VZCZCXRO1496
RR RUEHFK RUEHGH RUEHKSO
DE RUEHKO #1725/01 1760054
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R 240054Z JUN 08
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UNCLAS SECTION 01 OF 02 TOKYO 001725
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E.O. 12958: DECL: N/A
TAGS: EINV ECON OECD PGOV JA
SUBJECT: METI STUDY GROUP EXAMINES ROLE OF INVESTMENT FUNDS
1. SUMMARY: A Ministry of Economy, Trade, and Industry (METI) study
group June 16 released a report that describes the role of private
investment funds in Japan's financial markets. The report notes
investment funds can promote economic growth and contribute to
stronger corporate performance by acting as major suppliers of risk
capital, by encouraging greater transparency in corporate
management, and by contributing to an efficient reallocation of
human and management resources. The report urges a strengthened
dialogue between investment funds and the managements of listed
companies to improve public understanding of the funds' activities.
End Summary.
2. The Study Group on Investment Funds, established in February
2008 by METI's Industrial Finance Division, released a report June
16 entitled "Aiming at Funds That Contribute to Industrial
Development and Economic Growth." The stated purpose of the report
is to counteract what METI considers widespread misunderstanding
among the Japanese public of the function of investment funds in
global capital markets. The report examines the various types of
private investment funds, with a view to improving public
understanding of their role in the nation's financial system. The
report does not list funds by name nor does it rate different types
of funds as "good" or "bad."
3. The study group, under the chairmanship of Waseda University
Professor of Finance Yasuhiro Yonezawa, includes an M lawyer, a
senior accountant, two academics, an investment banker, the chairman
of the Japan Private Equity Association, several senior managers of
Japanese and foreign investment funds, and senior officials of the
Japan Business Federation (Nippon Keidanren) and the Japan Chamber
of Commerce and Industry.
Most Funds Make a Positive Contribution to Japan
--------------------------------------------- ---
4. The report identifies five broad categories of investment funds
-- venture funds, buyout funds, hedge funds, activist funds, and "a
new type of fund that invests in listed shares (including management
assistance funds, etc.)." The study finds investment funds
generally fulfill a positive function by supplying equity capital to
support corporate growth at all stages of the corporate lifecycle,
from start-ups to long-established listed firms. Funds, the METI
report states, also contribute to transparency of corporate
management, reallocate human resources, and provide strategic
management advice.
5. The report acknowledges a lack of understanding among the
general public about the different categories of investment funds.
Nevertheless, the report continues, it is relatively easy to prove
venture funds, buyout funds, hedge funds and funds that invest in
listed shares all contribute to Japan's economic growth and a
stronger corporate sector by providing liquidity to the equity
market and stimulating improvements in corporate value as reflected
in share price. The report is less definitive on the role of
"activist funds", noting that, based on available data, it is
uncertain whether these funds improve corporate value. The report
emphasizes the need for continued study on the impact of the
activities of "activist funds" on industry's development and
economic growth.
Hostile Takeovers Not Always Bad
--------------------------------
6. On the issue of hostile takeovers, the report emphasizes
investment funds have no "a priori relationship" with hostile
takeovers since operating companies also conduct hostile takeovers
against other firms. It notes that among the five categories of
funds the group examined, only activist funds have, so far,
TOKYO 00001725 002 OF 002
attempted hostile takeovers in Japan. The report notes further,
contrary to the negative image of the hostile takeover, such moves
can enforce discipline in management. It is difficult, therefore,
to make a sweeping judgement about whether the impact of hostile
takeovers on Japanese companies is always negative.
7. The report also identifies several challenges that need to be
solved for investment funds to fulfill their appropriate functions.
Such challenges include: lack of accurate understanding of
investment funds; lack of a consistent dialogue between companies
and investment funds; ensuring the social responsibility of
investment funds as shareholders; lack of coordination among
investment funds; concerns over the undersupply of risk money to
investment funds; and development, use and accumulation of human
resources for investment funds.
Investment Funds Play an "Indispensable" Role
---------------------------------------------
8. The report concludes investment funds will likely play an
indispensable role in the future in underpinning industrial
advances, and "creating a new framework for economic society through
the process of sophistication and diversification of their
functions." The latent strengths of investment funds have not yet
been demonstrated fully in Japan, the report observes, since
Japanese industries still lack an accurate understanding of the
functions and potential benefits of investment funds. The report
concludes by hoping its findings will stimulate further review and
discussion, contribute to better understanding of the significance
and functions of investment funds, and advance the dialogue between
business and investment funds.
SCHIEFFER