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After Mercari – Japanese asset managers see new era in venture capital investing

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By Tomo Uetake

TOKYO (Reuters) – The hugely successful IPO by online marketplace Mercari in June was a bonanza for its shareholders – and may transform lukewarm attitudes among mainstream asset managers about investing in startups, according to major Japanese institutional investors and industry officials.

Mercari <4385.T> became Japan’s first home-grown unicorn, with a pre-IPO valuation of more than a billion dollars in early 2016. Its value increased further and led to rich rewards for early backers who had invested in the firm either directly or through venture capital (VC) funds. The stock soared on its Tokyo market debut on June 19, doubling at one point.

“Venture capital used to be the ‘ugly duckling’ of private equity in Japan. Now we are seeing way more interest from institutional investors,” said James Riley, head of startup accelerator 500 Startups Japan. “Thanks to Mercari for making a big splash noticeable on a global scale.”

The large gains recorded by Mercari, which operates a popular smartphone app that allows people to trade used items online, should encourage more institutional players to look to domestic startups and other firms at an early stage of their development as a viable investment option despite the risks, especially given razor-thin returns on domestic bonds.

“Not only VCs but also other institutional people took part in Mercari’s late stage pre-IPO fundraising rounds. It was a big success for them,” said Soichi Kariyazono, chairman of the Japan Venture Capital Association (JVCA), referring to the unicorn’s debut on Tokyo’s Mothers market.

Its pre-IPO shareholders included Development Bank of Japan and Japan Post Capital. Neither will talk about how much they still own.

“When many institutional investors have a target annual return of 4 percent or so, Mercari’s late-stage investors had their funds more than double in just 1-2 years,” added Kariyazono.

In addition, its pre-IPO backers – through money they had in VC funds – included wider institutional investors, from insurance companies and banks to domestic pension funds, said Shinichi Takamiya, partner at Globis Capital Partners. He declined to name them citing confidentiality agreements.

Takamiya said Mercari was a potential game changer in Japan’s nascent venture industry, with “before-Mercari” and “after-Mercari” buzz phrases.   

Among the other recent unicorns was MTG <7806.T>, a manufacturer of beauty and workout products. It became the second Japanese unicorn to go public as the firm’s value soared above $1 billion shortly before its IPO last month.

And one of the next could be Sansan, a company that offers an app for managing business cards or business contacts. It has been attracting increasing interest from venture capitalists and other investors and its value has been growing.

In the pre-Mercari era, because Japanese startups were too small to attract big players, Japanese investors interested in the sector mostly looked to foreign ventures, primarily those in Silicon Valley.

GATEWAY TO PARTNERSHIPS

Nippon Life, a prominent Japanese investor in VC, had invested 60 billion yen ($540 million) in venture capital assets as of March 31, with half of that amount invested in domestic startups. The firm says it intends to increase its VC allocation but cannot say by how much.

In recent years, the insurer has wanted to increase its VC investments as it represents a fraction of its total assets of 66 trillion yen, but it has been difficult in practice because of the limited size of the domestic market, said chief investment officer Kazuhide Toda.

Nippon Life now sees venture capital not just as an investing route but also a gateway to finding possible partners in technology sectors it is keen on developing, such as FinTech or InsurTech – the use of the latest technology to transform the banking and insurance sectors.

“We plan to increase our exposure to venture capital assets, both domestic and foreign. We are keen to find opportunities that are attractive not only in terms of return but also help our core businesses,” said Toda. The Government Pension Investment Fund (GPIF), the world’s largest pension fund, is also looking to start investment in the domestic VC market, its officials said.

The Pension Fund Association of Japan, another big pension fund which manages 12 trillion yen on behalf of corporate pension funds, says it has invested in the sector for 4-5 years and plans to seek further opportunities.

“Japan’s startup ecosystem is evolving, with more institutional players participating in late-stage pre-IPO funding rounds,” said Shuzo Takahashi, head of private equity at the PFA. “We welcome it as a much-needed development to the industry.”

Their stance could lead smaller institutional investors to follow suit.

Rheos Capital Works’ president Hideto Fujino, a well-known fund manager whose Hifumi Fund <LP62006808> is the largest among all Japanese stock toshin funds, told Reuters he was considering starting a venture capital arm.

