JAPAN Law and Practice Contributed by: Mikito Ishida (Mori Hamada & Matsumoto) and David Azcu (Simpson Thacher & Bartlett LLP), Mori Hamada & Matsumoto
1. General 1.1 General Overview of Jurisdiction
of foreign funds that can be marketed to Japanese investors. The following six types of domestic fund structures may be formed under Japanese law and are com - monly used by sponsors for their private equity funds. Their key characteristics and common uses are sum - marised below. Nin’i Kumiai (NKs) A nin’i kumiai (commonly referred to as an NK) is a type of contractual partnership that has been permit - ted under the Japanese Civil Code since it came fully into force in 1898. As a contractual partnership, an NK is governed under a written partnership agreement. It is a basic pass-through entity (ie, treated as being tax transparent) for Japanese tax purposes. An NK does not have separate legal personality under Japanese law. In an NK, both the fund manager and its inves - tors (ie, its “members”) are deemed to be partners in a general partnership. All partners therefore generally share in the profits and losses of the partnership and have unlimited liability. To mitigate unexpected losses, NK partnership agree - ments commonly declare that the fund manager will be ultimately liable for losses of the partnership, although third parties that transact with the partnership may still be legally entitled to assert claims against the partner - ship’s investors for their losses, notwithstanding any contractual agreements in the partnership agreement to the contrary. NKs are commonly used for small joint ventures, legacy fund structures and syndications, although the potential lack of limited liability can be a concern for investors. Investment Business Limited Partnerships (IBLPs) An IBLP (sometimes referred to by Japanese prac - titioners as an LPS) is a form of limited partnership established under a law enacted specifically to create this vehicle: the Limited Partnership Act for Investment (IBLP Act), which was enacted in 1998 to promote investment funds in Japan. The IBLP is the most com - monly used vehicle for private equity funds in Japan. It is based on the Civil Code partnership (NK), but with several additional features introduced by the special law, the most significant of which is the introduction
Depending on the metrics, Japan is currently the world’s fourth- or fifth-largest economy by GDP, with sophisticated and well-developed debt and equity capital markets, and is home to many world-leading corporations. So it may be surprising that, until recent - ly, the Japanese alternatives industry lagged behind that of other developed countries. However, Japanese fundraising and M&A activity has increased signifi - cantly over the past decade, and Japan’s domestic alternatives investment industry is becoming increas - ingly attractive to both domestic and foreign investors. Private equity has a clear and unique value proposi - tion in Japan, as a majority of the economy is made up of small and medium-sized enterprises, in addition to there being a persistent under-penetration of M&A, a paucity of succession options in light of Japan’s declining birth rate and rapidly aging population, and high inheritance taxes. Against this backdrop, recent government policies have directly and indirectly helped to foster the development of the domestic alterna - tives industry. The tightening of listing requirements on the Tokyo Stock Exchange has made take-private transactions by private equity firms more attractive, and reforms in law and at self-regulatory organisations such as the Japan Investment Trust Association have helped to make it easier for Japanese investors (par - ticularly high net worth and retail investors) to access historically higher performing alternative investments
for the first time. 1.2 Key Trends
Please refer to the Japan Trends and Developments chapter in this guide for information on key trends.
2. Funds 2.1 Types of Alternative Funds and Structures A variety of alternative funds can be established in Japan, including buyout, venture capital, private cred - it, hedge funds, real estate funds including J-REITs (ie, listed real estate investment trusts), and infrastructure funds, and there are relatively few limits on the types
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