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Where is the Japanese IPO market headed this year? February 28, 2008

Posted by fukumimi in Finance, Japan.

I predict that the Japanese IPO market is going to be very quiet this year. There were 121 IPOs last year, and a start of year survey of market professionals by the Nikkei saw 15 out of 39 respondents suggesting that we should see 100-120 IPOs. Just under 20% of respondents said the number was going to be <100. This would mean that around 40% of “professionals” think we might get more than 120 IPOs this year.

Yeah, right.

Try somewhere south of 86, which is the number in 1998.

The general uncertainty surrounding the financial markets doesn’t help and the IPOs so far this year have been dismal. Out of 7IPOs, 5 floated below the offer price (and have not made progress since).

There is also likely to be a one-off moratorium on IPOs at the end of the year, due to the transition of the scheduled introduction of electronic stock certificates in 2009. Estimates for the moratorium range from anywhere between 1~3months. Given the competence of the TSE in IT related matters, I would guess it will be at the long end of that range.

What that will mean is that the listed VC firms are likely to come out with bad numbers this year, with a real likelihood that some will plunge into the red.

Will Japanese VCs finally realize that the game has changed, and they need to change their business model? We shall see, but I am less than optimistic.

The old school firms have traditionally mostly engaged in a “spread it wide and thin” strategy, and have benefited from the increased IPO activity mainly in the new markets set up to allow smaller (but allegedly growing) companies to list.

However, my personal opinion is that it would be foolish (and plainly wrong) to expect the same throughput of IPOs going forward. Since the listing requirements were relaxed, we have had a significant number of companies listing due to a “flexible” interpretation of listing requirements by underwriters and exchanges, especially with regards to the fact that companies should have the potential for high future growth. Post-IPO performance for too many companies has been poor, as their growth has disappointed investors. I believe that underwriters and the exchanges have a lot to answer for. Now the average investor has caught on (the fact that private individuals make up so much of the volume is also a problem, given the size of companies and the relaxed regulations), hitherto inflated valuations have come down to more realistic levels.

The “new school” VC firms, either independent or affiliated with newly cash rich firms who got out onto the market when the valuations were still frothy, do not escape the change in investor sentiment. There have been too many hyped IPOs where investors comprised a significant proportion of the customer base. Drecom, which listed 2 years ago, is a perfect example. Drecom, at its post-IPO peak, was worth about $1B. Two years later, it is worth less than $40M. And in its second year as a public company (year ending March 07), posted a loss of nearly JPY249M on sales of JPY843M. The previous year saw a profit of JPY256M on sales of JPY703M. The year before that, it was JPY89M on sales of PY238M. Funny how the growth stagnates (and profits fall through the roof) pretty much as soon as the company lists. And public market investors appear to have caught on.

To put it bluntly, this is just one example of a case where the interests of the company, investors=customers, and underwriters were aligned, and were able to take advantage of the market’s naivety (easy to do when the majority of players are OAPs, housewives or people looking for an alternative for the pachinko parlour or horses) by creating a growth story and unrealistically insisting that the curve will continue post-IPO. I can’t imagine that the insiders were not well aware of the reality of the situation.

This kind of IPO is easy when you have companies able to list on single digit $M sales, and you have a large/cash rich customer/”strategic” investor who is willing to buy services preferentially from you in return for a potentially valuable equity stake. But this model only works when the valuations are in arithmetically silly territory, and the net sum required to be injected into the company (via equity and also via buying services to pad out the company financials) is likely to be less than the capital gain achievable in an IPO. If a company required sales in significant double or even triple digit $M territory, there just aren’t that many companies who could (and would) engage in this kind of financial engineering.

Everyone appears to still be turning a blind eye to this kind of behaviour, even though the pattern is clear to see. Pre-IPO investors and insiders may win, but investors (again, mostly private individuals) lose. I do understand the whole caveat emptor thing, but you can’t invoke that if you are saying that the market IS regulated (which it should be).

The failure of market regulation is clear to see. More than that, there is more than a whiff of market manipulation and even maybe fraud in the air. If this were the US, we’d have seen a bunch of shareholder lawsuits already.

The valuation hyping is aided and abetted by NO and also the media (and retail securities firms), which seems to be populated with way too many novices from the naive tat they churn out – that is of course if you believe that they aren’t also in on the game….

