June 29, 2018
The Ministry of Economy, Trade and Industry (METI) established the Study Group for Risk Capital Supply for the Fourth Industrial Revolution in October 2017. METI hereby releases a report summarizing discussions by the study group.
As the advancement of innovative technologies such as IoT, big data and AI, which is referred to as the Fourth Industrial Revolution, is bringing about changes in the structure of industries around the globe, methods of supplying risk capital based on the general thinking towards taking high risks in the long term are also changing significantly, with the roles of both sovereign wealth funds (SWFs) and public pension funds expanding.
In light of this circumstance, METI established the Study Group for Risk Capital Supply for the Fourth Industrial Revolution in October 2017. Since its establishment, the study group held discussions in order to clarify the challenges concerning risk capital both inside and outside Japan and to formulate measures to overcome such challenges.
2. Clarifying the challenges
Amid intensifying global competition with the progress of the Fourth Industrial Revolution, companies that successfully dominate global markets and create new industries notably tend to be those that achieve dramatic growth through making bold business decisions and revising and strengthening their business portfolios. Conventional methods of selecting prospective businesses and fields and transferring resources to them are no longer effective in enabling companies to catch up with rapid global economic growth driven by the large amounts of risk capital in circulation. Furthermore, it is pointed out that companies now need to have authentic power for management and good governance to properly utilize risk capital for their growth and to accelerate rejuvenation.
The Study Group ascertained such circumstances based on a wide variety of data and discussed the challenges and subsequent measures for Japanese companies in order to attract global risk capital as the source of their growth and strengthening their investment chain that supports strategic investment (a series of routes and parties leading to business investment that starts from contributors of risk capital). Additionally, the Study Group discussed means of strengthening companies' ecosystems as a whole including the development of human resources and intellectual property infrastructure bases indispensable for their dramatic growth, and not limited to fund procurement.
The Study Group focused on the global flow of risk capital and major players in the investment chain that supports the former and discussed the following concerning each of the suppliers, intermediaries and beneficiaries (investment destinations and managerial personnel) of risk capital, while giving due consideration to close mutual collaboration among them.
- SWFs and public pension funds are playing greater roles in supplying risk capital around the world. Public funds, public-private investment funds, universities, operating companies, and general households, which are suppliers of risk capital in Japan, are also required to play their respective roles in the new environment.
- In order to properly utilize a large amount of funds in the world as growth funds for Japanese companies, financial intermediaries that can correctly analyze prospective businesses and support companies' growth under good governance are necessary. Private equity (PE) and venture capital (VC) are both increasing in Japan, but the system supporting them are inferior to those in the United States or other countries, both qualitatively and quantitatively, and data on their performance has not been sufficiently collected or analyzed.
- In Japan, there are very few so-called “unicorn” unlisted startups that have achieved dramatic growth, nor are there many companies that have achieved growth after being listed (post-IPO startups). Reform of large companies to improve profitability and governance, which enables them to attract risk capital as growth funds, has only been undertaken in half measures. It is necessary to encourage companies to make efforts to improve productivity and profitability appropriate to their growth stages and to achieve growth, thereby enhancing their appeal as investment destinations.
4. Future Directions
Based on these discussions, the Study Group report presents the following as future challenges and directions.
- The organizational structure and roles of Japanese public-private investment funds as suppliers of risk capital should be reviewed after clarifying their operating principles and regulatory frameworks based on their fiduciary responsibilities. Their analytical abilities in the fields of technology, industry and policies, etc. should be strengthened and they should play a central role in supplying risk capital as globally recognized investors, together with private funds.
- It is necessary to create a mechanism facilitating investment from a long-term perspective to foster university ventures and support their innovation. For that purpose, possible measures include the promotion of M&A to accelerate growth through the use of corporate operating capital and the effective utilization of household financial assets.
- Data on performance of Japanese PE and VC should be collected and organized in order to attract funds from overseas institutional investors. Developing human resources through joint investment opportunities by public-private investment funds and supply of funds to local university-based venture businesses should also be promoted.
- Unlisted startups with the potential to become unicorns competing in global markets should be intensively supported by the public and private sectors, and support should also be provided to post-IPO startups to sustain their growth. Additionally, measures should be taken to encourage companies to hold dialogues with investors, overcome the second “Death Valley” they face in dialogues between investors, and enhance corporate value.
- The government should encourage large companies to reform governance in order to improve profitability and facilitate metabolism, and should also consider measures to promote dialogue between companies and investors and recommend delisting or business reform for companies whose corporate value is not improving.
Based on the Study Group report, efforts will be made to establish and implement concrete measures.
- Study Group for Risk Capital Supply for the Fourth Industrial Revolution: Summary Overview(PDF:301KB)
Division in Charge
Industrial Revitalization Division & Industrial Finance Division, Economic and Industrial Policy Bureau