Asian alts stalwart MCP connects global investors to Japan’s burgeoning venture cap market

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StoneX Prime News

By Hugh Leask

Founded in 1999, Hong Kong-headquartered MCP – which also has offices in Tokyo, Fukuoka, Chicago and Seoul – has established itself as one of the pre-eminent hedge fund solution providers in Asia, with activity spanning customized multi-manager solutions, single managed accounts, and global fund of hedge funds.

One of Asia’s oldest and largest independent alternative asset managers, MCP recently broadened its scope beyond hedge fund solutions, tilting towards the growing venture capital and private market opportunity set in Japan.

This new initiative is spearheaded by Keisuke Yamashita, MCP’s chief investment officer and head of venture capital and private equity investment in Tokyo. Prior to joining MCP in 2022, Yamashita set up and was a representative director for Dymon Asia Capital Japan, a multi-strategy hedge fund and private equity-focused firm, having been with the firm’s Singapore unit since 2017.

“I’ve been connecting Japan to offshore markets throughout my career, and MCP is uniquely positioned in a way that looks at Japan from an international angle, given that its founders are Japanese, but as a firm it is headquartered in Hong Kong,” said Yamashita, who started his investment career as an M&A banker at J.P Morgan in Japan and the U.K.

An untapped opportunity

While international institutional investors have trained their focus on Tokyo-listed equities in recent times - Warren Buffett’s Berkshire Hathaway ramped up its holdings of Japanese stocks earlier in the summer – the country’s private assets space remains something of an untapped landscape for global allocators.

Here, MCP sees a particularly undervalued opportunity set emerging for venture capital strategies within Japan’s early- and growth-stage domestic startup space, predominantly in technology and related sectors.

“We think there is a great opportunity here in Japan that not many foreign investors know about yet,” Yamashita told Alternatives Watch in a recent interview, noting that many Japanese VCs still tend to operate domestic-only vehicles.

MCP has approximately $3 billion in assets managed on behalf of major Japanese and global institutional investors, including life insurers, pensions, large banks and university endowments, with the bulk of its AUM still managed in its fund of hedge fund business.

Reflecting on the prevailing market environment, Yamashita said that private equity has developed into a “huge presence” in Japan since the 2008 global financial crisis, with large global players such as KKR and Blackstone capitalizing on cheaper borrowing costs to take small- to mid-sized companies private and successfully exit while still maintaining top-line growth. In contrast, the venture capital ecosystem - while growing - remains “immature” when compared to the U.S. and China. Underlining this point, he said that the total funding amount raised by startups in Japan in 2022 was only around $6 billion - though this represents a tenfold increase since 2013.

Shifting perceptions

Yamashita acknowledged that the perception held by many global investors of a Japanese economy grappling with little-to-no growth, producing very few startups and unicorns, remains tricky to shake off. As such, some larger overseas venture capital players have tended to overlook opportunities here.

It is against this backdrop that Japan’s government is now bolstering efforts to attract more inward investment into domestic companies. In a speech in New York in September, prime minster Fumio Kishida outlined plans to strengthen the country’s $5 trillion asset management industry and draw more new entrants into the space. The initiative follows a government-led five-year development plan, unveiled last year, which aims to grow investment into Japanese startups to some JPY10 trillion ($66 billion) by 2027.

“When overseas investors think about Japan, it’s actually Japan as a manufacturing country,” Yamashita said. “People know that Japan has great technology – there’s robotics, many of the semiconductor-related companies, automobile manufacturing – and there are still a lot of sectors where Japan has the leading market share. However, a manufacturing company has a deeper J-curve – you need to put a lot of cash into it if you want to compete on a global scale.”

As a result, domestic VCs and foreign investors alike have tended to eschew hard technology manufacturers, instead focusing on software-related companies. MCP, however, sees fertile opportunities here.

“The sectors we are interested in are these more hard-tech companies – robotics, agriculture, some of the IPs that Japan still has, and the ESG-related companies,” said Yamashita, adding the firm has a particular focus on middle-stage companies that can offer a demonstrable proof-of-concept.

“These are companies which can overcome the language difficulties and the cultural differences, and which we believe can compete on a global scale if we get enough support from domestic investment and from overseas investors.”

Bridging the gap

In early 2020, MCP began diversifying its business and putting more emphasis onto private markets, having received a mandate from Tokyo’s Metropolitan Government to invest in private equity funds of funds, including M&A succession funds and ESG-related funds. This year, the firm launched an investment vehicle focused on Japanese venture capital, directly investing in startups and venture companies in Japan.

Now, as the government looks to attract more capital into fledgling companies over the next five years – aiming to raise the number of startups from around 4000 to 100,000, and increase the number of unicorns from roughly 10 to close to 100 – Yamashita believes MCP can broaden its venture activity further, acting as a bridge to international markets as momentum gathers pace.

“Traditionally, most of the startups or even the VCs have focused on domestic markets. While this was sufficient to reach a market cap $500 million or $1 billion, people are realising that if you want to have unicorns, or even bigger $10 billion companies, you need to look overseas,” he explained.

A key inflection point, according to Yamashita, is the trend of ex-investment bankers, along with former private equity managers and consultants, now moving into the venture space with a specific mandate to help companies expand overseas and attract foreign capital. This influx of talent will prove critical in determining both the viability of target companies as well as the credibility of a prospective investor.

“We focus on the middle-stage companies, where the company has completed the proof-of-concept stage. We’re not just investing in companies with just an idea – we at least want them to have some product or have some proof-of-concept completed in a certain area so that they are ready to go global.

“It’s also important from the entrepreneur perspective – they want to know the nature of the investors, and they want to know if they are credible or not in their home countries.”

Going global

Regarding returns, he said that some investors in China or south-east Asian ventures are now facing challenges with regards to distributed to paid-in capital (DPIs). But in Japan, “because of the well-established markets, depending on the year and the venture, DPIs in certain vintages are actually on par with the U.S. or China.”

Currently, much of the investor appetite stems from family office-type allocators who already have some connections in Japan, but who also want to expand their portfolios into startups. “But we also think that many of the U.S. and European family offices should be interested in this area, especially in certain sectors such as robotics, and some of manufacturing sectors, and ESG sectors, because Japan is also keen to compete in these sectors.”

Looking ahead, as many institutional investors turn to Japan to diversify their portfolios, Yamashita conceded that the ticket sizes of the largest allocators, such as sovereign wealth fund allocations, are often too big for most startups, an issue that has also dogged the hedge fund industry over the years. Illustrating this point, he noted that of the $6 billion raised by startups in Japan last year, just 20 or so companies raised more than JPY5 billion ($35 million).

“I think it will start coming – maybe not this year, but in maybe two to three years. MCP’s mission, our job, is to promote Japan. We need to educate those Western investors that Japan’s venture ecosystem actually exists and is starting to go global,” he added. “Going forward, it will be easier for foreign investors to access those startups which want to attract foreign capital, and to grow their companies overseas, because everyone knows that without expanding their business overseas, they can’t expect the top-line growth if they just keep focusing on Japan’s domestic market.”

This article, “Asian alts stalwart MCP connects global investors to Japan’s burgeoning venture cap market” was originally published on November 27st, 2023 on Alternatives Watch and is republished here with permission from BMV Digital, Inc.

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