And yet the politicians, bureaucrats and market insiders keep going on and on about how to reassert Japan’s presence as a major financial hub. The Japanese markets, especially at the lower end, lack credibility. Without changes to the system (even if it means seeing a drastic cut in IPOs), savvy financial investors aren’t going to touch these markets with a bargepole. I can’t help thinking if it is all one big conspiracy to suck financial assets out of peoples’ saving accounts and into the pockets of certain interests.

MoF to post debt clock on homepage July 31, 2007

Posted by fukumimi in Finance, Japan, Politics.
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The Ministry of Finance is apparently going to post a “debt clock” on its homepage (reported here). The clock will show the amount of long term debt the nation is burdened with and how that is changing (increasing) with time . Japan’s long term debt is expected to rise to JPY773Trillion (JPY773,000,000,000,000) by year end 2007. That is about $60,000 for every man, woman and child. And increasing at a pace of JPY190,000 every second.

Then add the Financing Bills and short term debt, and
total debt tops JPY1x10^15….

Japanese debt clocks (such as this one here) have been around for years, one has to question why the MoF is getting around to doing this now. Are they seeing the light? Perhaps, but my money is on the theory that they are beginning a PR drive (with the cooperation of the media) to remind the public how indebted the nation is, as part of a plan to lower resistance to tax rises (and cuts in handouts) in the near future. (all the while continuing to funnel money to their pet projects and institutions which they will later join on retiring from the civil service, no doubt)

Update 8/1: Having had a look at the MoF homepage this morning, I don’t see the reported debt clock anywhere…. I’m going to keep an eye on the site to see if it does eventually appear. For a prefecture by prefecture breakdown, see here.

China invests in Blackstone May 22, 2007

Posted by fukumimi in Economy & Business, Finance, History, Japan.
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China is putting $3B into Blackstone which is preparing to IPO. (Times)

This is the tip of the iceberg. The same article goes on to say that $200B is earmarked for overseas investments.

Jin Renqing, the Finance Minister, has said that one of its models would be Singapore’s state-owned Temasek Holdings, which invests in a broad range of industrial and financial assets at home and abroad, including Chinese state-owned banks.

I’ve been saying privately to anyone who wants to listen (and to many who probably don’t) that Japan should be embarking on a similar strategy with a strategic fund which is aligned to Japanese interests and strengths. (I suspect the best way would not be to get the government to do it themselves, otherwise it will end up being another exercise in futility, staffed by clueless academic “experts” and others who will be busy trying to divert money to their (and their supporters’) interests as is so often the case)

I don’t think putting money into funds controlled by interests not necessarily aligned with Japanese interests is the way to go (but then I’m sure it was a cheap way for China to get in the current US regime’s good books – after all Swarzman and Bush Jr were dorm mates at Yale – China isn’t stupid), but the country needs a well financed fund to a) keep key Japanese interests from being transferred to competitive hands outright (such as this one, but even moreso the other business units belonging to same), and b) to take a stake in overseas assets which are aligned with the future direction of the Japanese industrial base. (I’m thinking strategic technology and access to resources (energy, raw materials, logistics))

Japan’s foreign currency reserves are only $900B (according to the IMF) compared to $1.2Trillion for China, but there is another $2.1Trillion sitting in the Japan Postal Savings system, more than half of which are in low yield Japanese Government Bonds. It would seem that it would be in the government’s interest to put some of that into play.

Give me and my buddies $100B or so to go to work with, and I’m confident that we can return more money to the Postal Savings system than the current investments, whilst simultaneously strengthening Japan’s strategic position. Hell, even with just $10B and taking strong positions in venture businesses and SMEs I can see a lot of opportunities. I’m sure some of the big industrial companies and financial groups would be willing to pitch in a little money, after all they seem to be perfectly fine financing overseas funds in a similar fashion.

I’ll even offer to work on a miniscule management fee. The fee depends on the focus of the fund, but I think Japan needs new hands-on players in the VC scene (ie people with a nose for technology who are with the programme and not playing the game 6~24 (or more) months behind the global leaders), as well as in the bigger PE sector. If that is the case, it’ll need more than a handful of people to manage of course. Still, I’d have absolutely no interest in trying to get rich off management fees, nor do I feel the need for a corporate jet.
I’m not holding my breath for the Japanese government to come knocking on my door, although there are certain individuals (ok, one) making the right noises.

Japan 2006 IPO roundup December 27, 2006

Posted by fukumimi in Finance, IPO, Japan.
1 comment so far

We’re all done with IPOs on the Japanese exchanges for this year.

