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Venture Capitals in Japan
In Japan it was in the early 1970s when a few first venture capitals were formed in the private sector.
In those days, however, the conditions were far from good enough for the Japanese venture capitals, trying to get revenues from investing in private equities, especially through IPOs (initial public offering). It usually took 20 years from incorporation for emerging businesses to conduct IPOs, as the listing requirements of the stock market were extremely rigid. Evidently twenty years was too long for the venture capitals to wait for the results. As to the legal systems, the limited partnership or equivalents was not stipulated as a scheme of venture capital funds under the Japanese law. Such situation was basically unchanged until the late 1990s.
However, the situation has totally changed today.
At present there are five securities exchanges in Japan, including Tokyo Securities Exchange. All of the five exchanges have their own market for emerging businesses. In addition, there is an OTC Market (over-the-counter market) called JASDAQ. The listing requirements of the First Section of Tokyo Securities Exchange are still hard to meet, but the listing requirements of the markets specialized for emerging businesses are among those the least strict in the world. Now in Japan, even a company having deficits or liabilities larger than its assets can conduct IPO.
For this reason, now the time an emerging business might take from its incorporation to IPO has become even shorter. Accordingly, the venture capitals in Japan have more opportunities to increase the profits.
As to legal systems, Limited Liability Investment Partnership Act was enforced in 1998. The Limited Liability Investment Partnership formed under this law is the Japanese equivalent of the limited partnership. Presently such partnerships have become a standard scheme of investment funds of the venture capitals in Japan.
In addition, there is increased demand for investing in private equities. It is principally because the Japanese deposit interest rates have been lowered for 20 years and also because the stock market has been floundering since the early 1990s. While the investments in listed stocks or bonds are not good, people are attracted to the large profits that may be obtained from the IPOs. In this way, the investments in private equities by the venture capitals are now recognized as one of the remarkable “alternative investments.”
Such situation has been promoting the change of operations in the Japanese venture capitals.
Years ago, there used to be a reputation that the Japanese venture capitals would invest in the businesses in later stages or “mezzanine,” which means they are already expected to conduct IPO soon. It was partly because the IPOs of the emerging businesses took too long a time under the conditions peculiar to Japan. At present, however, a increasing number of emerging businesses conduct IPO only after three to five years from their incorporation. Accordingly, the operations of the Japanese venture capitals are properly getting closer to those of the venture capitals in Europe or the United States, finding the promising businesses in their early stage and giving the active hands on the operation of those businesses.
While most of the venture capitals in the United States are organized in the form of limited partnership, most of the Japanese venture capitals are joint-stock corporations. Such corporations organize a fund in the form of Limited Liability Investment Partnership and join that partnership as an executing partner. An executing partner is a Japanese equivalent of the general partner of limited partnership.
Most of the contributors are financial institutions such as banks and other business companies. The contributions by the pension funds and individuals have only small shares. This is remarkably contrasted with the Western venture capital funds in which the contributions by the pension funds and wealthy individuals have substantial shares. This is explained by the fact that many of the Japanese venture capitals are subsidiaries of the financial institutions or other business companies, but recently it seems that independent venture capitals (organized by accounting offices, etc.) and/or foreign venture capitals are increasing in number.
Among the Japanese venture capitals, one of the most famous is Softbank Corp., which is specialized in computer, internet-related business. It is a parent company of Yahoo! Japan, which occupies about 70% shares in the search engine traffic of Japan. It also cooperates with E*TRADE Securities in Japan. In the field of the Internet-related business, Softbank is one of the biggest venture capitals in the world. Another big venture capital is JAFCO, a subsidiary of Nomura Securities, which is the survivor of the first private venture capitals in the country.
It is said that as an industry the business of the whole venture capitals in Japan is only one-twentieth as large as that in the United States. You see it is still very small in proportion with the whole economy as the Japanese economy is not so small as one-twentieth of that of the United States. It means that the business of the Japanese venture capitals still have substantial potentials for growth.
Cooperation with universities is considered as a promising field of the Japanese venture capitals. Recently, the TLO (Technology Licensing Organization) System has started in Japan. By the TLO System, technology transfer from the university to the private business is made easier. It is expected that in the near future a lot of new businesses will be born from such cooperation. It will enhance the demand for venture capital funds.
It is also expected that the Japanese venture capitals will make more investments in foreign businesses. As the business of the Japanese venture capitals is getting closer to that of the Western venture capitals, more contributions by the pension funds, wealthy individuals or from the foreign countries are prospected.
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