US companies court Japanese moneymen for venture capital
Boston — Venture capitalist Mitsuo Goto is a bit chagrined. American entrepreneurs have been ringing phones all over Tokyo's financial district, trying to find newly wealthy Japanese investors to buy into young American companies. ``They all know that Japan has the biggest money in the world now,'' Mr. Goto says through an interpreter.
He's happy to oblige, which is why he was in Boston and a handful of other North American cities this month talking to business groups about venture capital. The problem is that his company's initial foray into the US venture capital market was, to say the least, disappointing.
``So far, we have had seven investments in the US,'' he says, adding with a chuckle: ``Six of them failed.''
That doesn't mean the Japanese have given up on the United States. In fact, Japanese investors are to be found everywhere - in the bond market, the stock market, buying property, buying art, setting up factories, and taking over US companies. Venture capital - getting in on the ground floor of a hot new American company - is a natural extension.
Goto is executive director of Japan Associated Finance Company Ltd. (JAFCO), Japan's largest venture capital firm. Like most things Japanese today, JAFCO is very, very wealthy. The fund has assets of $733 million, giving it a war chest that outstrips the biggest American venture capital funds by several hundred million dollars.
``We've not really seen this kind of thing before,'' observes Fuhrman Nettles of Robert Stanger & Associates, which monitors venture capital funds.
JAFCO is a 15-year-old joint venture of Nomura Securities, Nippon Life Insurance, and Sanwa Bank. It and its parents began small. But like JAFCO, its parents are now giants - respectively, the world's largest securities firm, the largest life insurer in Japan, and one of Tokyo's five biggest banks.
This financial firepower is mostly directed at Japanese start-ups. But Goto says his fund, with offices in New York and San Francisco, is keen on doing its part in ``recycling'' Japan's huge trade surpluses into United States business.
``In simple terms,'' he says, ``our aim is to direct a flow of capital from the Tokyo capital market to the world.''
American high-tech is No. 1 on his list. But given the surge in US exports, Goto says, his company is also looking at opportunities in mature US industries like steel.
``From now on,'' he notes, ``JAFCO is going to make a steady approach to US companies.''
JAFCO has regrouped after its early setbacks. Now, Goto says, it plans to be a bit more of the silent partner, preferring to co-venture with established US investors. This will spread the risk in the very risky venture capital business. JAFCO is also working more closely with Big Eight accounting firms and US law firms to find worthwhile companies.
``If we can use these people, we can judge better than before,'' Goto says.
JAFCO is part of an overall Japanese investment trend of diversification out of the US Treasury bond market. As an institutional investor, Goto says he sees real value in the US today. The strong yen, and the relatively modest price-earnings ratios in the US market compared with Japan, are very attractive. He also says he believes that the US budget and trade deficits can only ease up now, ``so the direction is one of recovery.''
More fuel for US purchases could soon come from Japanese life insurance companies, according to specialists on Japanese finance. Insurers will soon be able to pay interest out of capital gains as well as dividends. This, notes Hideo Karino of Nikko Securities, may mean less emphasis on yield (bonds) and more on capital appreciation (stocks).
On a grander scale, Japanese companies - like their European counterparts - are increasingly looking at corporate takeovers in the US. Bridgestone last month acquired Firestone for $2.6 billion. Also last month, the Aoki Corporation and Texas financier Robert Bass teamed up to buy Westin Hotels for $1.5 billion. Last fall, Sony bought CBS Records for $2 billion.
Goto thinks big American companies are missing out right now on an opportunity to tap Japanese capital markets by letting their subsidiaries in Japan go public. Raising money would be very easy, he says, given the ultra-high levels at which Japanese investors value local enterprises.
He notes, for example, that Baxter Travenol Laboratories of Deerfield, Ill., and Avon Products of New York both harvested huge gains by letting their subsidiaries go public in Japan. While Baxter Travenol trades on the New York Stock Exchange at a price 21 times earnings, its Japanese subsidiary, International Reagents Corporation, trades on the Osaka Stock Exchange at 51 times earnings. Avon's price is 11 times earnings in New York; Avon Products Company fetches 29 times earnings in Tokyo.
Such is the altitude of a stock market. At $3 trillion, Japan now accounts for almost 42 percent of the world's stock market capitalization. The US is No. 2, at $2.2 trillion and 31 percent of the world market. With all that capital, Japanese moneymen such as Mr. Goto are becoming increasingly visible in the US.