JAFCO Co. Ltd.

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JAFCO Co. Ltd.

1-8-2 Marunouchi, Chiyoda-ku
Tokyo, Japan
Telephone: (+81 03) 5223 7536
Fax: (81 03) 5223 7561
Web site: http://www.jafco.co.jp

Public Company
Incorporated:
1973 as Japan Associated Finance Co. Ltd.
Employees: 360
Sales: ¥33.12 billion ($309.54 million) (2005)
Stock Exchanges: Tokyo
Ticker Symbol: J.JAF
NAIC: 523999 Miscellaneous Financial Investment Activities

JAFCO Co. Ltd. is Japan's leading private equity finance group. The company operations include venture capital, buyout investment, and the management of venture capital-oriented funds. The company's investments target four primary markets: Incubation investments, seeding new startups; Venture Investments of companies in the early development phase; Development Capital Investments of companies entering their growth phase; and Buyout Investments of established companies. JAFCO is an active investor; in 2005, for example, the company invested in more than 140 companies, nearly two-thirds of which were venture investments. As part of its investment operations, the company also creates funds, lining up a group of investors. Many of the companies backed by JAFCO are then guided toward their initial public offering (IPO). Since its founding in 1973, JAFCO has invested in nearly 3,000 companies, and has completed IPOs for nearly 750 of its investments, including 23 IPOs in 2005. The company has also overseen more than 60 venture capital funds. The company is especially active in the Japanese market, but is also present in the United States, China, Hong Kong, South Korea, Singapore, and Taiwan. JAFCO itself is listed on the Tokyo Stock Exchange. Nomura Holdings controls nearly 21 percent of the group's stock. In 2005, JAFCO posted revenues of ¥33.12 billion ($309.54 million).

PIONEERING JAPAN'S VENTURE CAPITAL MARKET: 197291

Japan's rapidly growing economy in the post-World War II era, and particularly the country's effort to establish itself as a global technological and manufacturing leader, created in its turn a strong venture capital investment market. Until the 1970s, however, Japan itself lacked a homegrown venture capital market, and instead tended to look overseas for investment capital. The first Japanese venture capital companies began to appear in the early 1970s. Between 1972 and 1974, some eight private venture capital firms were created. These firms were generally created as partnerships between Japan's largest financial companies, particularly banks and securities brokers, such as Mitsubishi, Nikko, Sumitomo, and Yamaichio.

In 1973, a group of some of Japan's largest financial institutions, including Nomura Securities, then the world's largest, as well as Nippon Life Insurance, the country's leading insurance company, and Sanwa Bank, the leading bank in Japan, joined together to form a new venture capital firm, called Japan Godo, or Japan Associated Finance Co. Ltd. (or JAFCO). While the company counted 15 in its group of investors, Nomura emerged as JAFCO's major shareholder.

From the start JAFCO targeted a range of industries, and by 1975, the company had already brought its first investment to the IPO market, listing appliance maker Shintom on the Tokyo stock exchange in July of that year. Also that year, the company brought Tateho Chemical Industries, which specialized in producing electrofused magnesia and other chemicals, to the JASDAQ stock exchange. Other successful IPOs completed during the 1970s included industrial valve producer Kitz; paint manufacturer Asahipen; Nippon Cable System; the supermarket groups Maretsu, Inageya, and Chujitsuya. JAFCO's string of IPOs continued into the early 1980s, and featured Sanshin, a civil engineering group; Chiyoda, a shoe retailer, and, in 1981, Aplus, a consumer finance group. JAFCO began its own geographical expansion, opening its first branch office, in Osaka, that same year.

The Japanese government had helped to facilitate the country's venture capital market by providing new vehicles enabling investors to exit their holdings more quickly, such as the creation of an over-the-counter market and the JASDAQ technology index. JAFCO itself helped pioneer another vehicle, the limited partnership investment fund, launching the country's first fund in 1982. Soon after, JAFCO, which had started out with a capital of ¥500 million, underwent a major capital increase, to ¥2 billion. In that year, also, the firm opened its second branch office, in Nagoya.

JAFCO soon began to target the international market as well, and in 1983 the company established its first foreign subsidiary, JAFCO International (Asia) Limited. The company's Asian region investments including Singapore Airlines, which made its IPO on the Singapore exchange in 1985; Jurong Shipyard, which went public in 1987, also on the Singapore exchange; Korea's Tae Il Media, which manufactured computer peripherals, in 1989; Ayala Land, in the Philippines; and Krung Thai Bank, in Thailand, in 1989.

