Mercuria Holdings 7347
マーキュリアホールディングス
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2021-11-12
2021-10-21
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Summary
The main businesses of Mercuria Investment Co., Ltd. are Fund management (90.6% of operating revenue in FY12/17), where it forms and manages funds for domestic and overseas investors, and Principal investment (9.4%), where it invests its own funds. In October 2005, Mercuria was founded with the Development Bank of Japan (DBJ) as its main shareholder and formed its Fund No. 1 (see Business description section for more information). With a focus on cross-border investment opportunities, the company provides financial and business support to Japanese businesses and assets with growth potential, and distributes the returns to investors. Mercuria also forms and manages financial products to invest in overseas businesses and assets that provide strong and stable returns, and repatriates investment gains from these products.
Capital Markets
Key dates
2018-12-25
Coverage initiation
Executive summary
Business overview
Mercuria Holdings Co., Ltd. was established in July 2021 as the wholly owning parent company of Mercuria Investment Co., Ltd. (established October 2005), the core entity of the Mercuria Investment group. Mercuria Holdings has three core management principles: Being "cross border" (crossing national, mental, and generational boundaries), having "global reach" (becoming a world-class investment group), and pursuing the "undiscovered common" (pursuing areas that would become common knowledge in five years). As the holding company of the Mercuria Investment group, Mercuria Holdings oversees the Group's operations centered on Mercuria Investment (hereafter, "Mercuria" and "the company" refer to Mercuria Investment). The Group shifted to a holding company structure with a view to aggressively expanding its business fields by pursuing initiatives in areas that will become common knowledge in five years time. Its renewed mission, according to the Group, is to "change today's Japan through the power of funds."
The main businesses of Mercuria Investment are Fund management (37.4% of operating revenue in FY12/20), where the company forms and manages funds for domestic and overseas investors, and Principal investment (62.6%), where it invests its own funds. Mercuria Investment—founded with the Development Bank of Japan (DBJ) as its main shareholder—formed its Growth Fund No. 1 in October 2005. The company provides financial and business support to Japanese businesses and assets, and distributes returns from those investments to investors. It also forms and manages financial products to invest in overseas businesses and assets that provide strong and stable returns, and repatriates investment gains from these products.
DBJ, a former public corporation, has been Mercuria’s top shareholder from its establishment with a roughly 24% stake. DBJ collaborates with Mercuria by investing in Mercuria’s funds and identifying investment candidates. Mercuria also formed capital alliances in 2015 with Itochu Corporation (roughly 14% stake) for real estate investment and with Sumitomo Mitsui Trust Bank (roughly 3% stake) for fund investment and identification of investment candidates in business investment and other strategies. Itochu is also a major partner in the company's BizTech Fund.
For the Fund management business, the company raises money from investors in Japan and overseas using investment partnerships, and forms and manages funds. Targeting absolute returns, it specializes in alternative investments with a different risk/return profile from that of traditional assets such as publicly traded stocks and bonds. However, Mercuria does not pursue investment strategies sought by hedge funds and venture capital firms that invest in seed-stage startups (except for the BizTech Fund). Within alternative investments, the company focuses mainly on private equity funds, which invest in unlisted companies, and real estate investment trusts (REITs). Mercuria does not engage in short-term trading, but invests for the longer term (five years or longer). Its stock selection is based on cash flow generated by the business, rather than themes likely to become hot topics among stock market participants. It is the only listed company in Japan that is a member of the Japan Private Equity Association.
Mercuria’s funds invest in either businesses or assets. In business investment, funds engage in one of three investment strategies: Growth, Buyout/Succession, and Value. The company offers these funds mainly to institutional investors such as pension funds and banks. The funds have an investment period of 5–10 years. After a fund is formed, the company sources investment candidates, executes investments, increases their value, and exits. Funds have a target internal rate of return (IRR) of around 15%. In asset investment, the company uses Real Estate, Cash Flow, or Value investment strategies. Under the Real Estate investment strategy, Hong Kong subsidiary Spring Asset Management Ltd. primarily invests in office buildings in Beijing Central Business District (CBD) and properties in the UK, and manages Spring REIT (Hong Kong Stock Exchange: 01426). Spring REIT has provided an average annual dividend yield of around 7%. Under the Cash Flow investment strategy, which aims to provide stable cash flows to the investors, affiliate Enex Asset Management Co., Ltd. manages the Enex Infrastructure Investment Corporation (TSE: 9286). The company also manages an infrastructure/warehousing fund and an aircraft leasing fund.
At the Fund management business, which accounted for around 40% of operating revenue in FY12/20, the company receives 0.5–2.0% in management fees (based on assets under management or AUM; i.e., capital commitments and total investment) and around 20% in performance fees (based on investment gains) from the funds. In FY12/20, revenue from management fees totaled JPY1.8bn (+2.9% YoY) and performance fees came to JPY563mn (-54.8% YoY). The Real Estate and Growth investment strategies drove management fees and performance fees, respectively. AUM totaled JPY193.4bn (-0.2% YoY) in FY12/19. AUM by investment strategy: Growth JPY12.1bn (-45.5% YoY), Buyout/Succession JPY10.1bn (+114.9% YoY), and Real Estate/Cash Flow JPY171.6bn (+2.0% YoY).
