Rise in Japanese IPOs Indicates Lack of Venture Capital Culture


The small but ambitious Institution for a Global Society Corporation debuted on the Tokyo Stock Exchange’s start-up market on Wednesday. In the first 15 minutes of trading, its shares had climbed 26% above the issue price; after 30 minutes, most of these gains had evaporated; after an hour, it had increased another 13 percent.

Beyond its sickening beginnings, the Tokyo-based company, which sells human resource assessment software to schools and businesses, could have a long and bright public listed future. But so far, IGS’s main claim to fame is that this was the last initial public offering of the busiest month in Japan for new listings. Some 32 companies have entered the Tokyo market since early December; seven of them on Christmas Eve only; 25 in the Mothers market.

This flurry keeps the Tokyo equity scene alive (albeit only from the small cap side). It makes the job profitable for IPO bankers. But it can also be a sign of something fundamentally flawed in Japan’s relationship with risk and the deployment of capital. There are gems in there, but a lot of these companies, investors say, unfortunately don’t seem ready to be listed.

At first glance, this extraordinary concentration of IPOs suggests an energetic capitalism at work. It also attests, to an optimistic glance, the dynamism of Japanese entrepreneurship despite its tarnished image.

The range of IPOs over the past four weeks has offered a wide choice of industries to bet on. Along with fintech offerings and several claiming transformational ‘artificial intelligence solutions’, companies include a social media account manager, a company that collects medical data, a producer of ready-made tea drinks and a start-up that manages beauty salon reservations.

And for Japanese retail investors who focus most of their attention on Mothers stocks, December’s IPO glut has generated exactly the kind of churn and marketability they expect.

Best IPO performance of the month (a provider of digital marketing solutions) is up nearly 250%; the worst (a cloud architecture provider for brokerage apps) fell 35% below the issue price in its early days – the worst day one dip for an IPO of this size in two decades.

But there is a much more pessimistic view of it all. The December IPO boom, bankers involved in several of the new stock issues admitted, seemed rushed. Almost panicked. Many companies, one broker noted, are far too immature to list. The mothers market – theoretically the most exciting end of the Japanese listed spectrum – has fallen nearly 17% since the start of 2021, far underperforming the broad Topix index of stocks in the first section of the TSE, which increased by more than 11%.

The fear, of which the year-end IPO rush is a symptom and Mothers’ underperformance a leading indicator, is that Japanese stocks will fare badly in 2022.

Mizuho Securities analysts suggest several sources of this concern, but one of them is MSCI’s November decision to reduce its weighting of Japan in its global index from 6.9% to 5.7%. More and more US funds decide that Japanese stocks are not worth studying. In the same week in December that 23 new stocks hit the market, foreigners extended their sales to a sixth week with a net dumping of $ 4 billion of shares in cash.

Coupled with the fact that the Bank of Japan is no longer buying exchange-traded funds at a rapid pace, this means that Japanese retail investors were the largest net buyers of shares in 2021 for the first time in a decade. Market veterans – and bankers advising companies on their IPOs – know this is not a segment with a risk appetite that can be counted on even in the medium term.

But the biggest problem, as the glut of IPOs illustrates, is that Japanese startups have very little choice but to register. Their decision to do so is made in the pernicious and long-term absence of a deep-rooted venture capital culture in Japan outside of big business.

Rather, the rounds of funding that in Silicon Valley and elsewhere would be satisfied by VCs must be satisfied in Japan with the expectation that stock market investors will be better distributors of capital early in a company’s life than founders. experienced start-ups. Add to that a whirlwind of well-equipped bankers promising quick wealth to founders and reminding them that listed status makes it easier to recruit talent and the stage is set. For both investors and newly created stocks, the December IPO party could quickly lead to a nagging January hangover.

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