Rising sum for private equity in Japan

Japan's move to scrape its onerous capital gains tax could help boost its current dwindling foreign private equity numbers.

Japan is seeking to become more attractive to the private equity industry, as a recent government proposal could make the country one of the cheapest places in the world to invest.

Limited partners in Japanese buyout and venture capital funds are currently subject to capital gains taxes of over 40 percent. Consequently, despite the fact that Japan is the world's second-largest economy, less than $4 billion in private equity and buyout deals occurred in the country last year, as opposed to $90 billion in North America and $37 billion in Europe, according to Bloomberg.

Japan's current tax law was introduced in 2005 following the sale of Shinsei Bank by a consortium led by US private equity firms Ripplewood Holdings and JC Flowers, a deal regarded as one of the most profitable private equity investments of all time. The two firms pulled in around $24 million in advisory fees immediately after the transaction, along with $2.1 billion in profits after the bank's shares were floated. They later earned another $2.8 billion when they sold a one-third stake in the bank.

The fact that the firms did not pay any capital gains taxes on the sale led to a public outcry and the passage of what has commonly been known as the “Shinsei tax”. However, that was then, and with the country now in the midst of a recession, boosting the amount of managed funds coming from overseas from the current paltry 4 percent has become a priority.

The current tax is expected to be revoked by 1 April, exempting foreign investors from paying capital gains taxes when stakes are held through funds with local subsidiaries. There will still be some exceptions, including a requirement that foreign investments must be more than a year old and should not make up more than 25 percent of a fund's capital.

Japan may also be taking action in response to other recent efforts by competing Asian markets to attract foreign private equity investment. For instance, Shanghai last year allowed private equity funds to set up a Shanghai-registered entity with the legal status of a local investment company and receive special tax treatment. This would put foreign firms on more equal footing with Chin's growing domestic alternative asset industry, while officials have also considered eliminating its 20 percent capital gains tax on hedge funds.

Meanwhile Korea has made it easier for funds and foreign banks to be the main shareholders in local banks.

With the race for reduced foreign investment dollars increasing, Japan's actions should make the country more competitive both regionally and with the US and Europe.

3i shifting China staff
British private equity firm 3i Group is closing its Hong Kong and Shanghai offices and relocating Chinese deal-makers to Beijing as part of an effort to cut costs. 3i currently has eight investment professionals based in its three Chinese locations. Two team members will leave the firm while the remaining six will move to Beijing. Partners Anna Cheung, based in Hong Kong, and Albert Xu, based in Shanghai, are relocating and will lead the expanded office. Earlier this month 3i announced plans to lay off 15 percent of its workforce as part of a “thorough review of the group's resourcing needs” in reaction to worsening market conditions. In addition to improving efficiency the firm is also focusing more on deals in China, where 3i has invested nearly $300 million since 2003. Traded on the London Stock Exchange, 3i's shares dropped to an all time low of £2.43 in December, and have since recovered slightly, trading at £3.28 today.

HarbourVest's listed fund of funds sees values drop
HarbourVests's Euronext listed fund of funds, HarbourVest Global Private Equity (HVGPE), has reported its net asset value as of 31 December 2008 at an estimated $650.3 million, or $7.84 per share – an 11.1 percent decrease from the 30 November 2008 estimated NAV per share of $8.81. “This change was primarily driven by yearend valuation provisions taken by the HarbourVest funds to reflect the investment manager's preliminary estimate of year-end 2008 valuation declines,” HarbourVest said in a statement. The firm noted that the declines were partially offset by foreign currency gains as the euro appreciated approximately 10 percent against the US dollar during the month. The methodology used to calculate the valuation provision takes into account both actual third-quarter declines in the HarbourVest funds as well as decreases in public markets during the third and fourth quarters of 2008, the firm said. “In general, the NAVs for buyout fund of funds have been reduced to reflect 75 percent of the public market declines experienced by the relevant industry-weighted indices in the second half of 2008 (S&P indices for US fund of funds and MSCI indices for non-US. fund of funds),” the firm said. “For US venture fund of funds, fourth quarter 2008 NAVs reflect the same proportional declines relative to the industry-weighted S&P indices that were experienced in the third quarter of 2008.”