Earnings trends
In FY12/20, the company reported full-year operating revenue of JPY6.2bn (+31.1% YoY), operating profit of JPY772mn (-58.4% YoY), recurring profit of JPY758mn (-57.9% YoY), and net income attributable to owners of the parent of JPY525mn (-57.8% YoY). Operating revenue and recurring profit surpassed the company’s revised (December 18, 2020) forecasts of JPY5.9bn and JPY750mn, respectively. The five-year average for net income (attributable to owners of the parent) was JPY1.1bn (-1.7% YoY).
The company’s full-year FY12/21 forecast (revised on November 11, 2021) calls for operating revenue of JPY3.8bn (-38.5% YoY), operating profit of JPY1.8bn (+133.0% YoY), recurring profit of JPY1.8bn (+137.6% YoY), and net income attributable to owners of the parent of JPY1.2bn (+128.5% YoY). In FY12/20, the company recorded a sizable amount of operating revenue related to restructuring of Spring REIT as principal investment, and for this reason, expects operating revenue in FY12/21 to fall YoY. However, it anticipates YoY growth in operating profit, owing to business recovery following the COVID-19-induced lull. The company revised up its full-year FY12/21 forecast to reflect the increased probability of generating performance fees in Q4.
From FY12/19 through FY12/25, the company aims to maximize core fund revenues (performance fees) and enhance revenues (management fees) from its frontier funds and solution business. For FY12/25, the company is targeting five-year average net income of JPY2.0bn or more (JPY1.12bn as of FY12/19 and JPY1.10bn as of FY12/20) and a 50% increase in equity capital (JPY12.2bn at end-FY12/19 and JPY11.9bn at end-FY12/20). On August 13, 2020, the company changed the target year for these quantitative targets from FY12/23 (five-year target) to FY12/25 (seven-year target) in light of the impact of the pandemic.
Strengths and weaknesses
Shared Research sees Mercuria’s strengths as its relationships with DBJ and Itochu and the ability to expand its business overseas by leveraging overseas networks built up since its founding; its fund planning capability, which allows the company to develop funds in fields that would become common knowledge in five years; and having an earnings structure in which a stable source of revenue covers most of its fixed costs. Its three main weaknesses in our view are the difficulty of controlling the timing of performance fee accrual; an organizational structure that is heavily dependent on the current management team, making it difficult for next-generation management to flourish, and the risk of competition with other companies affecting its earnings performance (see Strengths and weaknesses section for details).
Key financial data
Notes: Figures may differ from company materials due to differences in rounding methods.
The forecast for FY12/21 financial results by Mercuria Holdings is identical to the forecast made by Mercuria Investment in terms of operating revenue, operating profit, recurring profit, and after-tax income. However, at the level of earnings per share (calculated on a fully diluted basis), based on the number of shares outstanding at the time the holding company was established, Mercuria Holdings is projecting EPS of JPY59.48.
Recent updates
Revision to FY12/21 full-year earnings forecast
On November 11, 2021, Mercuria Holdings Co., Ltd. announced financial results for Q3 FY12/21; see the results section for details.
On November 11, 2021, Mercuria Holdings Co., Ltd. announced a revision to its FY12/21 full-year earnings forecast.
The company revised up its FY12/21 full-year earnings forecast on November 11, 2021. The revised forecast calls for operating revenue of JPY3.8bn (-38.5% YoY), operating profit of JPY1.8bn (+133.0% YoY), recurring profit of JPY1.8bn (+137.6% YoY), and net income attributable to owners of the parent of JPY1.2bn (+128.5% YoY). The company made the revision to reflect the increased probability of generating performance fees in Q4.
Investment in NOT A HOTEL Inc.
Mercuria Holdings Co., Ltd. announced that its subsidiary company Mercuria Investment Co., Ltd. had invested in NOT A HOTEL Inc.
Mercuria Investment established the Mercuria BizTech Fund, together with Itochu Corporation, for the purpose of providing backing for companies attempting to transform the real estate and logistics industries. The investment in NOT A HOTEL Inc. was made through this fund.
NOT A HOTEL Inc. provides a service allowing one to earn income by transforming purchased houses (orapartments ) into hotels, via an app, while not in use because of holidays, business trips, or the like. Going forward, NOT A HOTEL intends to promote the digitalization of hotel and home sales, and extend bases nationwide.
Japan's real estate and logistics (transport and warehousing) industries are among those where productivity is expected to benefit the most from digitalization. The company plans to make growth investments and use hands-on support to maximize the enterprise value of companies aiming at industry innovation through next-generation technologies or unique business models or ideas, and will work to revitalize industries and boost productivity.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
The figures in the table above are for Mercuria Investment Co., Ltd., a subsidiary of Mercuria Holdings that is no longer a listed company.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: “-“ denotes YoY increase greater than 1,000%.
The figures in the table above are for Mercuria Investment Co., Ltd., a subsidiary of Mercuria Holdings that is no longer listed.
Cumulative Q3 FY12/21 results
*Net income attributable to owners of the parent
Key takeaways
Operating revenue: The 18.5% YoY decline in operating revenue was mainly due to a considerable revenue booked in cumulative Q3 FY12/20 from the sale of a unit the company group had held in Spring REIT. In cumulative Q3 FY12/20, the company also recorded performance revenue for investment recovery from the sale of shares held by Asuka DBJ the company operates.
Earnings: The company logged gains on the sale of shares held by its Buyout Fund No. 1 and on the addition of a solar power generation facility to the portfolio of Enex Infrastructure Investment Corporation. Also, the company recorded losses on the sale of a unit of Spring REIT it had held in cumulative Q3 FY12/21. As such, recurring profit increased 43.6% YoY in cumulative Q3 FY12/21.
