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At the time of its launch, Japan’s first ESG venture capital fund, MPower Partners Fund, established by former Goldman Sachs Vice President Kathy Matsui and valued at US $ 150 million, garnered considerable attention within of the fund industry.
The MPower Partners Fund is a rarity in Japan given its female leadership, as Bloomberg and other media have noted. Additionally, while the venture capital investment market has grown rapidly in Japan in recent years, it remains small compared to its counterparts in the United States and China. The fund’s launch marks a milestone in the Japanese investment fund industry.
Despite the relative novelty of ESG funds in Japan, structuring an investment fund fueled by an ESG strategy is similar to structuring any other type of investment fund. This article provides practical information and tips that fund managers can refer to when looking to establish an ESG investment fund in Japan.
In the investment fund industry in Japan, certain fund structures have become widely accepted within specific investor communities. Despite such familiarity, fund managers are always encouraged to assess how the considerations discussed below may apply to their proposed fund.
There is no guarantee that a fund structure that worked in the past will work again in the future. In addition, given the constant changes in the laws governing investment funds, it would be precarious to launch a fund without a careful assessment of its risks and reward potential.
The structure of an investment fund is one of the characteristics, if not the most important. While it is easy to fall back on “proven and tested” fund structures, we recommend that fund managers carefully review the fund structure before launch.
When structuring a venture capital fund, taxation is one of the most important considerations. The performance of a fund’s strategy is ultimately irrelevant, unless the investment of the fund’s assets and its distribution to investors is carried out in a tax-efficient manner. Multiple factors can potentially affect tax efficiency, including the nature and domicile of the target assets, the form of the investment fund itself, the administration of double taxation treaties and the jurisdiction of the fund’s investors.
In addition, it is equally important that fund managers fully understand all the regulatory considerations that may apply to the operation of the fund, as each jurisdiction has its own laws and regulations governing various aspects of its operations. The laws and regulations of each jurisdiction in which the fund will be linked (e.g. where investments are made, where the fund is managed, where the fund’s interest is offered, etc.) should be properly reviewed to ensure that the fund can operate in full compliance with applicable laws. Given the inherently cross-border nature of investment funds, various licenses, registrations or notifications may additionally be required by regulators.
Finally, it is important to note that the attractiveness of a fund is not necessarily linked to fiscal and regulatory concerns. Even if an investment fund is set up in a manner that is both tax efficient and in full compliance with applicable regulations, there is no guarantee that the fund will be successful in raising capital. Investors in certain jurisdictions may have strong preferences for specific types of investment funds depending on their structure and location. Therefore, some investors will only invest in structures that they have invested in in the past.
The ESG component
While the process of structuring an ESG fund does not differ much from that of other venture capital funds, the strategy for selecting portfolio companies plays a more important role for ESG funds. ESG fund managers must strictly adhere to the various self-imposed investment guidelines that restrict the sectors in which they can invest and the ways in which investments should be made.
Due to the recent popularity of ESG strategies among allocators, some fund managers may seek to “greenwash»Their fund by adding an isolated ESG component to their strategies. This practice was made more and more widespread by the divergences in the interpretations of “ESG”.
However, “greenwashingIs not without risks. First, various regulators are taking steps to prevent this practice. For example, the United States Securities and Exchange Commission issued a “Risk alertIn April following recent reviews of ESG investing and the discovery of problematic ESG investing practices.
In addition, investors themselves are increasingly sophisticated in understanding and monitoring their investments in any ESG fund. We have observed that more and more key investors document additional ESG investment restrictions and follow-up obligations in cover letters with fund managers.
In light of recent trends, we expect the popularity of “true“ESG-themed investment funds will only continue to grow in the future. As regulations regarding ESG funds continue to evolve and investors gain more experience in such investments, we believe that ESG fund managers who are truly dedicated to advocating for societal and environmental causes will benefit from new opportunities and success in this space.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.