Like most venture capitalists, JAFCO also developed a keen interest in the high-technology sector, and in 1984 the company moved closer to the global center of that market, opening its first U.S. subsidiary in San Francisco in 1984. The company's, and its own investors', relationship with Japan's industrial and technological markets made it an attractive partner for U.S. technology firms seeking entry into the Japanese market. JAFCO was characterized as a more patient, and less aggressive investor than typical U.S.-styled venture capital firms. While the U.S. groups often sought returns as high as 60 percent on their investment, JAFCO was willing to accept returns of just 25 percent. At the same time, the company leaned towards a hand-off investment approach. As then Managing Director Mitsuo Goto told Electronic Business: "Unless we are asked for help first, we never interfere with a company's management."

JAFCO quickly established itself as a primary source of Japanese investment capital for U.S. companies, accounting for some 80 percent of all such investments at the end of the 1980s. By then, the company had achieved a number of successful IPOs, such as Calgene, listed on the NASDAQ in 1987; Novellus Systems, which launched its IPO in 1988, and Cephalan, which went public in 1991. The company was also an early investor in hard drive leader Syquest, which launched its IPO on the NASDAQ in 1991.

COMPANY PERSPECTIVES

The JAFCO Group aims to build an earnings base that can absorb changes in the business climate, boost long-term profitability and underpin sustainable growth. To do this, JAFCO has implemented the following four processes: 1. The first is to encourage risk money through the launch of new funds. JAFCO obtains funds to maximize investment opportunities. As a result, JAFCO earns stable fund management fees. 2. The second is to implement full-line investment. JAFCO invests in high-quality companies and has constructed a well-balanced portfolio. 3. The third is to raise corporate value of investee companies. JAFCO actively supports the strengthening of investees' core business structure and corporate growth through our VA (Value Added) activities. 4. The fourth is to promote portfolio IPOs and increase capital gains through the establishment of a virtuous cycle of private equity investment. Finally, JAFCO carries out the above strategies based on an effective cost structure.

INTERNATIONAL EXPANSION: 198699

In the meantime, JAFCO had continued to expand its geographical reach, opening a subsidiary in England in 1986. The company opened a second office in the United States, in New York, in 1987. In that year, the company listed its own shares on the OTC market. During this period, JAFCO's capital base made a dramatic increase, jumping to ¥9.4 billion in 1988, and then past ¥20 billion in 1989.

Back home, JAFCO launched a new subsidiary, JAFCO BRAINS CO. in 1989. By then, the company had completed a number of other Japanese IPOs. These included Ryoyo Electro and Tokai Bussan, both involved in the sale of electronic materials and equipment; CSK Electronics, a computer retailer; Fuji Soft ABC, a software developer; Nihon Electric Wire & Cable; Sakata Seed; Kokusai Securities; consumer electronics distributor K's Denki; Funai Consulting; and software developer Japan Systems, among others.

The company's Asia operations were boosted in 1990 when the company joined with Nomura to establish a new joint-venture subsidiary in Singapore. In 1999, that joint venture became 100 percent controlled by JAFCO and changed its name to JAFCO Investment (Asia Pacific). In the meantime, JAFCO completed a number of IPOs in the region, including its first IPOs in Indonesia in 1990. Hong Kong became an attractive market for the company as well, and led to a number of IPOs, including computer game developer Magnum, in 1992; audio component producer Kosonic, in 1993; Innovative, an automobile parts group, in 1994; and footwear manufacturer Simphony Holdings, in 1995. By the end of the 1990s, JAFCO's Asia Pacific operations had included investments in the Philippines, Malaysia, Taiwan, and Australia as well.

JAFCO's European wing grew more slowly during the decade, despite the launch of a full-fledged subsidiary in the United Kingdom in 1994. The company's European investments focused especially on the biomedical research field, and led to investments in, and later IPOs by such companies as Celltech, Chiroscience, Biocompatibles International, Plasmon, and others in the United Kingdom, as well as Genset in France, Elekta Instrument in Sweden, and NV Innogetics in Belgium. By the end of the 1990s, the company had added investments in Germany, Israel, Switzerland, and Spain as well. The European market nonetheless remained a minor one for JAFCO. Meanwhile, JAFCO had continued to expand its presence in the United States, launching a new subsidiary, JAFCO Ventures, based in Boston and Palo Alto, California.

PUBLIC COMPANY: 2001

JAFCO changed its name, to JAFCO Co. Ltd., in 1997. The company began restructuring, merging its JAFCO BRAINS subsidiary with another subsidiary, JAFCO Consulting. The company took full control of the Asia Pacific subsidiary in 1999, then absorbed another of its subsidiaries, JAFCO Properties Co., that same year. In 2001, IPO-maker JAFCO launched its own full-fledged public offering, listing its shares on the Tokyo Stock Exchange.

