOs in Japan (companies) 23365253869487799592 Number of IPOs: JAFCO (companies) 418201921 8 6 7 2 3 Invested capital (A) 3,541 5,401 3,717 12,859 9,361 2,610 5,212 2,025 900 1,293 First price-based market cap (B) 7,054 5,511 10,540 77,077 49,492 8,273 20,727 23,343 7,128 13,396 First-price based capital gains (B)-(A) 3,513 110 6,823 64,218 40,131 5,663 15,515 21,318 6,228 12,103 Multiple (B)/(A) 2.01.02.86.05.33.24.011.57.910.4 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.)

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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, 2020). 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 2020, Neil Shen, the founding managing partner of Sequoia Capital China, topped the ranking for the third consecutive year. Of companies included in the ranking, Sequoia Capital had the most people (11), followed by US firms Andreessen Horowitz (6) and Accel (5). Every year, Forbes Japan announces its ranking of Japan’s most influential venture investors. Venture capitalists at JAFCO 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 showcase the individual’s risk-taking ability to differentiate itself from competitors.

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).

To date, JAFCO’s Asian expansion has 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

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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.

Investment trends at overseas bases JAFCO JAPAN JAFCO ASIA Icon Ventures Year established 1973 1990 2003 Regional coverage Japan A sia Pacific San Francisco, Silicon Valley Type of investors PE,VC VC VC T arget st ages Seed, Early, Middle, Lat er Early, Middle Early, Middle Unlist ed securit ies 141,000 (JPYmn; end Mar 2020) 82,300 18,100 40,600 Unlist ed invest ees 126 48 32 New investments (FY03/20) 34,769 (71） Investees (companies) 35 12 24 Invested capital (JPYmn) 24,883 1,459 8,425 YoY 218.7% 48.4% 78.4% Venture investments 19,177 Buyout investments 5,706 Businesses invested Social/Consumer internet 52 (19) 5 Cloud/Enterprise software 25 (6) 12 Clean-tech 4 (2) 9 Industrial technology 14 (3) Consumer products & services 12 (7) 14 Life science/Healthcare 18 (6) Business products & services 22 (3) Mobile 21 5 Security 2 T echnology/Devices 60 Medical & Healthcare 6 Others 3 Buyout 18 (8) Source: Shared Research based on company materials Note: Figures in parentheses indicate the number of exits through IPOs or trade sales. Buyout investments are exits through M&A deals. Figures for JAFCO Asia and Icon Ventures include only active investments.

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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 2018,” capital raised by startups in Japan amounted to JPY388.0bn in 2018. This figure represents five-year CAGR of 36.2%, from JPY82.9bn in 2013. The number of companies raising funds totaled 1,426 (including those for whom amounts were unclear). Average capital raised per domestic startup was JPY323.1mn, with JPY100mn being the median amount. By comparison, in 2013 the mean and median amounts of capital raised per company were JPY106.8mn and JPY21.9mn, respectively, indicating that these figures increased by more than 3x in the five years to 2018.

VC investments and JAFCO’s market share JAFCO’s market share for VC investment (excluding BO investment): 10.5% (FY03/20) In FY03/20, Japanese domestic VC investments (excluding those by the Innovation Network Corporation of Japan, or INCJ) amounted to JPY216.4bn, while overseas investments amounted to JPY60.1bn (total of JPY276.5bn). JAFCO’s annual VC investment amount (excluding BO investment) was JPY29.1bn over the same period, or 10.5% of the total.

VC investment trends in Japan

(JPYmn) 2015 2016 2017 2018 2019 Venture investments: Overseas 49,600 50,500 52,900 113,700 60,100 YoY - 1.8% 4.8% 114.9% -47.1% Venture investments: Japan 73,800 95,000 125,700 136,100 216,400 YoY - 28.7% 32.3% 8.3% 59.0% T ot al (excluding INCJ)・・・① 123,400 145,500 178,600 249,800 276,500 YoY - 17.9% 22.7% 39.9% 10.7% No. of investments: Japan 845 1,074 1,151 1,287 1,436 No. of investments: Overseas 218 269 223 259 257 Total number of investments 1,063 1,343 1,374 1,546 1,693 Investment per company: Japan 87 88 109 106 151 Investment per company: Overseas 228 188 237 439 234 Investment per company 116 108 130 162 163 JAFCO's annual investments・・・➁ 17,959 16,776 24,332 22,807 29,063 JAFCO market share (① / ➁) 14.6% 11.5% 13.6% 9.1% 10.5% 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 FY03/19, VC investment markets in four regions (US, Europe, China, and Japan) totaled JPY19.4tn. The US market alone accounted for JPY14.5tn, up 57.8% YoY. The Chinese market also expanded, but at a slower pace. The Japanese market was worth JPY0.3tn, up 40.6% YoY, making the US market 52x larger. (Source: “Venture White Paper 2019,” Venture Enterprise Center)

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.

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Roles and investment targets of major providers of risk capital Provider Structure and role Target companies Target industries Main organizations Industries slated for large-scale grow t h Invest in venture companies, JAFCO, Globis Capital Partners, VC (IT, biotech, high Soft bank Vision Fund aiming for high returns tech) Start-ups and companies in Business corporations invest their the growth stage own capital to establish funds, Sectors related to its own businesses CVC Sony, Nikon, Mitsubishi Corp. prov iding capital and support and linked to core mainly to unlisted v enture corporate earnings companies

In sectors where supplies of private Public- cash are insufficient, provide long- Japan Investment Private term risk capital to stimulate the Corporation, Cool Japan Fund fund provision of cash by privat e-sect or financial inst it ut ions

Provide cash to companies at the All indust ries Carlyle, KKR, Bain Capital, growth and maturity stages; PE Integral, Japan Industrial ult imat ely sell shareholdings aft er Companies after the Partners, Polaris, Unison enterprise value has increased growth stage Make indust rial invest ment s in a w ide Mitsubishi UFJ Financial Group, Banks range of companies, focus on debt Sumit omo Mit sui Financial repayment account abilit y Group, Mizuho Financial Group 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 active with 16 corporate-VCs established in 2018. Also, business companies’ investment in startups is gaining further momentum. In 2018, investment in startups by business companies (including corporate-VCs) exceeded JPY200.0bn, accounting for half the total.