Earnings forecast revision: The company revised up its full-year FY12/21 forecast to reflect the increased probability of generating performance fees in Q4. The revised forecast calls foroperating revenue of JPY3.8bn (-38.5% YoY), operating profit of JPY1.8bn (+133.0% YoY), recurring profit of JPY1.8bn (+137.6% YoY), and net income attributable to owners of the parents of JPY1.2bn (+128.5% YoY)
Financial position
At the end of Q3 FY12/21, the company’s consolidated total assets were JPY16.0bn, an increase of JPY955mn from end-FY12/20. This reflected a JPY2.7bn increase in operational investment securities resulting from the company's acquisition of a special-purpose holding company for a solar power generation facility for inclusion in the portfolio of the Enex Infrastructure Investment Corporation and an impact from market value of investment securities. On the other hand, cash and deposits decreased PY1.4bn and short-term loans receivable from subsidiaries and associates
declined JPY293mn.
Net assets of JPY13.8bn were up JPY1.4bn from end-FY12/20, with the increase reflecting a JPY431mn increase in valuation difference on available-for-sale securities and a JPY690mn increase in retained earnings. Shareholders equity was up JPY1.2bn versus end-FY12/20, due mainly to earnings during the period and valuation gains on operational investment securities held. At the end of Q3 FY12/21, the company had a shareholders equity ratio of 82%, up 3pp from 79% at end-FY12/20.
Company forecast for FY12/21
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Net income refers to net income attributable to owners of the parent.
The figures in the table above are for Mercuria Investment Co., Ltd., a subsidiary of Mercuria Holdings that is no longer a listed company.
FY12/21 forecast by Mercuria Investment Co., Ltd.
For FY12/21, the (initial) forecast by Mercuria Investment called for consolidated operating revenue of JPY3.5bn (-43.4% YoY), operating profit of JPY1.5bn (+94.2% YoY), recurring profit of JPY1.5bn (+98.0% YoY), and net income of JPY1.0bn (+90.4% YoY).
The estimate for operating revenue does not assume any performance fees but does assume management fees of JPY2.0bn and JPY1.5bn revenue in Principal investment and other. The company commented that it expects to exit some investments, but none are likely to pay performance fees. The company has not factored in any impact of accounting for operating revenue and cost of revenue associated with the restructuring of Spring REIT as a gross, not net, amount.
The company revised up its full-year FY12/21 forecast on November 11, 2021. The revised forecast calls for operating revenue of JPY3.8bn (-38.5% YoY), operating profit of JPY1.8bn (+133.0% YoY), recurring profit of JPY1.8bn (+137.6% YoY), and net income attributable to owners of the parent of JPY1.2bn (+128.5% YoY). The company made the revision to reflect the increased probability of generating performance fees in Q4.
FY12/21 forecast by Mercuria Holdings Co., Ltd.
With regard to the forecast for FY12/21, Mercuria Holdings made no changes in the full-year guidance initially provided by Mercuria Investment on February 12, 2021, explaining that the expenses associated with the changeover to a holding company structure had already been baked into its original forecast.
Medium-term outlook
Review of past performance between FY12/05 and FY12/18
The company views the years between its founding in October 2005 and early 2010s as the first stage of the company, and sees early 2010s and onward as the second stage. During the first stage, Mercuria laid out and implemented two themes; new approach with Growth investment strategy based on its cross-border theme and establishment of its revenue base with the exchange listing of Spring REIT.
During the second stage, the company has set out to reinforce its revenue base so as to achieve stable growth that is not swayed by changes in the external operating environment, achieving this by 1) increasing its ability to raise funds by enhancing its credibility with the help of a listing on the Tokyo Stock Exchange; and 2) becoming a fund management company that manages multiple funds pursuing different investment strategies. Toward this end, during the first half of the second stage (from early 2010s through FY12/18) the company has thus far achieved a listing on the Tokyo Stock Exchange (listing on the TSE 2nd Section in October 2016, then moving up to the 1st Section in December 2017) and has also raised money to fund Principal investment strategy by issuing new shares.
Using the fund raised through these new share issues, Mercuria established the foundation of a fund management company to manage multiple funds pursuing different investment strategies, including new Buyout/Succession strategy and Cash Flow strategy funds.
Plans for seven-year period from FY12/19 through FY12/25
Priorities during the seven-year period FY12/19–FY12/25 and performance targets for FY12/25
From FY12/19 through FY12/25, the company aims to maximize core fund revenues (performance fees) and enhancing revenues (management fees) from its frontier funds and solution business.
For FY12/25, the company is targeting five-year average net income of JPY2.0bn or more (JPY1.12bn as of FY12/19 and JPY1.10bn as of FY12/20) and a 50% increase in equity capital (JPY12.2bn at end-FY12/19 and JPY11.9bn at end-FY12/20). On August 13, 2020, the company changed the target year for these quantitative targets from FY12/23 (five-year target) to FY12/25 (seven-year target).
The company had initially created a five-year management plan covering the five-year period from FY12/19 through FY12/23, during which it set the following priorities: First, maximize revenue (performance fees) from core funds it formed around the time of its stock exchange listing; and second, boost the revenue (management fees) coming from its frontier funds and from its solutions fund business. Under its initial five-year plan, for FY12/23 the company was targeting five-year average net income* of JPY2.0bn or more (JPY1.1bn as of FY12/20) and a 50% increase in equity capital** (roughly JPY11.9bn at end-FY12/20).
