T E N E O PA R T N E R S
Structuring your business for effective capital raising in Japan By Stanley Howard
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ffective capital raising is generally a key, if not the primary objective of global fund managers when considering whether to establish a presence in Japan. Despite the Covid-19 induced acceleration of conducting business within virtual meeting environments, the positive impact of having a physical presence in Japan should not be minimised. More than in other countries and regions, the importance of personal communication and relationship building in the Japanese culture is vital to sustained success. But how asset managers manage to achieve that objective in a cost-efficient way is a critical issue. There are two principal approaches to raising capital in Japan. The first is the securities distribution approach whereby funds are placed directly with investors by distributors. The second is the asset management approach whereby a manager offers funds based on a contractual investment management mandate with an investor. The approach that an asset manager takes in respect to capital raising will depend on their strategy, which will in turn determine the licenses that are required, and the structure used for the business. Securities distribution in Japan can only be conducted by an entity that is registered with the Financial Services Agency (“FSA”) as a Financial Instruments Business Operator (“FIBO”), comparable to a fully licensed broker-dealer in the US. If marketing shares of a corporate type fund or units of a trust type fund, the FIBO will need what is referred to as a Type-1 license. If on the other hand, the FIBO is placing partnership interests, it will need a Type-2 license. In either case, an 8
asset manager that decides to rely on the securities distribution approach will need to decide whether to incorporate a company in Japan and apply for their own FIBO license or to work with an established FIBO as their outsourced placement agent. This can be a difficult choice since the first option that offers complete control of the branding and marketing process is both expensive and time consuming. The other more economical option leads to the delegation of the sales and marketing strategy to a third party that may not execute in a manner that is satisfactory to the asset manager. The asset management approach also comes down to a choice of incorporating locally and subsequently applying for a Discretionary Fund Management (“DIM”) license or working through an established local entity already holding a DIM license. The fundamental difference between the two approaches is that in the case of the asset management approach, the manager cannot sell funds. Rather, placements are made by executing a discretionary mandate agreement with each separate investor. Establishing its own company with the requisite fund management license enables an asset manager to enter into those direct agreements with allocators such as pension funds. But the set-up and approval process is slow and the regulatory requirements high. Working as a sub-contractor to an existing domestic DIM is a faster and less expensive alternative but the downside is that the asset manager will have a difficult time in developing any meaningful relationships with the pension funds. Before asset managers despair the difficulty in acquiring a foothold in Japan, they should TOKYO FUND SERVICES IN FOCUS | Dec 2020