Some headline numbers:

  • Total number of IPOs: 188
  • 20 failed to post initial prices above the subscription price
  • 36 companies (or perhaps 37, depending on how eBASE does. The company listed on Dec 26th but has yet to trade in two days, buys outnumbering sells by approximately 30:1, and looks like the initial trades will occur at a level of PER>100) posted opening prices which translated to an initial price trailing PER >100
  • Highest initial price PER was Drecom (Feb 9th), at 953.94
  • 8 companies had initial price trailing PER<10, and a further 2 companies were loss-making for the most recent financial reporting period

More stats when I’ve had a chance to get the data into Excel.

Mixi IPO Countdown (T-16 days and counting) August 29, 2006

Posted by fukumimi in Economy & Business, Finance, IT, Japan, Uncategorized.

I’m sure everyone’s counting down the days to the Mixi IPO (September 14th)…..

The TSE announced the tentative price range for the Mixi IPO, at between JPY1.3M and JPY1.55M. Seeing that every single IPO this year has seen offer prices at the upper limit of the announced range, we can say with a fair degree of confidence that Mixi will be offered at JPY1.55M per share. Expect the full 7100 shares to go on sale, including the 500 over allotment shares.

That is still going to mean incredibly slim odds for anyone who isn’t a heavy trading high net worth individual on good terms with their brokerage or an institutional investor to get their hands on even one single share as part of the IPO.

70,500 shares (total issued shares as of 9/14) at JPY1.55M puts the IPO valuation at JPY109.2B, or a shade under $1Billion. Financial market insiders are talking about the share price peaking at anywhere between JPY5M-8M, which would put the post-IPO frenzy peak valuation at between $3Billion and $5Billion……

Crazy? Well, not in the alternative reality that is the Japanese emerging markets exchanges. Remember, Drecom was up in $1B territory (now around $400M, PER still above 300 though…), and that company had approximately 1/10th the sales and earnings of Mixi….

Assuming that Mixi is around 6 million accounts, 70% of which are active (access within last month),  gives about 4.2M unique-users-per-month. Which values Mixi users at around $200 per user, which is significantly more than the per-user valuations seen in US M&A plays of community sites like MySpace or Flickr….

More on the BoJ’s Fukui June 22, 2006

Posted by fukumimi in Finance, Japan.

Governor Fukui's hole seems to be getting deeper and deeper.

Having previously stated that he didn't "make much" on his investment with the Murakami fund, it transpires that his original JPY10M had grown to JPY24.7M in 6 years or so. This during a time where ordinary people were earning about 0.1% annual interest on their savings accounts, or 0.001% annual interest on their basic accounts.

He also said previously that he had not realised any profit from his investment, yet 5 years ago, JPY2.42M was paid into his bank account. 

Major media outlets are also discussing the timing in february of his decision to withdraw his funds from Murakami & Co., specifically citing possibilities such as a leak regarding the investigation into Murakami's suspected insider trading, or the BoJ's monetary policy shift about which Fukui would have had full knowledge.   

The Bank of Japan’s Fukui and his dealings with Murakami June 15, 2006

Posted by fukumimi in Economy & Business, Finance, Japan.

The Bank of Japan's Governor, Toshihiko Fukui, is under pressure after it was revealed that he had put JPY10M in the care of Murakami, who was recently arrested on suspicion of insider trading.

Whilst I don't think anyone in their right mind would blame Fukui for having made the investment in the first place (when he was in the private sector), it does seem to betray poor judgement that he did not sever ties with Murakami when he became Governor of the Bank of Japan, a position in which he holds a great deal of power in influencing the Japanese economy and market conditions.

Fukui was called before the Upper House Financial Affairs Committee, and was criticised for not disclosing how much profit his investment has made, and for not giving a sufficient explanation as to why he contacted the Murakami Fund in february of this year to recall his funds.

Is it a stretch of the imagination to suggest that Fukui, being in an influencial position in the financial machine, heard about investigations into Murakami?

Fukui explained he did not think his investment in the fund was a problem because he did not have any control over how the funds were managed.

He however stated that he also holds some stock in individual companies, stock which came to be in his possession during his time in the private sector when he was a board member of several companies. He said he has "frozen" his portfolio, but he admitted he has not put them into a trust mechanism or similar.

