An eye on Asia: Building up in Japan

Last month, Tokyo based asset manager Topaz Capital launched what it claimed was the first independent private debt fund in Japan. Given domestic debt funds so far seem to be all affiliated or directly managed by the financial institutions, this may well be correct. The $190 million fund is the latest sign that the private debt industry is slowly building momentum in Japan.

Private debt in the country appears to be largely focused on three areas – property, mezzanine and, interestingly, a growing focus on SME special situations.

After the economic implosion in Japan in the early 1990s, the country became pretty familiar with international distressed debt investors. This familiarity only increased after the Asian financial crisis.

Eventually easy pickings grew scarce for such funds and though corporate distressed debt remains a viable investment play in the country, this is more a function of Japan being the world’s third largest economy combined with a workable system of creditor rights and underlying laws rather than any particular opportunity set.

The bulk of private debt investing in Japan now seems to be focused on either real estate or mezzanine financing.

Real estate seems to be making a real comeback in Japan, which was reportedly the third most active market globally for international real estate investors in 2013, after the US and UK. About $40 billion of transactions completed last year, a 70 per cent increase from 2012.

The financial crisis had a disproportionate impact on Japanese property markets, as the CMBS route of securitisation disappeared and the J-REIT market seized up. This created opportunities. Combine this with a real estate debt funding gap estimated to be $20 billion, based on the amount of real estate debt maturing in 2014 and you have the supply.

Positive results from ‘Abenomics’, yen depreciation against the dollar, availability of low-cost domestic bank loans and the bottoming out of rents and land prices in major Japanese cities have added to the pull for foreign investors.

New, foreign real estate debt funds have been successfully raised on the back of this opportunity. They include AXA REIM’s $260 million CRE debt fund, raised last November, which will support equity investments from foreign investors.

In May 2013 Canada Pension Plan Investment Board and GE Capital Real Estate announced a co-investment program to invest in central Tokyo office properties, focusing on core-plus and value-add opportunities. Fortress Investment Management also raised $1.65 billion back in 2012.

Another area that also continues to see growth is mezzanine financing. In November last year ICG and Nomura announced a 50:50 joint venture to target domestic mezzanine financing. Both parties committed to investing $125 million each into the JV, to be managed by a local fund management company that have formed. The pair plans to raise third party funds from domestic and international investors to supplement that amount.

Domestic mezzanine investor Tokio Marine announced a corporate-focused mezzanine fund with a balance sheet commitment of $100 million and a target size of $370 million, while Mitsubishi Corporation subsidiary Diamond Realty Management established an 11.3 billion yen private real estate mezzanine loan fund to finance large residential and commercial developments in Tokyo.

Real estate and mezzanine then continue to dominate. However a more recent area where there has been growth is in regionally focused debt based turnaround or ‘Business Restoration’ funds.

At the end of last year Yamaguchi Capital, part of Yamaguchi Bank, formed a $30 million fund focused on providing capital to SMEs in the Yamaguchi region in western Japan. This was the latest in a series of similar-sized regionally focused funds, which typically have backing from a government agency focused on SMEs that comes under the Ministry of Economy, Trade and Industry. Local banks were the other investors in the fund.

Apparently a key factor here is the expiry of the Japan’s Debt Moratorium Law, which has meant that SMEs cannot defer payments and is creating more distressed opportunities in this sector.

So it looks there are definite opportunities for private debt investors in Japan and one should also note that the Government Pension Investment Fund, at $1.3 trillion the largest in the world, is now actively looking to move into alternatives investing… It’s only a mooted few percent of the fund that’s been allocated to private debt, but that is still a whole lot of money. Good to get on their radar by being active in their home market!