Corporate-VCs Investment in startups by business companies, including corporate-VCs

(companies) (JPYbn) Other Individuals 448.1 18 450 Overseas Number of CVCs established 16 16 400 Financials 375.1 14 VCs 14 13 350 CVCs 12 Business companies 12 300 250.7 10 9 250 230.5

8 7 200 179.8 21.1 6 139.2 6 150 11.1 108.5 109.4 118.1 4 89.3 4 33 100 196.3 10.0 155.1 7.4 14.7 2 50 2.0 3.2 5.6 77.2 2.2 4.3 62.1 61.7 34.5 23.6 40.2 43.2 39.8 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Shared Research based on the “Japan Startup Finance Report 2018”

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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 34 investments via IPO and 17 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.

Overview of Globis Funds Fund Est'd Description Fund No. 1 Globis Incubation Fund 1996 Fund established solely by Globis. T ot al amount of JPY 540mn, 13 port folio companies, six IPOs. Fund set up jointly with Apax. Total amount of JPY20.0bn, 47 port folio companies, eight IPOs. Set up Apax Globis Partners as a joint venture with Pax Group of the UK, which has more than Fund No. 2 Apax Globis Japan Fund 1999 30 years of 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 Fund No. 3 Globis Fund Ⅲ 2006 (as 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 Fund No. 4 Globis Fund Ⅳ 2013 with 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 port folio companies, one IPO Fund No. 5 Globis Fund Ⅴ 2016 (as of end-March 2020). Fund established solely by Globis. Total amount of JPY40.0bn, 14 port folio companies (as of Fund No. 6 Globis Fund Ⅵ 2019 end-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.

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SBI Investment has invested in 909 companies, exiting 150 (as of end-June 2019). SBI Investment has established SBI BB Mobile Investment Limited Partnership and 12 other major funds. The SBI AI & Blockchain Fund, established in June 2018, has a fund size of JPY50.0bn.

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 17 IPOs and 48 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 Sony Financial Brain’s network and ascertaining eye for discovering and cultivating SFV/GB Partnership LLP Global Brain 10 years JPY5bn Ventures promising venture companies. In 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 31VENTURES–Global Brain– Mitsui Fudosan, leveraging Mitsui Fudosan’s assets and resources: real estate tech, IoT, 10 years JPY30bn Growth I Project Global Brain cyber-security, sharing economy, 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 31VENTURES Global Innovation Global Brain Mitsui Fudosan 10 years JPY5bn business categories having strong synergies with the Mitsui Fudosan group. Fund 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 Cool Japan America, South Korea, Southeast Asia, Israel, India, and Europe. Strategic Fund, JTB, Global Brain Limited Partnership LP investors include Cool Japan Fund, Inc.; JTB Corporation, and Sumitomo Global Brain Sumitomo 10 years JPY20bn No. 6 Mitsui Banking Corporation. Aimed at boosting Japan’s international Mitsui Banking competitiveness by contributing to more competitive tourism and inbound Corp., other industries in preparation for the 2020 Tokyo Olympic and Paralympic Games. JPY10bn Investments target IT-oriented venture companies in Japan and overseas 10 years (JPY5bn for that partner with KDDI. In addition to collaboration with the broad-ranging KDDI Open Innovation Fund (through Global Brain each of No. 1 networks of KDDI’s numerous companies, its marketing capabilities, and au (KOIF) Jan and No.2 SmartPass and other services, the fund is aimed at leveraging Global Brain’s 2022) funds) management support program to implement effective growth strategies. Investment targets are innovative IT venture companies with traction in the global market. Through collaboration between INCJ (strong industry Global Brain Limited Partnership Through Global Brain INCJ JPY15bn networks) and Global Brain (hands-on, global, CVC track record), this No. 5 Dec 2023 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.

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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.

Overview of Incubate Fund’s funds Fund GP LP Est'd Fund size Investment target Toru Akaura, Companies that foster innovation based on open systems in such areas as Masahiko 2010– social applications, related services, and social media. Companies targeting Incubate Fund No. 1 Homma, DeNA JPY3bn 2017 global (as well as domestic) expansion and are capable of operating Keisuke Wada, globally. Yusuke Murata Toru Akaura, Infocom, S ega, Masahiko SMRJ, D2C, Incubate Fund No. 2 Homma, 2013 JPY2bn Investing in 100 seed startup companies. Nissay Capital, Keisuke Wada, mixi, others Yusuke Murata Toru Akaura, INCJ, Yahoo!, Masahiko Areas of investment include next-generation media, entertainment, games, SMBC, DBJ, Incubate Fund No. 3 Homma, 2015 JPY11bn commerce, logistics, healthcare, finance, real estate, automotive, and TBS Holdings, Keisuke Wada, housing-related innovation. others Yusuke Murata Toru Akaura, Business Masahiko corporations, Companies that support changes in existing industries through such areas as Incubate Fund No. 4 Homma, government 2017 JPY10bn fintech, electric power systems, sharing, space, drones, and mixed reality. Keisuke Wada, and financial Yusuke Murata institutions Source: Shared Research based on materials from Incubate Fund

Trends at competing companies Globis Capital SBI Inv est ment Global Brain Incubat e Fund Partners Year established 2006 1996 1998 2010 Investor type VCVCVCVC Targeted stages Early, Later, Seed Early, Later, Seed Early, Later, Seed Early, Seed Operating investment securities 394,900 No. of companies in the portfolio 54 161 110 Investment team 12 58 Exits (number of companies) 51 150 65 26 Total IPOs 34 108 17 20 Total M&As 17 42 48 Businesses invested Consumer 26 43 Enterprise 24 New technologies 4 Internet, AI, IoT 31.3% 8 Fintech services 15.3% 23 9 Digital asset, blockchain 14.5% Financial 19.8% Biotech, healthcare, medical 4.7% 8 Services 4.9% Commerce 20 Disruptive technologies 46 Game 45 Media 10 Kids/Education 5 Cloud 10 A dvert ising 8 B2B 33 Frontier Tech 12 Other 27 Source: Shared Research based on individual companies’ materials Notes: “No. of companies in the portfolio” and “Businesses invested” for Global Capital Partners include current investments only. The number of “Exits” for SBI Investment is as of end-June 2019. As SBI does not disclose the number of companies by “Businesses invested,” the breakdown of operational investment securities by business category is shown(FY03/20). “No. of companies in the portfolio” for Global Brain includes current investments only. Figures for Incubate Fund are for partner funds, excluding exited deals.