In the wake of the COVID-19 pandemic, the company issued a downward revision to its full-year FY12/20 forecast at the time of its 1H results announcement. Along with the downward revision to its outlook for FY12/20, the company pushed out the target date for its long-term performance targets by two years, from FY12/23 to FY12/25, but made no changes to its priorities or the target figures themselves, as detailed above.
Shared Research thinks that the company’s revenue and earnings will be fairly stable during the first half of this seven-year period as management fees rise steadily on increases in assets under management (the company projects AUM of JPY350.0bn in FY12/25), then grow rapidly during the latter half as more performance fees start flowing in.
Shared Research thinks Mercuria aims to increase management fees by increasing assets under management and, toward this end, plans to offer new subscriptions to Buyout/Succession funds and form new Cash Flow strategy funds.
Mercuria reported JPY563mn in performance fees in FY12/20, a 54.8% decline YoY. The Growth Fund No. 1 (Asuka DBJ) reached the stage where it would start generating performance fees at the end of 2017, and the company expects to continue exiting investments over the next two or three years from FY12/18. The company is also expecting to earn performance fees from the Buyout Fund No. 1 and the En Fund.
With regard to expenses, the biggest expenses under SG&A expenses are employee salaries and bonuses. Based on indications from the company that it finished expanding its staff in FY12/18, we do not expect outlays for employee salaries to change much over the medium term. Bonuses are another matter, though, for the company which pays out 30% of its performance fees as bonuses to its employees, so bonus expense will vary directly with the company’s performance fees.
Accelerate growth by leveraging transition to holding company structure
The company transitioned to a holding company structure effective July 1, 2021. It says that this will enable alliances with strategic partners in each business area and spur expansion through external growth.
Business investment
Buyout Fund No. 1: The company is looking to maximize its performance fee income by solid fund management (i.e., making good initial investments, adding value, and then exiting investments in a timely fashion) and, towards this end, is targeting an average annual IRR of more than 15% over five years, which would more than double the value of its original investment.
Buyout Fund No. 2: Leveraging its track record, the company is looking to create a second buyout fund as an extension of its first buyout fund, and for this new fund is looking to raise between JPY40bn and JPY50bn from overseas investors.
En Fund, BizTech Fund, Kiraboshi Fund: Working closely with its business partners, the company is looking to manage these funds so as to achieve an average annual IRR of 15% over five years, thereby doubling the value of its original investment.
China Fintech Fund: Looking to form new funds that will add value by expanding into the Chinese market.
Asset-oriented funds
Growth Fund No. 1 and Growth Fund No. 2: Expects to earn performance fees upon existing investments
Spring REIT: Looking to increase acquisition fees and management fees by acquiring new properties
Aircraft Leasing Fund No. 1, Thai mezzanine fund, infrastructure fund/warehousing fund for renewable energy projects, and real estate fund: Looking to attract total of JPY100bn into these cash-flow strategy funds from investors seeking stable cash flow.
With respect to Principal investments, the company aims to generate a steady flow of dividend income from its investments in Spring REIT while at the same time generating a 15% internal rate of return by making strategic pre-formation investments and same-boat investments in the funds it manages.
External growth
The company plans to leverage its transition to a holding company structure to focus on the following businesses: 1) solutions fund business; 2) Value investment strategy funds such as funds investing in aircraft; 3) private debt funds; and 4) inbound real estate investment funds. For solutions fund business, the company aims to deepen collaboration with a real estate development company to further develop its commission fee business. For Value investment strategy funds, the company will consider forming Aircraft Leasing Fund No. 2 with a value investment approach, because aircraft prices have slumped amid the COVID-19 pandemic.
At its FY12/19 results briefing, Mercuria announced name changes to some of its funds. At the same time, the company positioned Growth Fund No. 1, Growth Fund No. 2, Spring REIT, Buyout Fund No. 1 and Buyout Fund No. 2 (planned) as core funds, and other funds as frontier funds. The company says it aims to raise the earnings of these frontier funds and turn them into core funds in the future.
Outlook for assets under management between FY12/19 and FY12/25
AUM increased sharply from FY12/12 to FY12/14. AUM in FY12/14 was 2.7x what it was in FY12/11, mainly because of arranging Growth Fund No. 2 and an increase in the appraisal values of real estate investments. AUM decreased marginally in FY12/15 and FY12/16 due to exiting investments before increasing 8.5% YoY in FY12/17 to JPY195.2bn. The upturn was the result of acquiring additional real estate assets. AUM in FY12/19 was JPY193.4bn (-0.2% YoY). Mercuria commented that it aims for AUM growth for both business investment and asset investment.
Note: Figures may differ from company materials due to differences in rounding methods.
FY12/19–FY12/25 outlook for assets under management at business investment
Investment strategies in business investment include Growth, Buyout/Succession, and Value funds. AUM totaled JPY9.3bn (-58.1% YoY) in FY12/19, of which Growth accounted for JPY7.2bn (-40.5% YoY) and Buyout/Succession for JPY2.1bn (-79.2% YoY). The company had no assets under management in Value funds due to exits made in 2017. In the medium term, the company expects an increase in assets of Buyout/Succession strategy to compensate for the decline in assets in Growth strategy.
