JAPAN Trends and Developments Contributed by: David Azcu (Simpson Thacher & Bartlett LLP) and Mikito Ishida (Mori Hamada & Matsumoto), Simpson Thacher & Bartlett LLP
to the Proto Corporation MBO, and Taiyo Pacific Part - ners’ tussle over Roland DG). Re-emergence of private credit In what surely would have been a surprise only a few years ago, private credit has emerged as a promising growth area in the Japanese alternative funds land - scape. Japanese corporates continue to face financ - ing constraints from traditional bank lenders, particu - larly in the mid-market. This has created opportunities for managers to establish Japan-focused credit funds targeting direct lending and special situations. Inter - national sponsors are building origination capacity in Tokyo, while domestic financial groups are exploring partnerships to expand into this space. Many of Japan’s largest public and institutional inves - tors are also under pressure to diversify allocations, with alternative credit representing an attractive means of achieving stable returns. The development of a robust private credit market is expected to be one of the most important structural shifts in Japan’s alternatives industry over the next several years. Continued strength in the real estate and logistics sectors Real estate and logistics remain a cornerstone of the Japanese alternative investment landscape, consist - ently representing some of the largest funds raised in the market. Low interest rates, strong demand for logistics and residential assets, the continuing weakness of the Japanese yen against major foreign currencies, and international interest in core, core+, value-add and opportunistic funds have led to strong interest in real estate among sponsors, particularly foreign sponsors in recent years. Regional sponsors have launched new Japan-heavy funds, while global sponsors have raised multibillion-dollar vehicles with a significant allocation to Japanese assets.
Despite strong interest in the sector, there are still some challenges to forming and raising Japan- focused real estate and logistics funds. The structures used to tax-optimise Japan-focused real estate funds typically require establishing entities and substantial legal presence in Singapore, which can be an obstacle to emerging sponsors who lack the resources of more established regional and global firms. There is also a need for substantial local talent, which tends to be in short supply in the midst of increasing demand for capable multi-lingual professionals. Furthermore, while large institutional investors are often experienced in investing into foreign funds and capable of evaluating English language materials, smaller investors with less international experience and fewer bilingual resources may require more local - ised support. Forming a domestic feeder or parallel fund that meshes with a global sponsor’s master fund can become a major endeavour, particularly for a first fund, and requires time and substantial devotion of resources. In any case, Japanese investors investing into Japan- focused real estate funds may be disinclined to pay hedging and Fx costs to facilitate investment by non-Japanese investors, creating greater need for bespoke tailoring of funds products. These challenges have likely held back greater growth of real estate and logistics funds, as well as other strategies, in Japan.
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