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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 Acquisit ion by Fund Incept ion Size (JPYmn) No. of invest ees No . o f exit s investees Japan (buyout) MBI Fund Ⅰ Oct 1997 3,000 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 13 Advantage Partners Fund Ⅳ-S Dec 2012 20,000 11 2 4 Advantage Partners Fund V Oct 2015 60,600 13 4 1 Asia Asia Fund Ⅰ Jan 2016 USD370mn 6 1 0 Japan (listed minorities) InfleXion Ⅰ May 2008 26,500 10 13 10 InfleXion Ⅱ Jan 2018 10,700 11 4 1 Source: Shared Research based on materials from Advantage Partners

Reference companies: US

Rankings according to “Venture Capital Power Rankings: VCs Rate VCs” by CB Insights of the US were: Sequoia Capital (1st), Benchmark (2nd), Accel (3rd), Greylock Partners (4th), and Andreessen Horowitz (5th).

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 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.

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Trends at reference companies Sequoia Capital Benchmark Accel Greylock Partners Year established 1972 1995 1983 1965 Sillicon Valley, West West Coast, Western Sillicon Valley, West Sillicon Valley, West Location Coast US Coast Coast Investor type VCVCVCVC Targeted 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 1,314 589 1,396 699 Period Q4/1995–Q2/2020 Q3/1996–Q2/2020 Q4/1996–Q2/2020 Q1/1996–Q2/2020 No. of investments lead by co. 470 194 525 169 Exits (companies) 274 155 288 201 IPO (companies) 81384838 Period Q4/1995–Q2/2020 Q4/1997–Q2/2020 Q2/1996–Q2/2020 Q3/1995–Q2/2020 Instagram, NViDIA, Twitter, Instagram, Facebook, Atlassian, Instagram, Facebook, Main IPO and exits Zoom Zendesk Dropbox Houseparty No. of companies in the portfolio 155 591 (total) 59 Businesses invested Consumer Commerce 174 1 Devices 5 Fintech 4 Financial 12 Gaming 87（including media） Healthcare 917 Market place 17 4 Media 339 Mobile 67 Networks 2 Productivity 4 Real Estate 2 Search 0 Social 5 Enterprise Apps & Services 47 Data & Analytics 17 6 Dev Tools 3 Hardware 10 Healthcare 12 5 (HealthTech) Infrastructure 28 83 5 Marketing 10 Networking 7 Observability 2 Productivity 5 SAAS 171 7 Security 9405 Storage 0 Transportation 4

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.

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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 126, 48, and 32 unlisted companies, respectively, in FY03/20. By comparison, Globis Capital Partners invested in 54, Global Brain in 161, and Incubate Fund in 110. Among leading global VC companies, Sequoia Capital invested in 155 portfolio companies and Greylock Partners in 59. JAFCO is smaller than the top US VC firms, but is relatively strong in terms of investment numbers 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. 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

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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.

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Historical performance and financial statements Income statement

Income statement (JAFCO' interest) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) 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 Revenue from operational investment securities 10,077 15,187 17,744 38,498 56,471 32,376 20,774 23,470 23,291 23,697 Income from partnership management 4,921 4,485 4,225 6,279 5,218 8,688 7,062 5,987 2,586 6,155 Other revenues 143 131 102 112 256 90 201201 Cost of revenue 12,966 15,757 11,576 11,727 23,778 16,839 13,188 10,176 10,444 11,399 Cost of operational investment securities 12,726 15,448 10,738 11,469 21,904 16,687 11,973 9,848 9,274 8,337 Other costs 240 308 838 258 1,873 151 1,215 328 1,169 3,061 Gross profit 2,176 4,046 10,496 33,163 38,167 24,316 14,668 19,293 15,433 18,455 (Reversal of) provision for investment losses -5,233 -5,331 -866 -77 -3,087 -574 -2,835 -865 -712 -514 Unrealized losses (gains) on operational -73 438 -1,101 203 -607 -15 -157 -105 24 -88 investment securities (Reversal of) provision for performance fee refunds 02,491 -18 -50 -2,267 -10 -140 -6 Gross profit–net 7,482 6,447 12,482 33,087 44,129 24,916 17,801 20,269 16,121 19,059 Gross profit margin–net 49.4% 32.6% 56.6% 73.7% 71.2% 60.5% 63.9% 68.8% 62.3% 63.8% SG&A expenses 4,635 4,361 4,475 5,784 5,710 5,689 5,476 6,017 3,882 4,088 Operating profit 2,847 2,086 8,007 27,302 38,419 19,226 12,324 14,252 12,239 14,970 Non-operating income 1,235 2,070 1,501 1,416 1,895 1,382 1,520 1,482 1,426 2,169 Interest income 40 66 101 102 100 75 34 76 152 109 Dividend income 962 1,707 871 1,005 991 1,285 1,373 1,383 1,258 2,040 Miscellaneous income 23321952165942153221619 Other 0 77 475 143 709 0 59 0 0 0 Non-operating expenses 881 536 480 314 182 800 178 180 255 94 Interest expenses 553 460 422 301 170 114 48 23 3 1 Loss on valuation of investment securities 129 558 Seconded personnel expenses 109 659 146 229 76 Office relation expenses 535 Miscellaneous losses 32755812112071103 5 Contribution to an investee 181 1 Recurring profit 3,202 3,620 9,028 28,404 40,132 19,808 13,666 15,554 13,410 17,045 Extraordinary gains 302 10,243 25 2 2,122 513 19,718 190 - Gain on liquidating dividend of subsidiaries and affiliates 24 Gain on sale of investment securities 23 9,989 25 2 2,098 19,718 190 - Gain on reversal of subscription rights for shares 0253 Compensation for forced relocation 270 Gain on recovery of written-off receivables 9 513 Extraordinary losses 52 4,649 15 3 506 Loss on retirement of fixed assets 6 Loss on valuation of investment securities 22 4,649 9 3 403 Accumulated foreign currency translation adjustments 04,101 Relocation expenses 103 Business restructuring expenses Loss on valuation of memberships Pre-tax profit 3,451 9,215 9,037 28,406 42,252 19,808 14,180 34,766 13,600 17,045 Income taxes 238 205 1,423 11,549 13,454 3,539 2,865 10,500 3,105 5,214 Deferred income taxes 886 2,904 1,036 -434 1,090 -748 240 30 332 -7 Total income taxes 1,125 3,110 2,459 11,114 14,544 2,790 3,106 10,530 3,437 5,206 Implied tax rate 32.6% 33.8% 27.2% 39.1% 34.4% 14.1% 21.9% 30.3% 25.3% 30.5% Pre-tax profit attributable to minority interests 2,326 6,104 6,577 17,292 27,707 17,018 11,073 24,235 10,162 11,839 Net income attributable to non-controlling interests -2 -1 -5 0 Net income attributable to owners of the parent 2,329 6,106 6,583 17,292 27,707 17,018 11,073 24,235 10,162 11,839 YoY - 162.2% 7.8% 162.7% 60.2% -38.6% -34.9% 118.9% -58.1% 16.5% Net margin 15.4% 30.8% 29.8% 38.5% 44.7% 41.4% 39.7% 82.2% 39.3% 39.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Balance sheet