AUM (Growth)
Growth funds comprise Growth Funds No. 1 and No. 2, with Growth Fund No. 1 accounting for the bulk of AUM. The company commented that Growth Fund No. 1 reached the phase of earning performance fees at the end of 2017, and plans to exit from investments over two to three years starting in FY12/18.
From FY12/19 to FY12/25, Shared Research thinks the company aims to increase AUM in Growth strategy funds by creating a new China Fintech fund through cooperation with investees.
AUM (Buyout/Succession)
The first subscription for Buyout Fund No. 1 was completed at a total of JPY8.1bn in August 2016. In April 2018, the final subscription for the fund was completed at a total of JPY21.3bn. In November 2018, the company formed the Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership).
In FY12/21, the company also plans to begin subscriptions for Buyout Fund No. 2 (target fund size of JPY40bn) as an extension of Buyout Fund No. 1.
FY12/19–FY12/25 outlook for assets under management at asset investment
Investment strategies in asset investment include Real Estate, Cash Flow, and Value. AUM totaled JPY184.0bn (+7.2% YoY) for Real Estate in FY12/19. As for Cash Flow, the company targets double-digit growth in AUM in the medium term by increasing AUM for the Real Estate and Cash Flow investment strategies.
AUM (Real Estate)
Consolidated subsidiary Spring Asset Management Ltd. manages Spring REIT, which is listed on the Hong Kong Stock Exchange (stock code: 01426). Spring REIT mainly invests in office buildings in Beijing, China, although in 2017 it added commercial properties in the UK with a total value of JPY10.0bn to its portfolio. In the medium term, Spring REIT will continue to acquire more properties for external growth, with expectations of identifying investment properties by gathering investment information through a network of contacts and organizations it has built in the past few years.
AUM (Cash Flow)
The Cash Flow investment strategy includes funds being formed or progressing to executing investments from FY12/18 onward, such as Aircraft Leasing Fund No. 1, Thai mezzanine fund, and Infrastructure Fund. Starting in FY12/19, the company is looking to attract a total of JPY100.0bn to form new Cash Flow strategy funds over the seven years from FY12/19 through FY12/25.
Aircraft Leasing Fund No. 1: The fund acquires and owns used aircraft, sets up operating leases of the aircraft with airlines, and seeks investment gains from revenues from leasing fees and aircraft sales. The company’s Aircraft Leasing Fund No. 1 completed its first subscription in March 2018 at JPY5.0bn. It raised additional subscriptions through Q4 FY12/19 and its AUM totaled over JPY12.0bn at final closing. In the medium term, the company expects to form a series of aircraft leasing funds but, in the wake of the pandemic, has pushed out plans for launching a second aircraft leasing fund until FY12/21 or later.
Thai mezzanine fund: In August 2019, the company collaborated with Origin Property to form the Gate City Bangkok Mezzanine Fund, the second project for the two partners. The fund provided mezzanine investments to Knightsbridge Sukhumvit Thepharak, a condominium development project. In December 2017, the company invested its own funds in a real estate development project in Thailand (investment in preferred stock), and in February 2019 agreed to make its second mezzanine investment in Bangkok real estate development.
Infrastructure Fund: In August 2018, the company jointly established fund management company Enex Asset Management (in which Mercuria took a 22.5% stake) with Itochu Enex Co., Ltd. (50.1%), Sumitomo Mitsui Trust Bank, Limited (22.5%), and Maiora Asset Management Pte. Ltd. (4.9%). In February 2019, Enex Infrastructure Investment Corporation, which was established with Enex Asset Management as the organizer, listed on the infrastructure fund market of the Tokyo Stock Exchange. The company is currently drawing up plans for funds focused on areas that have been largely unaffected by the COVID-19 pandemic, such as warehousing funds for renewable energy projects. Because there is likely to be an increasing number of owners of such assets looking to sell, the company thinks there will be much investment opportunities in these areas.
FY12/19–FY12/25 outlook for management fees
Shared Research thinks that management fees will grow as AUM continues to increase. Regarding business investment made under the Buyout/Succession strategy, we look for an increase in management fees due to the rise in capital commitments and total investment, on which management fees are based. We also forecast an increase in management fees with growth in AUM in asset investment.
FY12/19–FY12/25 outlook for management fees from business investment
From FY12/19 to FY12/25, we expect total investments under Growth Fund No. 1 to decline as the fund exits investments over two to three years starting in FY12/18. However, for Growth Fund No. 1, the decrease in total investment does not affect management fees, because the company does not receive management fees associated with the extension of the investment period of the fund.
In contrast, at Buyout Fund No.1, we find capital commitments increasing by JPY13.2bn since August 2016 to JPY21.3bn in FY12/18. Shared Research expects management fees to increase in the medium term as the company increases AUM (capital commitments and total investment) by forming and completing subscriptions for a new fund (Buyout Fund No. 2), and in this relation note that the company is looking to attract another JPY40–50bn by forming new Buyout/Succession strategy funds between FY12/19 and FY12/25.
FY12/19–FY12/25 outlook for management fees from asset investment
During FY12/19–FY12/25, we see management fees from asset investment rising along with the increase in AUM. Spring REIT aims to continue adding assets (Real Estate), and the company is looking to attract another JPY100bn by forming new Cash Flow strategy funds, including Aircraft Leasing Fund No. 1, Thai mezzanine fund, and Infrastructure Fund. As a result, we expect growth of management fees accompanying the increase in AUM.
