MUFG Investor Services, the asset servicing arm of mega-bank Mitsubishi UFJ Financial Group, is seeking to develop Japan’s nascent fund finance market.

Japan’s private equity market has expanded in recent years as both domestic and international firms have been drawn in by take-privates, business succession events and turnarounds.

As a new wave of Japan funds come to market, fund finance providers such as MUFG Investor Services are hoping to capture opportunities that could emerge in lockstep with the market’s development.

“With many funds coming into Japan, as well as the rising domestic homegrown Japan GPs and the increased sophistication of the Japanese LPs, fund finance is something that people have started to talk about there,” Fi Dinh, head of fund finance for Asia-Pacific at MUFG Investor Services in Singapore, told affiliate title Private Equity International.

“A lot of [the existing use] is mostly by the international sponsors with Japan funds that will put the facility in an offshore structure. There is a handful of domestic Japan fund financing setting up with its own unique structure, but that is still very early stage, which is exactly why we feel the need to really bring the market up.”

The Fund Finance Association will host its first Japan conference on 25 April at MUFG’s Tokyo headquarters. The event is designed to “educate the markets and hopefully bring that in with the rest of Asia,” Dinh said.

Worlds apart

Asia-Pacific has been buzzing with fund finance activity for some time now. However, industry professionals have largely been unclear about who is active and in what products – and how much activity there really has been, Private Funds CFO reported last year.

Banks dominate fund finance in the region, according to an October report from law firm Mourant. Alternative lenders represent only 25 percent of the Asia market, compared with 80 percent in the US. Some of the region’s active lenders today are understood to include Australia and New Zealand Banking Group, ING, National Australia Bank, Societe Generale Group and United Overseas Bank.

Asia-Pacific subscription credit lines were cheaper by 50-100 basis points as of October, PEI reported at the time. Though some US and European firms were looking to the region as a source of cheaper financing, its pricing also threatened to deter lenders there in favor of markets where they could earn a better return.

Dinh has been active in Asia-Pacific since 2018, having relocated to Singapore from London to launch ING’s fund and insurance finance business in the region. She joined Citi as a fund finance director in 2021 before moving to MUFG Investor Services in December 2022.

Much has changed since Dinh’s arrival. As of 2017, the Asia-Pacific fund finance market was estimated to have been – at most – a quarter of the size of its US counterpart, according to Global Legal Insights’ Fund Finance 2018 report. At the time, less than half of the funds active in Asia-Pacific were thought to make use of fund finance.

“This new tool has become a lot more mainstream in APAC since 2018,” Dinh noted. “Most of the folks that I speak to – especially the pan-Asia funds – would already know about that it or have it in place, with the exception of a very hot market that’s coming up: Japan.”

Finicky financials

Entering Japan will require significant legwork. “Fund finance was very established by 2018 in the US and Europe and a lot of the standard terms were market accepted,” Dinh added.

“And then you’d go to Asia and because it was new, we used to have a lot of negotiations, and people wanting to merge the standard terms in Europe with the standard terms in the US to get the best of all the terms. From the early conversations with the Japanese market, it’s very similar, and so it’s basically an education process to be able to justify why and understand the context and explain that, rather than just saying: ‘Well, it’s market standard.’”

What’s more, Japanese private equity is not without its idiosyncrasies. The tax treatment of private equity funds in the country is considered complex relative to other markets, with the choice of fund structure having significant implications.

Funds in Japan are also subject to a 25/5 rule, meaning the country does not impose tax on capital gains from the sale of shares of a Japanese company by a non-Japanese entity unless that person or business owns 25 percent or more of the Japanese company and disposes of 5 percent or more in the same tax year, according to Thomson Reuters Practical Law. This rule is reflected in the way some funds are structured.

“In Japanese private equity structures, you have the 25/5 rules, which means you will have multiple parallel sleeves in a fund that cannot be cross-collateralised,” Dinh said.

“So the biggest area [of negotiation] for terms is really the construct of the borrowing base and how these leads interacted, which is unique to Japan. And then also, because of this unique structure of on and offshore, you have the language barrier, because the Japan vehicles will all be in Japanese – so some might get lost in translation, particularly around the reporting requirements and in what form it should be, etc.”

NAV-ing a go

Though MUFG Investor Services so far only offers subscription credit financing in Asia-Pacific, the firm in January appointed Tim Bulmer, former global head of structuring in fund financing at Credit Suisse, as global head of asset-backed fund financing. Bulmer, who is based in London, has been tasked with building the firm’s NAV financing business globally.

“NAV financing can mean different things to many different people,” Dinh noted. “We don’t have the asset-level capability so we wouldn’t look at NAV financing for the time being for individual direct assets, but NAV financing for us means funds of funds. We already have quite a significant book of funds of hedge funds NAV financing, and we’re looking to grow that into the private capital space – such as funds of private equity funds.”

NAV financing remains extremely nascent in Asia-Pacific, lenders noted at the Fund Finance Association’s APAC Symposium in Hong Kong last year. As one lender noted, London is by far the world’s pre-eminent NAV financing hub, with the US yet to catch up and APAC “a decade” behind.