Balance sheet (JAFCO's interest) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and deposits 12,712 14,063 20,752 21,736 28,711 18,431 88,179 67,586 61,378 69,540 Operational investment securities 87,896 76,583 81,880 111,449 78,785 60,644 62,274 61,287 59,267 63,532 Allowance for investment losses -28,163 -19,701 -18,843 -18,788 -15,757 -15,176 -12,332 -10,351 -9,501 -8,229 Securities 15,206 28,964 38,811 50,554 73,184 80,870 19,000 2,500 2,500 2,500 Deferred tax assets 5,003 788 52 446 42 50 Other 1,622 1,126 1,254 1,833 2,456 3,556 1,376 816 1,991 1,078 Allowance for doubtful assets -183 -156 -31 -34 -11 Total current assets 94,094 101,668 123,875 167,198 167,369 148,370 158,549 121,839 115,636 128,421 Buildings–net 148 141 131 177 153 122 97 180 190 332 Vehicles–net 7621 Furniture and fixtures–net 239 157 154 113 92 219 170 116 122 102 Total tangible fixed assets 396 306 289 292 245 342 268 296 312 435 Software 125 158 204 156 137 99 74 74 188 222 Other 444444300 Total intangible fixed assets 129 162 208 160 141 103 78 74 188 222 Investment securities 37,929 32,807 38,787 51,649 70,345 64,536 78,140 68,281 67,646 92,131 Investments in capital 27 25 127 31 36 34 32 32 17 0 Long-term loans receivable 210 215 195 183 173 166 143 139 7 117 Deferred tax assets 95 96 110 130 167 133 146 245 7 334 Other 558 527 527 521 555 559 543 640 397 396 Investments and other assets 38,820 33,672 39,748 52,516 71,279 65,430 79,006 69,339 68,076 92,980 Total fixed assets 39,346 34,141 40,246 52,969 71,666 65,875 79,352 69,710 68,577 93,637 Total assets 133,441 135,810 164,122 220,167 239,035 214,245 237,902 191,550 184,213 222,059 LIA BILITIES Short-term debt 14,095 8,434 18,915 4,100 11,060 1,724 3,343 795 116 234 Income taxes payable 151 197 1,264 10,552 8,371 200 1,860 9,350 1,193 4,344 Deferred tax liabilities 2,601 13,101 5,438 564 2,143 Provision for bonuses 198 208 235 383 425 346 324 309 194 226 Provision for directors' bonuses 83 128 153 168 192 165 156 127 89 89 Provision for performance fee refunds 2,491 2,473 2,423 156 146 6 Other 1,916 842 1,120 2,240 2,317 1,703 1,537 1,044 881 2,688 Total current liabilities 16,443 12,303 26,763 32,971 27,962 4,850 9,371 11,625 2,475 7,582 Long-term debt 22,487 19,145 16,636 14,120 4,301 3,978 977 182 249 15 Retirement benefit liability 509 580 582 580 616 453 434 Deferred tax liabilities 5,208 5,573 7,666 13,176 18,023 15,290 19,074 18,809 17,779 25,528 Other 565642424242421742132 Total fixed liabilities 28,170 25,203 24,822 27,848 22,948 19,893 20,675 19,625 18,523 26,110 Total liabilities 44,614 37,506 51,586 60,820 50,910 24,744 30,046 31,251 20,998 33,693 NET A SSETS 88,827 98,303 112,535 159,347 188,125 189,501 207,855 160,299 163,215 188,366 Shareholders' equity 81,576 86,573 91,897 108,136 134,734 147,313 153,949 112,477 117,739 126,113 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 35,593 40,590 45,915 62,156 88,755 101,336 107,973 54,005 59,268 67,643 Treasury stock -20,075 -20,075 -20,075 -20,077 -20,078 -20,080 -20,081 -7,585 -7,586 -7,587 Accumulated other comprehensive income 6,943 11,658 20,635 51,211 53,391 42,186 53,906 47,821 45,475 62,252 Valuation difference on marketable securities 9,842 14,799 22,619 52,098 52,672 41,989 53,771 47,961 44,719 61,529 Foreign currency translation adjustments -2,899 -3,141 -1,984 -879 751 193 136 -132 755 723 Remeasurements of defined benefit plans -8 -32 4 -1 -6 Share subscription rights 253 Non-controlling interests 54 72 3 Total net assets 88,827 98,303 112,535 159,347 188,125 189,501 207,855 160,299 163,215 188,366 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 Total interest-bearing debt 36,582 27,579 35,551 18,220 15,361 5,702 4,320 977 365 249 Net debt 23,870 13,516 14,799 -3,516 -13,350 -12,729 -83,859 -66,609 -61,013 -69,291 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Cash flow statement

