At present, there is a movement in Tokyo (and Japan) to attract global investment funds to Japan, as indicated by the fact that the Tokyo Metropolitan Government launched and is pursing the concept of being a “financial city”. However, there are some aspects of Japan’s current investment fund regulations that make foreign investment funds difficult to enter into Japanese market. I would like to point out three things that could possibly be modified to foster investment fund activities in Japan.
The first point is changing the fund regulation regarding subscription and investment management to a group basis. Under the current Financial Instruments and Exchange Act (FIEA), only the GP entity of a fund is allowed to conduct offering and management business under the special exemption of the FIEA. However, under the U.S. fund regulations, a group company of the GP entity is treated in the same way as the GP entity, subject to the condition that certain requirements are met. In many cases, the actual day-to-day operations of global investment funds are carried out by another operating company within the group that is not the GP entity. Therefore, global investment funds established based on the standard US fund structure must take into account the differences between the US and Japanese regulations when entering into the Japanese market. This should be changed if Japan wants to attract global investment firms.
The second point is giving more flexibility to formation of internal funds. Global investment funds often create small internal funds (partnership vehicles), in which only related parties of the investment firm participate. However, under the FIEA, the creation of such small funds must meet the same regulations as those for large funds that solicit outside institutional investors. As a result, it sometimes becomes difficult to provide the same incentive package to Japanese PE fund managers as to those of the overseas managers within the group.
The last point is eliminating the overseas investment restriction for investment limited partnerships. An “investment limited partnership” is the most common vehicle currently used to set up an investment fund in Japan. However, under the relevant law, investment in overseas companies by an investment limited partnership is limited to less than 50%, and in practice, it is perceived that much lower percentage (than 50%) can be invested in overseas companies, since this 50% threshold is calculated on contribution amount basis and must be met throughout the life of the fund. For this reason, it is difficult for funds that invest globally to use investment limited partnerships, and in some cases they are forced to set up their funds outside Japan, even if all of the fund managers are Japanese and all investors are Japanese companies.
Of course, it is natural that regulations differ from country to country. However, in order to attract global funds from overseas to Japan and to increase investment funds established in Japan, Japan should consider a way to ensure that overseas funds can maintain their existing framework in Japan without spending too much cost for local customization.