With an established track record of successful exits behind them from previous vintages, the credibility of the Japanese private equity manager, commonly referred to as the “Japanese GP”, has garnered strength in recent years. Many mid-size players have re-entered the market and following a flurry of deal activity last year, encouraged by negative interest rates, governance reforms and demographic shifts, 2016 was the best fundraising year in a decade.
The sheer size of Japan’s economy (the third largest in the world), coupled with the Japanese government’s incentive to encourage foreign direct investment (“FDI”), is proving an attractive proposition for foreign investors. Although measures taken by the government to boost FDI have been slower than anticipated, the strategies employed – including reforming Japan’s infamous corporate governance system by increasing transparency between investors – have been an encouraging factor in driving long-term investment into the region. Moreover, Japan’s ageing population is resulting in a succession crisis as more owners of small and medium-sized businesses reach retirement without a successor and, as such, they are increasingly looking to private equity firms. A key consideration for many Japanese GPs when fundraising is therefore to decide whether to raise a domestic-only fund or to also try and attract foreign capital.
Once the decision to attract foreign investors is made, thoughts turn to the practical considerations and how this inbound investment is best facilitated. Typically, this is achieved through a collective investment structure called a General Partner / Limited Partnership structure, established in the preferred offshore jurisdiction. The offshore fund will then co-invest alongside a domestic Japanese Partnership into a portfolio of Japanese companies.
Once the offshore fund has been established, there are a number of key items to address:
The fund documentation, administration and ongoing communications need to be in a language that is easily understood by the foreign-based investors. If suitable arrangements are not put in place by the Japanese GP, these ongoing requirements can be a drain on resources and deflect from the Japanese GPs core business – namely, sourcing attractive investment opportunities for the fund and then implementing the necessary measures to make the investments a success.
The information requirements of the offshore General Partner also need to be met. The directors of the offshore General Partner need sufficient quality information in order for them to satisfactorily discharge their fiduciary responsibility – by acting in the best interests of the Limited Partners at all times. This role includes making all investment decisions on behalf of the Limited Partnership. As such, the information flow between the Japanese GP and offshore General Partner is of critical importance.
In addition, for the integrity and tax neutrality of the structure it is important that the management and control of the structure remains offshore. This is primarily demonstrated by the key decisions employed by the experienced and independent directors located in the offshore jurisdiction.
Limited Partners are increasingly sophisticated, and therefore demanding, particularly when it comes to the reporting they expect to receive on their investment. Outsourcing this requirement to a specialised provider with a bespoke system tailored to the requirements of alternative investment funds can sharply decrease the burden on the Japanese GP.
Working with a trusted service provider who not only understands the above requirements and the potential barriers, but can also provide effective solutions, is vital to ensuring the operations of the offshore structure run smoothly. A service provider with bilingual staff, fluent in both English and Japanese, and with a detailed understanding of the daily operations of the offshore fund can add great value. These individuals can work closely with the Japanese investment manager to clearly explain the information that the offshore General Partner will require in order to make informed decisions, support with translation requirements, and act as a facilitator between the Japanese GP and the service provider’s operational teams.
These services can be particularly important during the busy time of acquiring and/or disposing of portfolio companies, when timeframes are tight and deadlines need to be adhered to.
Key benefits a service provider can provide to the Japanese GP:
The selection of the offshore service provider is therefore a key decision for the Japanese GP to make at the outset, once they have completed a successful fundraise involving capital from foreign investors. A good quality service provider will not only establish the offshore structure and run the daily operations throughout the fund lifecycle, but will also have the capability to act as a conduit of information between the Japanese GP and other parties in the structure, such as the directors of the offshore General Partner.
Here at Moore Management we have extensive experience of working closely with Japanese GPs to provide solutions to their offshore fund requirements. In addition to providing bilingual time zone support, personnel in our Tokyo office can help with translation requirements and structuring solutions. We can also provide experienced directors to sit on the board of the offshore General Partner in order to help ensure that the management, control and corporate governance requirements of the offshore structure are met.
For further information on the full range of services provided by Moore please don’t hesitate to get in touch.
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