Cash flow statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) -2,101 6,859 8,476 30,153 28,822 12,788 15,117 7,425 -1,350 12,177 Pre-tax profit 3,451 9,215 9,037 28,406 42,252 19,808 14,180 34,766 13,600 17,045 Depreciation 215 209 161 166 136 136 160 225 116 189 Increase in allowance for investment loss -5,233 -8,455 -866 -77 -3,087 -574 -2,835 -865 -712 -514 Increase in allowance for doubtful accounts 32 -27 -123 3 -23 -11 Increase in provision for bonuses -28 10 26 148 41 -79 -21 -15 -114 31 Increase in provision for directors' bonuses 83 45 25 15 23 -26 -8 -29 -38 0 Increase in allowance for performance fee refunds 0 2,491 -18 -50 -2,267 -10 -140 -6 Increase in provision for retirement benefits -10 949 Remeasurements of defined benefit liability 19 35 56 -10 26 -155 -18 (Reversal of) unrealized loss on operational -73 438 -1,101 203 -607 -15 -157 -105 24 -88 investment securities Relocation expenses 103 Interest and dividend income -1,002 -1,773 -972 -1,107 -1,091 -1,361 -1,407 -1,460 -1,410 -2,149 Interest expenses 553 460 422 301 170 114 48 23 3 1 Loss on retirement of fixed assets 30 6 Gain on reversal of share subscription rights 0 -253 Loss on disposal of memberships 00 Accumulated foreign exchange valuation adjustments 01459 Loss on foreign exchange 181 -632 -572 -321 -1,299 1,346 -227 373 449 151 Loss on sale of investment securities -23 -9,989 -25 -2 -2,098 -19,718 -190 0 Loss on valuation of investment securities 22 547 9 5 58 Loss on v aluation of inv estment securities (extraordinary loss) 03 403 Decrease in operational investment securities -209 13,630 2,045 3,171 11,892 6,124 3,229 -4,773 -2,264 -5,340 Decrease in consumption taxes refund receivable 16 25 -20 -57 -407 -107 326 41 -201 Increase in consumption taxes payable 0 10 -10 181 122 -259 -45 207 -207 Decrease in other current assets -184 513 -298 -295 -192 -293 936 549 -848 Decrease in other current liabilities -188 -1,020 -3 930 -1,029 -875 222 -828 829 Other -110 138 345 -13 343 -314 41 28 -241 2,324 SUM -2,346 5,738 8,116 31,623 42,892 23,663 14,350 8,945 8,640 11,632 Interest and dividend income 1,002 1,772 951 1,112 1,087 1,380 1,407 1,461 1,410 2,149 Dividends paid -535 -454 -386 -320 -177 -155 -50 -36 -3 -1 Income taxes paid -222 -195 -204 -2,261 -14,980 -12,101 -1,570 -2,944 -11,397 -2,396 Cash flows from investing activities (2) 15 15,971 -4,623 2,550 -5,744 11,768 -1,580 24,732 213 -277 Collection of short-term loans receivable Acquisition of securities 0 -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 -247 -79 -74 -98 -16 -175 -40 -239 -119 -88 Acquisition of intangible fixed assets -48 -102 -112 -17 -39 -25 -28 -50 -169 -84 Acquisition of investment securities -30 -500 -1,500 Proceeds from sale of investment securities 24 18,184 553 2 2,267 2 25,165 383 41 Payments of long-term loans receivable -48 -22 -12 0 -27 -26 -14 -128 Collection of long-term loans receivable18164117462737 018 Increase in investments and other assets -222 -48 -36 -32 -114 -70 -50 -182 -68 -41 Decrease in investments and other assets 569 23 18 178 87 39 13 40 187 5 Decrease in other fixed assets Free cash flow (1+2) -2,086 22,830 3,853 32,703 23,078 24,556 13,537 32,157 -1,137 11,900 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 Net increase in short-term borrowings -4,000 Net increase in long-term borrowings -10,699 -9,003 -2,028 -2,331 -2,859 -1,659 -1,382 -1,343 -612 -116 Proceeds from issuance and redemption of bonds 14,944 0 9,957 0 0 -8,000 0 -2,000 00 Acquisition of treasury stock -1 00-1 -1 -1 -61,270 0 -1 Increase in cash and cash equivalents -4,652 13,108 12,052 15,228 21,605 9,406 7,877 -37,093 -5,277 8,162 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 FY03/20, net cash provided by operating activities came to JPY12.2bn (compared to JPY1.4bn in net cash used in FY03/19). Notably, corporate tax payments were JPY2.4bn. Net cash used in investing activities was JPY277mn (compared to JPY213 in net cash provided in FY03/19). This was mainly for long-term loan advances of JPY1.3bn. Net cash used in financing activities was JPY3.6bn (compared to JPY3.9bn in net cash used in FY03/19). This was mainly for dividend payments of JPY3.5bn.

As of end-FY03/20, cash and cash equivalents were JPY72.0bn, up JPY8.2bn YoY. Of this amount, JPY5.8bn was in interests in funds. As of this date, JAFCO’s uncalled commitments to JAFCO-managed funds were JPY31.9bn.

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Historical performance

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 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.

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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.

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.

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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.

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 amounts 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. If it lacks the necessary capital, it will generate cash by selling off shareholdings.

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.

Interviews with portfolio company CEOs posted on homepage of corporate website

Source: Corporate website

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& 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 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.

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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.

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.

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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.

FY03/20 results Summary

▷ Revenue: JPY29.9bn (+15.4% YoY)

▷ Operating profit: JPY15.0bn (+22.3% YoY)

▷ Recurring profit: JPY17.0bn (+27.1% YoY)

▷ Net income*: JPY11.8bn (+16.5% YoY)

▷ Capital gains: JPY15.4bn (+9.6% YoY)

▷ IPOs: Four (three in Japan, one overseas) * Net income attributable to owners of the parent

In FY03/20, revenue rose 15.4% YoY, and operating profit increased 22.3% YoY as the result of two large IPOs, an exit from a buyout investment through M&A, and a trade sale of an overseas portfolio company. However, the IPO market has cooled considerably since February 2020 due to the COVID-19 pandemic, and the IPO of a portfolio company scheduled for April 2020 has been postponed. As a result, in Q4 (January–March 2020), JAFCO recorded its first net loss since FY03/12.

Capital gains In FY03/20, capital gains amounted to JPY15.4bn (+9.6% YoY). Of this figure, capital gains on sale of listed shares through IPOs and other exits totaled JPY2.7bn (-50.1% YoY), while capital gains on unlisted shares were JPY12.7bn (+45.5% YoY). Major IPOs in Japan were Chatwork (TSE Mothers: 4448) and Giftee (TSE Mothers: 4449). In the US, Bill.com Holdings (NYSE: BILL) listed its shares, but this IPO made only a limited contribution to JAFCO’s earnings. Other than IPOs, the trade sale of an Asian portfolio company (a Chinese e-commerce company) contributed to gains on the sale of unlisted shares. By increasing its holdings in portfolio companies, JAFCO has diversified investment exits other than IPOs.