KEY DATES

1973:
Japan Associated Finance Co. Ltd. (JAFCO) is founded.
1975:
Company completes its first investment initial public offering (IPO).
1981:
Company opens branch office in Osaka.
1982:
Company launches first venture capital partnership fund in Jaan.
1982:
Branch office opens in Nagoya.
1984:
First U.S. subsidiary opens in San Francisco.
1986:
Company opens office in the United Kingdom.
1987:
Second U.S. office opens in New York.
1990:
JAFCO forms joint venture with Nomura in Singapore.
1994:
Company launches subsidiary in United Kingdom.
1997:
Company changes name to JAFCO Co. Ltd.
1998:
Branch opens in Hokkaido.
1999:
JAFCO acquires full control of Singapore subsidiary.
2001:
JAFCO goes public with listing on Tokyo exchange; establishes subsidiary in South Korea.
2002:
Company establishes representative office in Beijing.
2004:
U.S. subsidiary, JAFCO Ventures in Palo Alto, California, is established.
2005:
JAFCO establishes five new investment funds for a total of $1.5 billion.

JAFCO continued to expand its operational base as well. The company had opened a new Japanese office, in Hokkaido, in 1998. In 2001, JAFCO moved into the Korean market, establishing a dedicated subsidiary there. The company backed up this move with the launch of a new $178 million fund, the JAFCO Asia Technology Fund, some 15 percent of which was to be dedicated to investments in South Korea. At the same time, JAFCO had also been eyeing an entry into the fast-growing mainland China market. The company took its first step there in 2002 with the opening of a representative office in Beijing.

In 2003, JAFCO Ventures was spun off into a new company, Globespan Capital Partners, as part of a management buyout. JAFCO soon returned to the United States, however, establishing a new JAFCO Ventures subsidiary, based in Palo Alto, backed by its new $100 million JAFCO Technology Partners I Fund. The launch of the new fund fit in with an upswing in the investment market, which had been hit hard by recession at the beginning of the 2000s. By the end of 2004, however, JAFCO helped to signal the market's return to growth, with the establishment of five new investment funds with a total value of some $1.5 billion. The company also took advantage of the boom in the Asia investment market, and especially the growing shift of the global economy toward mainland China, adding a new fund targeting Asian investments in 2005.

By early 2006, JAFCO boasted an impressive record of investments. Since 1973, the company had invested in nearly 3,000 companies and had participated in nearly 750 IPOs. The company showed few signs of letting up. In 2005 alone, the company completed 23 IPOs. Meanwhile, it had completed its first IPOs for 2006, including Makoto Construction in Osaka, Felissimo in Hyogo, E-ton Solar Tech in Taiwan, and Acorda Therapeutics in the United States.

PRINCIPAL SUBSIDIARIES

Beijing Representative Office; JAFCO America Ventures, Inc. (U.S.A.); JAFCO Consulting Co., Ltd.; JAFCO Investment (Asia Pacific) Ltd. (Singapore); JAFCO Investment (Hong Kong) Ltd.; JAFCO Investment (Korea) Co., Ltd.; JAFCOVEN Co., Ltd.; Taiwan Branch Office.

PRINCIPAL COMPETITORS

Nippon Venture Capital Corporation; Japan Asia Investment Co. Ltd.; SBI Holdings; Yasuda Enterprise Development.

FURTHER READING

"China: Chan Predicts Year Will Start with Bang," Venture Capital Journal, January 1, 2006.

Hayashi, Alden M., "Putting Japanese Venture Capital to Work in America," Electronic Business, July 1, 1988, p. 69.

"JAFCO Asia Enters Mainland," SinoCast China Business Daily News, October 11, 2002.

"JAFCO Launches $100m Fund," Private Equity Week, December 1, 2003, p. 6.

"JAFCO Planning Third Fund," Private Equity Week, July 11, 2005, p. 2.

"JAFCO Ventures Spins into Globespan," Private Equity Week, January 28, 2003, p. 12.

"JAFCO Ventures' Sun Rises in the West," Venture Capital Journal, January 1, 2004.

"Japan's JAFCO Procures $1.1 Billion for 5 Investment Funds," Asia Pulse, July 16, 2004.

"Japan's Largest Venture Capital Firm Opens Seoul Office," Korea Herald, June 12, 2001.

Moltzen, Edward F., "In Need of VC funds? See JAFCO," Computer Reseller News, July 24, 2000, p. 8.

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