Koizumi told the press he did not think there was a problem with Fukui's actions, as long as they are consistent with BoJ rules regarding this issue.

However, it seems that the rules themselves are inadequate, given that the Governor (or any other senior BoJ staff) is not required to make public declaration of assets, and there is no explicit rule preventing people in Fukui's position from having interests which may conflict with his job. Such a situation certainly is not allowed for members of the US FRB.

Japan needs to overhaul the environment around the stock market and the financial sector as a whole. To do so, prominent members of the financial community must believe in a new (to Japan), better, more transparent model. If Fukui was such a believer, he would not have maintained his financial interest in the Murakami Fund, nor his stock portfolio.

If Koizumi is serious about real reform, he needs to ask Fukui to step down.

PwC Arata June 14, 2006

Posted by fukumimi in Economy & Business, Finance, Japan.
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Having reported earlier that the Mainichi Shimbun was reporting that PwC's new Japanese firm Arata was going to employ 60-80 accountants transferred from ChuoAoyama, the Nikkei is reporting today that the headcount at Arata is expected to start at approximately 145, and will reach 800 by the end of the year. The number includes non-chartered accountants such as support staff.

Nevertheless, it seems like there is going to be a shift of a good proportion of the old ChuoAoyama crew over to Arata.

New name, same company?

Arata expects approximately 700 corporate clients on its books in the first year. I expect they will be pretty much all ex-Chuo Aoyama clients.

The Dowa problem, organised crime, local government and private companies June 14, 2006

Posted by fukumimi in Economy & Business, Finance, Japan, Society.
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There was a report in today's newspapers about a banker who was found dead in an apparent suicide, after being questioned by police in relation to an embezzlement case which has strong links to organised crime.

The issue revolves around one Kunihiko Konishi, who was, amongst other things, the head of a social welfare foundation called the Asuka-Kai.

He was also the head of the Asuka branch of Buraku Liberation League's Osaka prefectural confederation.

Konishi, who appears to have been a de facto dictator controlling the Asuka-Kai's affairs is suspected of embezzlement, but the evidence points to government officials and banks being aware of Konishi's embezzlement and turning a blind eye, or worse, aiding and abetting Konishi.

The banker who committed suicide was in charge of the Asuka-Kai account in the past. Other bankers who managed the account have also been questioned. The bank in question was the then Sanwa Bank (later UFJ Bank which is now part of MUFG). The banker, who was given a managerial post after his stint working the Asuka-Kai account (probably as a pay-off for work the bank knew was dodgy), is reported to have killed himself in protest at the bank's handling of this issue. The bank does appear to be taking the line that they were unaware and that this was just the act of a few rogue employees. Suicides of bank employees are not uncommon, but historically they rarely make the news. Even when reported, they are reported as being due to "overwork" or "depression", in an attempt to hide the real reason. I guess that when you have been conditioned for "job for life (if you are a "loyal" employee, and bonus points for doing "difficult" work)", and with little chance of decent reemployment at the kind of pay that big firm bankers are accustomed to, I can see how people might try to rationalise their actions. After all, so many people around them seem to be doing similar things, and the vast majority don't get caught. Most "problems" are sorted quietly. Unfortunately, if you happen to be "unlucky" enough to be caught up in something which makes headlines, the company shows its ruthless streak and offers you up for sacrifice. Not a very fair implicit contract, is it.    

It appears that not only was Konishi embezzling the money, he was reloaning money to organised criminal gangs. It transpires that the collateral he offered for the loans belonged to these gangs. Many of these dealings appear to have happened during the property bubble of the late 80's, and the statute of limitations probably means Konishi will get off with being charged for some nominal offenses relating to more recent embezzlement. Most of the loans made by the banks have been written off.

Osaka City officials first denied knowledge of any impropriety, then when confronted with evidence, admitted grudgingly that they were aware of irregularities.

Konishi appears to have been well known for his links to the organised crime syndicates, which is one reason government officials and bankers may have played along, so that they did not become targets of reprisals from criminal thugs. His face as the head of a group which promoted itself as promoting the welfare of the discriminated burakumin also no doubt helped his personal cause.

Especially in Western Japan, the burakumin discrimination problem is deep seated, and the government and local authorities have felt the need to assist these groups. However, rather than trying to cure the fundamental problem, it seems in this case (and probably many similar cases elsewhere) they threw money at the problem and tried to keep the figurehead happy. As long as that was achieved, the government and private businesses expected that Konishi would keep his side of the bargain and keep his minions under control (with the help of his friendly thugs, if necessary). It is basically an extortion racket, made even worse by the fact that it used the burakumin issue which in and of itself is a real and serious problem.  