IPOs There were three JAFCO-backed IPOs in Japan in FY03/20 (one in Q1, two in Q2, and none in Q3 or Q4). Branding Technology (TSE Mothers: 7067), an SV3 portfolio company, went public in Q1. In Q2, SV4 portfolio companies Chatwork (TSE Mothers:

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4448) and Giftee (TSE Mothers: 4449) underwent IPOs. Although the number of IPOs was small, the investment multiple was high, at 10.4x (7.9x in FY02/19). Overseas, Bill.com Holdings (NYSE: BILL), an Icon Ventures investment, conducted its IPO in Q3. The investment return from this deal, calculated as the ratio of portfolio company’s market value at IPO (opening price-basis) to invested capital, was 15.7x.

Allowance for investment losses Net change in provision of allowance for investment losses amounted to a reversal of JPY514mn (provision of JPY3.1bn, reversal of JPY3.6bn). The allowance ratio against the balance of unlisted securities fell further to 14.9% (17.4% at end-FY03/19). As of end-March 2020, the balance of investment in unlisted Japanese securities (including fund LPs’ interests) was JPY82.3bn.

The COVID-19 pandemic has caused portfolio companies’ sales to decrease and affected their ability to raise capital. In response, JAFCO added a total of JPY1.3bn to investment loss provisions for nine companies. This figure represents 43.1% of the JPY3.1bn in total additions. Of the nine companies, six were in Japan (additions of JPY1.1bn), one was in Asia (JPY80mn), and two were in the US (JPY190mn). JAFCO says that if the COVID-19 pandemic is prolonged, more portfolio companies will be affected, and it will need to increase loss provisions accordingly.

Income from fund management Management fees in FY03/20 totaled JPY2.6bn (+47.8%), and success fees were JPY3.6bn (+326.9% YoY). Progress in exits from SV4, established in 2013, caused the fund’s distribution to exceed invested capital. Outside JAFCO’s interest, the balance of unlisted securities in SV4 amounted to JPY19.5bn, so the company expects to recognize success fees as it makes headway in exits. The new JAFCO Asia Technology Fund VI L.P. also became subject to success fees. JAFCO saw a rise in management fees in tandem with an increase in capital raised from outside investors for SV6, established in June 2019.

Core income In FY03/20, SG&A expenses were JPY4.1bn (+5.3% YoY). Core income, which is management fees minus SG&A expenses, was negative, but income including success fees turned positive. Going forward, the balance between income and expenses is expected to be relatively stable on contribution from success fees from SV4.

Unrealized gains Unrealized gains on listed securities were JPY7.1bn, up from JPY6.4bn at end-March 2019, but the level is not particularly high. JAFCO carried forward unrealized gains on its shareholdings, partly because it curbed sale of post-IPO shares due to sluggish stock price performance following the listing.

Investment amounts The total investment made in FY03/20 rose to JPY34.8bn (+38.3% YoY). The increase centered on Japanese domestic investments following the establishment of a new fund. The amount of investment was JPY24.9bn (+118.7% YoY) in Japan, JPY8.4bn (-21.6% YoY) in the US, and JPY1.5bn (-51.6% YoY) in Asia. Of the amount invested in Japan, JPY5.7bn was buyout investment.

Fund commitments As of end-March 2020, total commitments came to JPY433.9bn (JPY359.1bn at end-March 2019), of which the amount subject to management fees (excluding capital committed by JAFCO, Icon Ventures funds, and funds under extensions) was JPY129.0bn (as of end-March 2020). The fund size of SV6, the new fund closed on March 2, 2020, is JPY80.0bn. Of this amount, outside investors committed JPY50.9bn and JAFCO JPY29.1bn. SV6 is the first fund the company has established since moving to the partnership business model. With JAFCO’s partners and employees aligning their interests by co-investing in the fund, JAFCO intends to demonstrate its enhanced commitment to portfolio companies.

Cash surplus As of end-March 2020, cash and cash equivalents (including securities) totaled JPY72.0bn, of which JAFCO’s interests in funds were JPY5.8bn. Interest-bearing liabilities were JPY249mn, and uncalled capital owed to funds totaled JPY31.9bn. The company’s significant cash surplus demonstrates its ability to respond to future demands for cash, notably uncalled capital commitments.

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Cumulative Q3 FY03/20 results Performance snapshot

▷ Revenue: JPY27.9bn (+27.1% YoY)

▷ Operating profit: JPY16.4bn (+62.5% YoY)

▷ Recurring profit: JPY18.4bn (+64.0% YoY)

▷ Net income*: JPY13.5bn (+54.0% YoY)

▷ Capital gains: JPY15.5bn (+35.7% YoY)

▷ IPOs: Four (three in Japan, one overseas) * Net income attributable to owners of the parents

In cumulative Q3 FY03/20, operating profit was JPY16.4bn (+62.5% YoY), and total capital gains on listed and unlisted shares were JPY15.5bn, up 35.7% YoY. Of non-operating income, dividend income increased to JPY2.0bn (JPY1.3bn in cumulative Q3 FY03/19), mainly due to a one-off dividend from cross-held shares.

In Q3 (three months), operating profit was JPY14.3bn (+336.4% YoY). Capital gains were JPY13.3bn (+262.4% YoY).

Capital gains Of the JPY15.5bn in capital gains in cumulative Q3, capital gains on listed securities through IPOs, etc. were JPY2.3bn, down 55.2% YoY. Major contributions were from domestic IPOs by Chatwork (TSE Mothers: 4448) and Giftee (TSE Mothers: 4449). Bill.com Holdings (NYSE: BILL) conducted its IPO in the US, but its contribution to earnings was limited. Capital gains other than through IPOs (gains on unlisted shares after accounting for reversal of loss provisions) rose to JPY16.6bn (JPY8.5bn a year ago), due mainly to trade sales of Asian portfolio companies.

IPOs In cumulative Q3, the company had three IPOs in Japan (one in Q1, two in Q2, none in Q3). The IPO in Q1 was Branding Technology (TSE Mothers: 7067), from the SV3 fund. The two IPOs in Q2 were from the SV4 fund, Chatwork (TSE Mothers: 4448) and Giftee (TSE Mothers: 4449). Although the number of IPOs was small, the return was high at 10.4x (7.9x in cumulative Q3 FY03/19). Overseas, there was one IPO by Icon Ventures’ portfolio company Bill.com Holdings (NYSE: BILL) in Q3.