Even the Japanese government is stepping up support. The Ministry of Economy, Trade and Industry (METI) launched the “J-Startup” project in June as it seeks to breed 20 unicorns by 2023.

(Reporting By Tomo Uetake; Editing by Martin Howell)

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BlackRock's $6 trillion investment chief lays out how to guard your portfolio against more losses as the risks of more …

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Playing defense should be investors’ priority right now, according to the $6 trillion fund giant BlackRock.

The sell-off in global stocks this month has no doubt rattled market participants, but it’s equally given them the chance to find cheaper investing opportunities.

But BlackRock is urging caution for any investor who’s eager to go on a buying spree.

“We reiterate our call to focus on portfolio resilience,” Richard Turnill, BlackRock’s global chief investment strategist, said in a note to clients on Monday.

The sell-off precedes one of the most fruitful periods for short-term investors: earnings season. If companies announce quarterly profits that top Wall Street’s expectations, their shares can see larger-than-usual gains. And analysts expect good news from corporate America over the next few weeks, with S&P 500 companies forecast to report 20%-plus earnings growth for a third-straight quarter according to FactSet.

But with the reward of earnings season also comes risk.

“Companies that disappoint on third-quarter earnings and fourth-quarter guidance risk being acutely punished,” Turnill said.

The trade dispute between the US and China is one of the issues that investors are keenly awaiting guidance on, particularly from global companies that benefit from freer trade and cheaper production outside the US.

A trade war is the No. 1 threat to the US-led global economic expansion, according to Turnill.

“We like quality exposures within equities and prefer the US within developed markets due to earnings resilience and stronger balance sheets,” Turnill said.

“In fixed income, we favor short-end bonds but are starting to see opportunities further out on the yield curve in the U.S. and Europe. Over the long term, the rise in yields should eventually point to higher returns across asset classes. Yet we see good reasons why risks will stay elevated or increase further in the short term, pressuring returns.”

Here’s a further breakdown of BlackRock’s views on major asset classes over the short-term, specifically the next three months:

  • US stocks: overweight. Strong earnings momentum, corporate tax cuts, and fiscal stimulus underpin its positive view, and technology remains its most favored sector.
  • European stocks: underweight. Relatively muted earnings growth, weak economic momentum, and political risks are challenges.
  • Emerging-market stocks: overweight. Attractive valuations, economic reforms, and strong earnings growth support the case for EM stocks.
  • Emerging-market debt: neutral. BlackRock prefers hard-currency over local-currency debt and developed market corporate bonds. Slowing supply and broadly strong EM fundamentals add to the relative appeal of hard-currency EM debt. Trade conflicts and a tightening of global financial conditions call for a selective approach.
  • US credit: neutral. Sustained growth supports credit, but high valuations limit upside. BlackRock favors investment grade (IG) credit as a counterweight for equity risk. Higher-quality floating rate debt and shorter maturities look well positioned for rising rates.
  • Commodities and currencies: no consolidated view. Global supply constraints are likely to underpin oil prices. Trade tensions add downside risk to industrial metal prices. BlackRock is neutral on the dollar. Rising global uncertainty and a widening US yield differential with other economies provide support, but an elevated valuation may constrain further gains.

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Self-directed investing: A beginner's guide to getting started as a DIY investor

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Read more e-books and guides from The Globe and Mail

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Successful direct investors possess the right mix of personal traits, knowledge and skills, and spend the time required to get the job done properly. If you think direct investing is in your future, learn the investing basics first and start small.

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Reading the Leaves: Strategies for investing in legal cannabis

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With cannabis legalization upon us, our expert panel will cut through the noise and give solid advice for how to invest in the cannabis market.

There has been widespread enthusiasm for investing in cannabis companies in Canada over the past few years. Few investments have offered such explosive growth and as the country heads towards creating a legal market for adult consumption, expectations for the future of the industry are high.

But plenty of questions remain about just how profitable these companies can be after legalization on Oct. 17. Hardly any of them are currently profitable, there are few meaningful metrics upon which to base investment decisions and it’s difficult to determine whether strategies of cost containment and product differentiation will be effective.

Join us at 9 a.m. Tuesday, Oct. 16 to get answers on Canada’s newest industry.

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Analyst cites structural problems facing producers as the reason for his bearish view and points out uncertain pricing in the sector

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