FY12/19–FY12/25 outlook for performance fees
The company booked a total of JPY1.2bn in performance fees in FY12/19 (-14.8% YoY). In FY12/19–FY12/25, Growth Fund No. 1 is at the phase of earning performance fees, and will progressively exit from investments over two to three years from FY12/18. In FY12/20, the company booked performance fees from Growth Fund No. 1 after exiting Lifenet Insurance Company.
Outlook for performance fees from Growth Fund No.1
In FY12/19, AUM of Growth strategy funds totaled JPY7.2bn. Growth Fund No. 1 entered the phase of earning performance fees at the end of 2017. The company plans to exit from investments over two to three years beginning in FY12/18. The company booked performance fees of JPY1.4bn from its Growth strategy funds in FY12/18 and JPY1.2bn in FY12/19. In FY12/20, the company booked performance fees of JPY549mn from exiting Lifenet Insurance Company.
Outlook for performance fees from En Fund and Buyout Fund No. 1
Formed in July 2014, the En Fund is a Growth strategy fund focused mainly on Japanese companies with strong brand power needed to expand sales channels in Asia. As the En Fund will surpass the five-year mark for operations during FY12/19–FY12/25, it will approach the exit phase for some investments and should be able to start generating performance fees for Mercuria. In this relation, we note that Mercuria is only serving as the investment advisor for the En Fund, so the assets under management in the En Fund are not included in the AUM total for Mercuria.
Buyout Fund No. 1 was formed in August 2016 and, following the completion of the final subscription in April 2018, had brought in a total of JPY21.3bn. In October 2018, the fund sold its shareholdings in Izumi Products to Maxell Holdings (TSE1: 6810), and in 2019, exited its position in Pentel with a certain return on investment. In 2021, the fund sold all shareholdings in Tsunoda Corporation to Nippon Commercial Development. FY12/20 was the fourth year since inception of Buyout Fund No. 1, and the fund will be in operation for a total of ten years by the end of FY12/25. Therefore, it will likely make progress in the exit phase and generate performance fees through FY12/25.
Assuming the same five-year period from investment to exit and an IRR of around 15%, Fund No. 1 and No.3 should see net investment gains of 100% (1.155 = 2.0). Performance fees would come to around 20% of the (100%) investment gain on the amount invested. In the case of the En Fund, since Mercuria is serving only as the investment advisor, its performance fees would be paid in a different form.
Expenses
SG&A expenses are mainly employee salaries and bonuses. Mercuria said it finished expanding its workforce in FY12/18 (increasing its headcount to 55, an increase of nine employees over the end of FY12/17). In FY12/20, the company had 61 employees (57 employees in FY12/19). With the number of employees expected to remain unchanged, we project payroll expenses (other than bonuses) to increase slowly between FY12/20 and FY12/25. As employee bonuses equal around 30% of performance fees, the amount of bonuses paid will vary year to year depending on performance fees received.
Initiatives to secure long-term revenue sources
Company initiatives to secure long-term sources of revenue include business succession matching platform BIZMA, investment in a Chinese fintech company, and formation of Chinese fintech fund.
Business succession matching platform BIZMA
In March 2018, its subsidiary Business Market Co., Ltd. began operation of BIZMA, a business succession matching platform. As a platform, BIZMA does not charge a retainer or commission fee even when a business succession deal (M&A) is closed.
In September 2018, Business Market formed a business alliance with the Bank of Fukuoka, Ltd. and Kirayaka Consulting & Partners, Ltd., a subsidiary of Kirayaka Bank, Ltd. to offer the clients of these companies the possibility of support from around the country via BIZMA. In November 2018, the company formed Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership), which utilizes BIZMA.
In October 2018, the company formed a capital alliance with Insource Co., Ltd. to deepen relationships with municipalities and business corporations by providing a broader range of solutions and services. Insource provides training programs (with instructors) and courses open to the public, targeting municipalities and companies nationwide. It has received a contract from the city of Sapporo to support business matching efforts for companies facing succession issues, and is currently operating the matching portal site on behalf of the city of Sapporo.
Kiraboshi Fund (Kiraboshi Capital Mercuria Investment Limited Partnership)
Mercuria and Kiraboshi Capital (a subsidiary of Tokyo Kiraboshi Financial Group, Inc.) formed Kiraboshi Capital Mercuria Investment Limited Partnership to support the business succession and the growth of domestic mid-tier companies and SMEs.
The two companies and Kiraboshi Bank (also a subsidiary of Tokyo Kiraboshi FG) are to invest in the fund as limited partners. Planned total investment is over JPY2.0bn. The company commented that the fund, by temporarily holding shares in companies facing business succession issues, will facilitate a smooth transfer to the succeeding company through centralized share ownership and support the acquisition by a third party of companies without successors. This allows the choice of the best solution for a company depending on the stage of its life cycle.
The fund will utilize BIZMA, a business succession platform for SMEs, to solve a range of management challenges facing companies such as finding successors, increasing sales, cost reduction, overseas expansion, and business diversification.
Investment in Chinese fintech company and formation of China Fintech L.P.
In June 2018, Mercuria invested in Beijing Zhongguancun Kejin Technology Co., Ltd. (Zhongkejin), an all-round financial services company that harnesses fintech.
