The current environment is creating ripe opportunities for foreign managers seeking looking to raise capital in Japan as local investors and institutions look for fixed income substitutes to supplement returns. Having a local presence can help elevate their offer, however they have to be patient and persistent as business practice tends to move at a slower pace.
Historically, Japanese portfolios have been heavily focused on domestic fixed income assets, with these investments representing the lion’s share of most holdings. However, this is changing.
Stan Howard, found and director, Teneo Partners, comments: “In spite of the fact that Japanese investors are, relative to US investors, risk averse, the levels of interest rates and bond returns have become too anemic to allow them to reinvest in domestic offerings as their holding mature.”
Funds aiming to benefit from this shift and looking to raise capital from institutional investors, having an established presence in Japan can be an important differentiator. For cultural reasons, being physically present can be advantageous.
Howard notes: “Japanese investors place a greater important on establishing a rapport, both on a personal and organizational level rapport with fund managers than in most domiciles. Getting to know the fund manager to whom they are considering an allocation is as important to them as the specifics and outcome of the research and due diligence processes.”
But Japan is not only a source of capital, the country is also home to numerous investment opportunities. Of the approximately 3,800 listed companies in Japan, it is estimated that around 70% have no analyst coverage. This means that Japan-related hedge funds can gain a distinct advantage by being based locally.
“The proximity to the assets and companies that managers will be investing in is one of the primary considerations,” says Howard, “Private asset managers, whether real estate or private equity, need to have both ears and feet on the ground in order to most effectively source the deals and opportunities. Similarly, fund managers that are investing in listed securities need to be able to visit companies regularly. This is particularly the case in Japan where manager strategies tend to be less macro and more bottom-up research driven.”
Practical steps
Acquiring the appropriate license aligned to their objectives is the first step for a manager setting up in Tokyo. “While this would appear to be self-evident, we have observed managers take advice based on the path of least resistance without understanding the full regulatory landscape. We have for example encountered managers who apply for a Discretionary Management License when their ultimate objective was to raise capital from family offices and high net worth investors for their existing funds. Be sure to find and pay for experienced and sound legal advice,” observes Howard.
Managers would also be best placed creating a local organisation which can effectively interact with their offshore counterparts. This includes building a team capable of navigating the cultural divide between Japanese investors and foreign institutions.
Howard suggests: “The subtle issue here is that in many cases, local employees who have spent their careers in foreign investment banks find it difficult to navigate through the maze of the client Japanese institutions. However, the manager also cannot rely exclusively on local employees who are not familiar with the mindset of the offshore head office. Finding that mix and balance could very well be the biggest challenge.”
Being persistent and committed is also critical to success in Japan. “Business can be excruciatingly slow to develop in Japan and pressuring potential clients in an attempt to address their immediate issues and initial objections will backfire in this environment. If you do not have patience, do not come,” Howard advises.
Overcoming challenges
So, there are significant opportunities for asset managers in Japan – both in terms of raising capital and investing in Japanese assets – however, some challenges remain.
The money in Japan is concentrated within a small number of institutions in Tokyo; these control the vast majority of assets to be allocated to offshore managers. On the surface, this may appear to be an advantage for capital raising but finding the pools of capital within those institutions can be difficult.
Exacerbating the issue is the fact that most of the institutions are HR-constrained with only a team of a few people handling the thousands of emails and contacts from managers wishing to introduce and pitch their funds. This constraint often leads to them only evaluate and allocate nearly exclusively to those funds managed by the largest, most widely recognised brand name managers.
This does not mean other managers are not considered at all, but it may not be straightforward. Howard says: “If a manager falls under that top tier, it takes exceptional performance or a differentiated investment approach as well as persistence [in order to succeed]. Having a local presence demonstrates commitment to prospective investors and creates the foundation for developing a relationship with the investors which will lead to breaking through into those allocators.”
Teneo Partners provides the necessary local presence on behalf of asset managers through a broad array of capital raising solutions in Japan, from complete fund placement mandates to regulated service offerings and salesforce sponsorships.
Teneo Partners offers an array of distribution and marketing solutions for asset managers looking to raise capital from Japanese investors. We provide three principal service offerings. Comprehensive Fund Placement: active, full-service marketing of offshore funds to Japanese investors Global Fund Bank: digital data rooms for capital introduction to Japanese investors Customized Distribution Solutions: innovative offering of unbundled marketing and regulatory support services to asset managers. Teneo Partners is a fully licensed securities company, registered with the JFSA and authorised to engage in the business of Type 1 and Type 2 securities. We work with asset managers across all asset classes and categories. Our business plan as submitted and approved by the Kanto Finance Bureau of the JFSA permits us to market all manner of fund products to all investor categories including, and without limitation to, financial institutions, pensions, corporates, endowments, individual investors, intermediaries and gatekeepers.
Stanley Howard is Founder, Managing Director and CEO of Teneo Partners. He is a veteran of the fund markets in Japan with over 30 years of experience in dealing with Japanese investors and institutions. He completed his MBA studies at Northwestern University and initially worked at Smith Barney Harris Upham, then Morgan Stanley managing the foreign equity desk in Tokyo. Then, he joined the Tiedemann Investment and then served as the Japan President of Investor Select Advisors. Stan was born and raised in rural Japan, giving him a level of understanding of the culture that few foreigners have.
