Japan plans to harness the power of $1.5 billion from the world’s largest pension fund to create a desperately needed domestic start-up culture after decades of failure in the country’s financial sector.
Unveiling the “grand design” of Prime Minister Fumio Kishida’s “new capitalism” agenda, his cabinet this week announced a push for the government’s huge pension investment fund to increase funding for start-ups.
The move to boost the start-up sector is part of Kishida’s economic agenda, a hodgepodge of promises of investment in human capital, decarbonization and technology that has been criticized for its lack of clarity.
The government said it was working to increase the number of start-ups 10-fold in five years and would also promote other measures, including helping new businesses bid for public procurement projects and making it easier to founders’ access to loans.
“Fostering start-ups is the key to promoting the dynamism and growth of the Japanese economy and solving social problems,” the agenda says.
He didn’t give details on how GPIF funds would be channeled to start-ups, but Keidanren, Japan’s biggest business lobby, called in March for the 10 billion yen to be used ( $75 billion) available to the fund for alternative investments.
While GPIF invests most of its money in stocks and bonds, it may invest up to 5% of its total assets in alternatives such as private equity and real estate. By March 2021, however, it had allocated just a paltry 0.7% to alternatives – and of that only a small chunk went to private equity, which includes venture capital investments.
“The impact of using GPIF money to invest in start-ups must be huge given the gigantic size of the fund,” said Fumiko Kato, chief executive of start-up WAmazing, which provides foreign tourists to Japan with translation and reservation services. “This will not only help start-ups grow, but also improve pension fund performance through high potential returns.”
Kato added that given the difficulties in identifying what she calls “star hits,” it would make sense for GPIF to invest indirectly through venture capital funds with the necessary know-how.
Naoko Ogawa, director of Keidanren, said GPIF could make long-term profits with start-ups. “It’s great to see that most of our proposals for boosting start-ups have been incorporated into the grand design,” Ogawa said.
Although Japan’s start-up scene has become more active over the past decade, it still lags behind other major economies. According to CB Insights, Japan has just six unicorns, or start-ups worth more than $1 billion, compared to 614 in the United States and 174 in China.
A study by Japanese news provider Initial shows that start-ups in Japan raised about $5.8 billion from venture capitalists last year, a 46% increase year on year. previous, but still far behind the 329 billion dollars in the United States.
Ogawa said pension funds play an important role in financing start-ups in the United States. In Japan, GPIF investments could be followed by private companies such as insurance companies to help break a cycle in which underfunded start-ups have failed and thus discouraged further investment in the sector.
But GPIF’s investment in start-ups could face opposition within the relatively conservative Labor Department that controls the fund. Ministry bureaucrats have previously resisted former Prime Minister Shinzo Abe’s reforms that gave investment professionals greater influence over the fund and shifted its portfolio towards riskier assets.
The inherent risks of investing in small, often unprofitable companies were underscored last month, when Japanese conglomerate SoftBank’s Vision Fund, one of the world’s largest start-up investors, posted a loss. 3.5 billion yen annually.
Shingo Ide, chief financial engineer at the NLI Research Institute, said strong controls and increased transparency would be needed to ensure GPIF focuses on growth-oriented investments.
“The success of this program depends on GPIF being able to make pure investments without political interference – it absolutely won’t work if it uses some of its money to help start-ups because politicians ask it to. “Ide said. .
The agenda approved this week also included plans to help start-ups compete for national government contracts.
Yusuke Mizuno, who runs educational startup Life is Tech, backed the move, saying a program that facilitated bidding for contracts with local governments had helped spread adoption of his company’s software. .
“This program not only helps direct more funding to start-ups, but it also gives them a boost in terms of credibility,” Mizuno said.
Kishida’s administration has also pledged to eliminate the need for personal collateral or the use of personal assets such as houses or cars as loan collateral by start-up founders. An agency under the Ministry of Economy has already started to guarantee up to half of the loans granted by banks to technology start-ups.
“It takes money and time for tech start-ups to launch a business,” said Shinya Nanno of the Organization for Small and Medium Enterprises and Regional Innovation. “Banks, on the other hand, are more reluctant to lend money to them than to their general customers. So we want to help bridge that gap by sharing risk with banks,” he said.
Mizuno, of Life is Tech, said start-ups were crucial to Japan’s future.
“In a country with a shrinking population, innovation is key to making money – Japan should aim to become a country where entrepreneurs can grow and innovate. This is very important for Japan’s recovery,” did he declare.