Allowance for investment losses Net change in provision of allowance for investment losses was a reversal of JPY1.6bn (provision of JPY1.8bn and reversal of JPY3.4bn). The allowance ratio against the balance of unlisted securities was 14.3% (18.4% at end-FY03/19). Excluding general allowance, this figure was low at 13.3%. At end-December 2019, the balance of unlisted securities in Japan (including fund LPs’ interests) was JPY79.3bn.

Income from fund management For cumulative Q3, management fees came to JPY1.8bn (+38.6% YoY) and success fees were JPY3.4bn (+434.7% YoY). An increase in success fees from SV4 established in 2013, for which investment activity has been completed, was a major factor behind a surge in success fees. With JPY19.5bn in the balance of unlisted securities, excluding JAFCO’s interest, success fees from SV4 will likely be posted steadily in line with the sale of remaining holdings. Management fees are expected to increase in line with new fund establishment.

Core income During cumulative Q3, SG&A expenses came to JPY3.0bn (-3.3% YoY). Core income, which is management fees minus SG&A expenses, was negative, but the addition of success fees allowed it to move into the black. Going forward, the company aims to generate relatively stable core income due to the success fees expected from SV4.

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Unrealized gains Although unrealized gains on listed securities increased YoY to JPY9.3bn (from JPY6.4bn at end-March 2019), the level was relatively low. The company carried forward unrealized gains on its shareholdings, partly because it curbed sale of post-IPO shares due to sluggish stock price performance following the listing.

Investment amounts Equity investment in cumulative Q3 FY03/20 came to JPY26.6bn (+28.4% YoY), with the increase centering on Japanese domestic investments. Investments in domestic equities were JPY21.2bn (+137.3% YoY). In the US, equity investments were JPY4.5bn (- 49.3% YoY), and in Asia they were JPY893mn (-69.1% YoY). Of the JPY21.2bn in domestic equity investments, around JPY5.2bn were buyout investments.

Fund commitments As of end-December 2019, funds under management totaled JPY434.4bn (JPY359.1bn at end-March 2019). Of this figure, the amount subject to management fees (including a Taiwan fund still open to new investors) was JPY126.3bn (as of January 20, 2020). The size of the new SV6 fund is JPY80.0bn (as of January 20, 2020). Of this figure, commitments from outside investors are JPY50.9bn and JAFCO’s commitment is JPY29.1bn (final closing scheduled by March 2, 2020). SV6 is JAFCO’s first fund since the transition in management style from a company-based to a partnership model. With JAFCO’s partners and employees aligning their interests by co-investing, the company intends to demonstrate its enhanced commitment to portfolio companies.

Cash surplus As of end-December 2019, cash and cash equivalents (including securities) totaled JPY71.8bn, of which interests in funds came to JPY13.9bn. Meanwhile, interest-bearing liabilities were JPY281mn, and uncalled commitments to funds were JPY34.9bn. The company’s significant cash surplus demonstrates its ability to respond to future demands for cash, notably uncalled capital commitments.

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Other information

News and topics October 2020 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

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).

ESG

▷ Mission: “Commit to new business creation and jointly shape the future”

▷ Under this mission, the company aims to “identify new technologies and services that are in high demand and commercialize them into new businesses with entrepreneurs with the aim of realizing a better society.”

Environmental initiatives Investment in environmental fields Rigorously select businesses that will impact society, and invest from a medium- to long-term perspective.

Environmental preservation efforts at offices Promote paperless operations.

Social initiatives Investment to realize a better society

▷ In selecting companies, always keep in mind what positive impact a startup will have on society.

▷ Through the growth and success of portfolio companies, contribute to the creation of new job opportunities and a sustainable society.

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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.

▷ Promote human resource diversity, allow members to have side businesses.

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.

▷ The company has introduced the corporate officer system to strengthen and accelerate business execution.

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

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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).

Dividend policy

JAFCO aims to pay dividends equivalent to 3% of average shareholders’ equity (based on the starting and ending amount of equity for the fiscal year). The company intends to ensure a good balance between ongoing shareholder returns and robust shareholders’ equity, allowing a long-lasting investment business. JAFCO uses dividend per share and average shareholders’ equity per share as dividend indicators.

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 FY03/20, the company set total dividends of JPY3.6bn, for JPY118 per share (determined as of April 2020).

Major shareholders

Shares held Shareholding Top shareholders ('000) ratio Japan Trustee Services Bank, Ltd. (Trust account) 3,777 12.21% The Master Trust Bank of Japan, Ltd. (Trust account) 2,278 7.37% STATE STREET BANK AND TRUST COMPANY 505001 1,409 4.56% (Standing proxy: Mizuho Bank, Ltd. Settlement Department) Hikari Tsushin, Inc. 672 2.17% THE BANK OF NEW YORK MELLON 140044 653 2.11% (Standing proxy: Mizuho Bank, Ltd. Settlement Department) DFA INTL SMALL CAP VALUE PORTFOLIO 646 2.09% (Standing proxy: Citibank N.A. Tokyo Branch) Japan Trustee Services Bank, Ltd. (Trust account 5) 619 2.00% JP MORGAN CHASE BANK 385151 561 1.82% (Standing proxy: Mizuho Bank, Ltd. Settlement Department) NORTHERN TRUST CO. (AVFC) RE U.S.TAX EXEMPTED PENSION FUNDS 515 1.67% (Standing proxy: The Hongkong and Shanghai Banking Corporation, Ltd., Tokyo Branch) Japan Trustee Services Bank, Ltd. (Trust account 5) 489 1.58% SUM 11,624 37.58% Source: Shared Research based on company data Note: As of end-March 2020

Employees

▷ Employees (as of end-FY03/20): 131 on a consolidated basis, 102 on a non-consolidated basis

▷ Average age: 44 years, 3 months

▷ Average tenure: 17 years, 4 months

▷ Average annual salary: JPY10.4mn

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Employees (consolidated basis) 500 Number of employees (consolidated)

400 418 411 384 357 358 300 329 281 276 260 255 200 216 185 175 167 159 162 159 152 148 100 134 131

0 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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

Profile

Company Name Head Office JAFCO Group Co., Ltd. 1-23-1 Toranomon, Minato-ku, Tokyo, Japan Phone Listed On +81-50-3734-2025 The First Section of the Tokyo Stock Exchange Established Exchange Listing April 5, 1973 June 3, 1987 Website Fiscal Year-End https://www.jafco.co.jp/english/ March IR Contact IR Web ir@jafco.co.jp https://www.jafco.co.jp/english/ir/