Zhongkejin is a Chinese fintech company with advanced technologies that provides all-round financial services to individuals by the use of proprietary technologies. It develops all systems required to provide services in-house, such as customer attraction, credit, debt collection, biometric authentication, and big data analysis. It also responds to consumer needs with AI-based services that allow it to process loan application screenings and present lending terms in as little as three seconds. The Zhongkejin Group holds a nationwide consumer finance license (which are limited in number) and has grown to around 40mn registered users and 15mn borrowers since the service was launched two years ago. Executed loans totaled CNY70.1bn (approximately JPY1.2tn) in 2017. Zhongkejin is also launching auto finance and insurance businesses harnessing AI, providing online financial services that fulfill a diverse range of consumer needs.
In October 2018, Mercuria converted its pre-formation investment into a fund, establishing China Fintech L.P., a fund whose purpose is to invest in Zhongkejin. Total investment is JPY1.35bn and the fund period is 10 years. Aozora Bank has also invested in the fund.
In February 2019, Mercuria entered into a tripartite business alliance with Aozora Bank and Zhongkejin for the purpose of establishing a working relationship in fintech businesses, overseas businesses, and various investment-related fields.
Company overview and business model
Company overview
Mercuria Holdings Co., Ltd. was established in July 2021 as the wholly owning parent company of Mercuria Investment Co., Ltd. (established October 2005), the core entity of the Mercuria Investment group. Its underlying concept is to focus on cross-border investments and become a world-class investment group that sees beyond national boundaries and preconceived notions.
Management principles
The three core management principles of the Mercuria Investment group are as follows.
Cross border: Crossing national, mental, and generational boundaries
The group aims to discover unique investment opportunities, thinking beyond all types of boundaries and leveraging its breadth of network in the industrial and investment spheres. Efforts will center on investments rooted in Japan's strengths but pursuing growth areas or growth potentials on a global scale.
Global reach: Becoming a world-class investment group
The group aspires to become a world-class investment group that distributes returns not only to investors in its funds, but to various stakeholders, including portfolio companies and the shareholders of the Mercuria Investment group. To do so, it will pursue the alpha (excess returns) in alternative investments and create a virtuous cycle through efficient use of invested capital.
Undiscovered common: Common knowledge in five years
The group believes the future of Mercuria Investment group will be shaped by its efforts in the yet unnoticed fields that will become common knowledge in five years time. It will thus work to cultivate business in these fields.
Business model
Mercuria, the core entity of Mercuria Holdings, is an alternative investment management company. Its main businesses are Fund management, which manages funds for domestic and overseas investors through investment limited partnerships and other vehicles (37.4% of operating revenue in FY12/20) and Principal investment and other, which invests the company’s own funds (62. 6%).
The Development Bank of Japan Inc. (DBJ), previously a public corporation, has been Mercuria’s principal shareholder from the beginning, with approximately a 24% stake. DBJ collaborates with Mercuria by investing in funds formed and managed by the company and identifying investment candidates. Mercuria formed capital alliances in 2015 with Itochu (approx. 14% stake) for real estate investment and Sumitomo Mitsui Trust Bank (approx. 3%) for investment in business investment funds and identifying investment candidates. Itochu is also a major partner in the BizTech Fund.
These relationships have helped the company to expand its business overseas, such as a referral by Itochu resulting in additional acquisition of an asset in the UK by Spring REIT, which is managed by a Mercuria’s subsidiary. Mercuria’s investment concept is cross-border investment, focused on expanding business opportunities by investing across national borders and thinking outside the box. Its overseas network—capital alliance partners like DBJ and the management team’s powerful network of contacts—underpins the cross-border investment concept.
The company is accelerating businesses that leverage its overseas network. In 2014, after Spring REIT was liked on the Hong Kong Stock Exchange in 2013, the company won a contract to manage a joint fund between DBJ and Charoen Pokphand (CP) Group, a major Thai conglomerate. In 2018, Shinx (portfolio company of Buyout Fund No. 1) and Biesse S.p.A., an Italian woodworking machinery manufacturer, formed a business alliance.
Mercuria transitioned to a holding company structure on July 1, 2021. It regards pursuing further growth opportunities through business expansion a management priority amid the change in industry structure spurred by the spread of COVID-19 and concluded that it needed to build a structure capable of nimble and flexible decision-making to maximize the potential for corporate restructuring through M&A and other means.
Fund management business (37.4% of operating revenue in FY12/20)
Form and manage alternative investment funds
In the Fund management business, the company raises funds from domestic and overseas investors in the form of investment partnerships to form and manage alternative investment funds. Alternative investments such as hedge funds, private equity funds, and REITs, have different risk/return properties from traditional investments in listed stocks and bonds, and are a form of investment that seeks absolute returns. Mercuria has formed and manages private equity funds engaging in hands-on investment mainly in unlisted companies, REITs, and leasing finance funds. As of FY12/20, AUM totaled JPY182.4bn (-5.7% YoY).
The company breaks down funds into two basic categories, business investment funds and asset investment funds.
Business investment
The company offers business investment funds with three different investment strategies (Growth, Buyout/Succession, and Value) to institutional investors like pension funds, banks, and other corporations. These funds have an operating life of 5–10 years. After a fund is formed, it identifies investment candidates, executes investments, increases the value of the investments, and exits from the investments. The target return (IRR) is around 15% per annum.
Asset investment
Asset investment funds are broken down into Real Estate, Cash Flow, and Value investment strategies. In Real Estate strategy, the company manages Spring REIT, a REIT listed on the Hong Kong Stock Exchange and marketed to individual and institutional investors that mainly invests in office buildings in Beijing. Spring REIT has provided an average annual dividend yield of around 7%. In the Cash Flow strategy, the company has formed and is operating, or is preparing to form, Aircraft Leasing Fund No. 1, Thai mezzanine fund, and Infrastructure Fund.
