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 02/57 JAFCO Group/ 8595 RCoverage LAST UPDATE: 2021.01.28 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 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