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A dvance Create C o., Ltd. Digital Garage Inc. Kanamic Network C o.,LTD ROUND ONE Corporation ADJUVANT COSME JAPAN CO., LTD. DIP Corporation KFC Holdings Japan, Ltd. RYOHIN KEIKAKU CO., LTD. Aeon Delight Co., Ltd. Doshisha Corporation KI-Star Real Estate Co., Ltd. SanBio C ompany Limited Aeon Fantasy Co., Ltd. Dream Incubator Inc. KLab Inc. SANIX INCORPORATED Ai Holdings Corporation Earth Corporation Kondotec Inc. Sanrio Company, Ltd. A I inside Inc. Edion Corporation Kumiai Chemical Industry C o., Ltd. SATO HOLDINGS CORPORATION AirTrip Corp. Elecom Co., Ltd. Lasertec Corporation SBS Holdings, Inc. and factory, inc. en Japan Inc. Locondo, Inc. Seikagaku Corporation ANEST IWATA Corporation Estore Corporation. LUCKLAND CO., LTD. Seria Co.,Ltd. AnGes Inc. euglena Co., Ltd. Marumae Co., Ltd. Serverworks Co.,Ltd. Anicom Holdings, Inc. FaithNetwork Co., Ltd. MATSUI SECURITIES CO., LTD. SHIFT Inc. Anritsu Corporation Ferrotec Holdings Corporation Media Do Co., Ltd. Shikigaku Co., Ltd Apaman Co., Ltd. FIELDS CORPORATION Medical System Network Co., Ltd. SHIP HEALTHCARE HOLDINGS, INC. ARATA CORPORATION Financial Products Group Co., Ltd. MEDINET Co., Ltd. SIGMAXYZ Inc. A rtspark Holdings Inc. First Brothers C ol, Ltd. MedPeer,Inc. SMS Co., Ltd. AS ONE CORPORATION FreeBit Co., Ltd. Mercuria Investment Co., Ltd. Snow Peak, Inc. A team Inc. Fujita Kank o Inc. Metaps Inc. Solasia Pharma K.K. Aucfan Co., Ltd. Gamecard-Joyco Holdings, Inc. Micronics Japan Co., Ltd. SOURCENEXT Corporation AVANT CORPORATION GameW ith, Inc. MIRAIT Holdings C orporation Star Mica Holdings Co., Ltd. A xell Corporation GC A C orporation Monex Goup Inc. Strik e C o., Ltd. A zbil Corporation Good Com Asset Co., Ltd. MORINAGA MILK INDUSTRY C O., LTD. SymBio Pharmaceuticals Limited AZIA CO., LTD. Grandy House Corporation Mortgage Service Japan Limited. Synchro Food Co., Ltd. AZoom, Co., Ltd. Hakuto Co., Ltd. MRT Inc. TAIYO HOLDINGS CO., LTD. Base Co., Ltd Hamee Corp. NAGASE & CO., LTD Takashimaya Company, Limited BEENOS Inc. Happinet C orporation NAIGAI TRANS LINE LTD. Tak e and Give Needs Co., Ltd. Bell-Park Co., Ltd. Harmonic Drive Systems Inc. NanoCarrier Co., Ltd. TEAR Corporation Benefit One Inc. HENNGE K.K. Net Marketing Co., Ltd. Tenpo Innovation Inc. B-lot Co.,Ltd. Hope, Inc. Net One Systems Co.,Ltd. 3-D Matrix, Ltd. Broadleaf Co., Ltd. HOUSEDO Co., Ltd. Nichi-Iko Pharmaceutical Co., Ltd. The Hokkoku Bank,Ltd. C anBas C o., Ltd. H2O Retailing C orporation Nihon Denk ei C o., Ltd. TKC Corporation Canon Marketing Japan Inc. IDOM Inc. Nippon Koei Co., Ltd. TKP Corporation Career Design Center Co., Ltd. IGNIS LTD. NIPPON PARKING DEVELOPMENT Co., Ltd. Tsuzuki Denki Co., Ltd. Carna Biosciences, Inc. i-mobile Co.,Ltd. NIPRO CORPORATION TOCALO Co., Ltd. CARTA HOLDINGS, INC Inabata & Co., Ltd. Nisshinbo Holdings Inc. TOKAI Holdings Corporation CERES INC. Infocom Corporation NS TOOL CO., LTD. Tokyu Construction Co., Ltd. Chiyoda Co., Ltd. Infomart Corporation OLBA HEALTHCARE HOLDINGS,Inc. TOYOBO CO., LTD. Chori Co., Ltd. Intelligent Wav e, Inc. OHIZUMI MFG. CO., LTD. Toy o Ink SC Holdings Co., Ltd Chugoku Marine Paints, Ltd. ipet Insurance CO., Ltd. Oisix ra daichi Inc. Toyo Tanso Co., Ltd. cocokara fine Inc. Itochu Enex Co., Ltd. Oki Electric Industry Co., Ltd Tri-Stage Inc. COMSYS Holdings Corporation JAFCO Co.,Ltd. ONO SOKKI Co., Ltd. TSURUHA Holdings COTA CO.,LTD. JMDC Inc. ONWARD HOLDINGS CO.,LTD. VISION INC. C RE, Inc. JSB Co., Ltd. Pan Pacific International Holdings C orporation VISIONARY HOLDINGS CO., LTD. C REEK & RIVER C o., Ltd. JTEC Corporation PARIS MIKI HOLDINGS Inc. World Holdings Co., Ltd. Daiichi Kigenso Kagaku Kogyo Co., Ltd. J Trust Co., Ltd PIGEON CORPORATION YELLOW HAT LTD. Daisek i Co., Ltd. Japan Best Rescue System Co., Ltd. QB Net Holdings Co., Ltd. YOSHINOYA HOLDINGS CO., LTD. Demae-Can CO., LTD JINS HOLDINGS Inc. RACCOON HOLDINGS, Inc. YUMESHIN HOLDINGS CO., LTD. DIC Corporation JP-HOLDINGS, INC. Raysum Co., Ltd. ZAPPALLAS, INC. Digital Arts Inc. KAMEDA SEIKA CO., LTD. RESORTTRUST, INC. Attention: If you would like to see companies you invest in on this list, ask them to become our client, or sponsor a report yourself.

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