Cross-border investment as an investment concept
Mercuria’s investment concept is expanding cross-border investment with an eye on the business opportunities that open up as the company crosses the boundaries of countries, generations, and preconceived notions. The company seeks to provide financial and business support to Japanese businesses and assets with growth potential, and offers to investors any returns that are generated as a result. Mercuria also seeks to form and manage financial products for investing in overseas businesses and assets that produce strong and stable returns, and to repatriate investment gains from these products to Japan.
Process from forming to exiting a fund
Mercuria breaks down the process from forming to exiting a fund into five stages. The period from planning and forming a fund through to exit ranges from 5–10 years and the revenue the company receives from each fund varies according to the investment stage. The structure of fees paid by the fund to the company is different for each fund, but in all cases, fees comprise management fees (approximately 0.5–2.0% of AUM) and performance fees (around 20% of investment gains). In FY12/20, the company’s fund management business reported operating revenue of JPY2.3bn (-21.5% YoY), including management fees of JPY1.8bn (-2.9% YoY) and performance fees of JPY563mn (-54.8% YoY).
Planning a fund
At the stage of planning a fund, the company analyzes economic and investment conditions and uses its contacts to devise an investment strategy. At the planning stage, the company does not receive any fees.
Prior to forming a fund, Mercuria may invest its own funds (independently or with another investor) in a company or property that it plans to include in the fund as a preparatory step (pre-formation investment).
Forming a fund and searching for investment candidates
To form a fund based on a plan, the company invites investors that approve of the fund’s investment strategy to subscribe.
At this stage, Mercuria searches for and evaluates investment candidates. The company searches for good investment candidates through management and other contacts/networks, and capital alliance partners DBJ and Itochu. It may also receive referrals from brokerages, banks, and M&A brokers. In identifying investment candidates, Mercuria focuses on direct negotiations with the candidate company, leveraging its management team’s contacts and networks.
If the investment candidate fulfills the fund’s criteria and can be considered for investment, Mercuria prepares and submits to the investment candidate an Expression of Interest describing the fund, post-investment scenario, and other aspects.
At the stage of forming a fund and searching for investment candidates, the fund has been formed and the company has started managing it, receiving a management fee of around 0.5%–2.0% of AUM (capital commitments). In cases where the company puts its own money in alongside investors (same-boat investments) or makes pre-formation investments, it may also receive dividends or other payments from the company in which it invests.
Executing investments
At the stage of executing investments, the company first conducts due diligence of the management and financial condition of investment candidates whose owners are prepared to sell at the price offered by the fund and agree to all other terms and conditions. The company also designs an investment structure (transfer of shares, business transfer, company split, etc.), arranges financing, and concludes a purchase or investment agreement with the investment candidate.
We understand that investment candidates identified in the planning and formation stage of a fund are those with a strong probability of going ahead with investment, and thus the first investment of a newly formed fund is executed immediately. Thereafter, the company continues to source other investment candidates and executes investments. The period between forming a fund and completing all investments is around five years.
At the stage of executing investments, the company receives a management fee of approximately 0.5%–2.0% of AUM (total investment) from the fund.
By investing its own funds as well (same-boat investment), the company can also increase revenue from its Principal investment business. However, because these investments are not marked to market, revenue in Principal investment is only recognized on the income statement after the company has received a distribution from the fund or the investment has been sold and the gains are realized. In the case of same-boat principal investments or pre-formation investments, when the fund is at the point where it is making the investment, the pre-formation investment may be sold to generate a profit in cases where the asset in which the pre-formation investment was made is sold.
Increasing the value of and monitoring investments
At this stage, the company may appoint directors and employees as required and engage in recruitment, provide training support, pioneer sales routes, and improve business operations based on a scenario produced at the time of executing the investment. The company works together with the employees of the company invested in to improve earnings and grow the business.
The period of increasing the value of and monitoring investments is generally 5–7 years.
During this period, the company receives a management fee of approximately 0.5%–2.0% of AUM (total investment) from the fund. As in the investment execution stage, the fund does not use mark-to-market valuations for investments; instead, returns in Principal investment are recognized on the income statement in case where the investment is sold and profits are realized.
Exiting and profit distribution
After the stage of increasing the value of and monitoring investments, resulting in enhanced corporate value, the company formulates and executes an exit strategy to recover its investment. This entails selecting an M&A broker, shortlisting potential buyers, responding to due diligence requirements, and negotiating a sale agreement. The company earns a profit from the sale of the investment through an IPO or transfer of the business to a third party (trade sale).
At the exit stage, the company receives performance fees of around 20% of investment gains from the fund. It also receives a distribution from the fund if it has invested its own funds. Revenue from the Principal investment will be recorded as equity-method income, such as gain on sales of operational investment securities or operational dividend income from its funds.
Two investment categories, five investment strategies
When forming and managing funds, Mercuria focuses on cross-border investment with an eye on the business opportunities that open up as the company crosses the boundaries of countries, generations, and preconceived notions. The company commented that its strengths lie in investing in new businesses that combine existing products, technologies, and services in response to changes in society, rather than investing in new technologies or scientific discoveries.
Mercuria invests in businesses with strong growth potential and in assets likely to produce large returns that fit the above concept. In business investments it operates under Growth, Buyout/ Succession, and Value investment strategies, while in asset investments it operates Real Estate, Cash Flow, and Value investment strategies.