There is no doubt in my mind that any form of discrimination against productive, law abiding, and loyal members of society is unacceptable. As the discriminated began to organise into a vocal group, it would seem in certain cases the leaders have exploited their position for personal gain. This is surely not isolated to burakumin related groups, it has happened the world over in relation to various minority rights movements and  also with trade unionism.  

Background on the issue can be read here: 





Murakami admits to insider trading allegations June 5, 2006

Posted by fukumimi in Finance, Japan, law, Politics.
1 comment so far

Yoshiaki Murakami held a press conference at the TSE at 11am this morning, where he announced the following:

a) With regards to the allegations of insider trading, he said he now belives that the Securites and Exchange Laws could be interepreted in a way which would implicate him on charges of insider trading. Rather than embarking on a long legal battle, he said he will admit that his actions appear in hindsight to have been in violation of the relevant laws, and has signed an admission saying that he understands he has broken the law.

b) With regards to the Hankyu Raliways TOB of Hanshin Electric Raliway Company, Murakami's funds will cooperate with Hankyu so that the TOB will suceed.

c) He will be severing his ties with the fund (which he said he hoped would continue without him), and will no longer continue working in his current line of work.

Of course, we shouldn't take Mr Murakami's apparent pre-emptive confessions at face value. However, I suspect that prosecutors will be tempted (or pressured) to just slap Murakami on the wrist, and not go digging in to find evidence of other crimes by Murakami, Horie, and other Roppongi Mori Bldg neighbours and their acquaintances.

I'm sure Murakami has enough money to live out the rest of his natural life any way he sees fit.

Personally I'm sceptical that someone like Murakami would have been ignorant of the relevant regulations. He is a vocal proponent of corporate governance, but that is a different issue from corporate ethics. Compliance issues can be tackled in two ways. Don't do anything illegal (or even grey), or, don't get caught. My gut feeling tells me his press conference is a well managed stage act, and that he know what he was getting into, and took steps to cover his tracks, but was just a bit too sloppy. Perhaps he misread how much Horie and Livedoor might be a liability where they to get caught doing something illegal (as they were).

With regards to the Hankyu/Hanshin TOB, Hankyu come out as winners. Hanshin lose their independence, but they have only their management to blame. Hankyu have a lot of political clout, and I suspect that the timing of the investigation into Murakami's dealings was not unrelated to Hankyu seeing a chance to swallow up a regional competitor. There are several private raliway companies in the Kobe-Osaka-Kyoto corridor, and a merger between Hankyu and Hanshin does not appear to be the best fit. This is a point Murakami has made in the past, and as far as this point is concerned, I am in agreement.

Hanshin basically just has its main east-west Osaka-Kobe route, which competes with JR and Hankyu. The best fit for Hanshin probably was Keihan Electric Railway Company, which has a Osaka-Kyoto route. A Hanshin/Keihan merger would have created a third Kobe-Osaka-Kyoto player, which would be better for competition compared to Hankyu and JR owning all of the Osaka-Kobe lines. The Hanshin and Keihan terminals in Osaka are less than a kilometer apart, and it would probably not have been much of an issue to connect the two networks in some way.

Many of the private railway companies have grown by owning property at terminus stations and building out residential developments along their lines. Hankyu appears to have done well in this regard by building out its north-south lines towards Takarazuka and Itami. The main Kobe-Osaka-Kobe corridor is already built up and players like Hanshin really don't have much room for geographical growth, having missed the boat.

Looking at the wider picture around the Hankyu/Hanshin deal, Osaka's economic condition remains a big worry looming over regional companies. Last week it was announced that Osaka has been overtaken by Kanagawa (south of Tokyo, including the cities of Yokohama and Kawasaki) in terms of population size. Further, economic growth in Osaka lags that of Tokyo or Nagoya, and the Osaka city is in dire financial straits, and it may be forced to declare bankrupcy at some point in the future. The Kansai area appears to lag in political reform also, with lots of stories of mismanagement, wastefulness and involvement in criminal activity implicating public officials. Discrimination issues are much more visible in Osaka than in cities in east Japan, as are incidents of people exploiting initiatives which are attempting to eradicate discrimination.