JAFCO : Information Meeting for Financial Results for the Six Months Ended September 30, 2023

Information Meeting for Financial Results for the Six Months Ended September 30, 2023

Date: October 25, 2023

Location: Station Conference TOKYO (Real time streaming on Zoom Webinar)

Matsuda: It is now time to commence the quarterly financial results briefing session for Q2 of the fiscal year ending March 31, 2024, of JAFCO Group Co., Ltd.

Today's speaker is Mr. Miyoshi, President and CEO. I, Matsuda, will be the facilitator.

In the next 30 minutes or so, our president, Mr. Miyoshi, will give an overview of our financial results and business activities, and then I would like to take your questions.

The materials used for the explanation will be the presentation materials for Q2 of the fiscal year ending March 31, 2024. As the materials have been handed out, we will be projecting the pages on a screen in the front of the room as we explain. We would also like to invite all online participants to view the materials shared on the screen. If anyone in the audience does not have the materials at hand, please raise your hand to let us know. Is everyone okay?

Please note that the audio for all online participants will be muted during the presentation.

Mr. Miyoshi will now begin his presentation.

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Miyoshi: My name is Miyoshi. I will explain page-by-page based on the financial results briefing materials disclosed today.

This is page three of the financial results presentation. We begin with an overview of the financial results for Q2 of the fiscal year ending March 31, 2024.

This page discusses the change in the business environment and its impact on the investment portfolio. With the reemergence of geopolitical risks and other factors, the sense of uncertainty about the future has yet to be dispelled, and we see the trend of careful selection continuing. In addition, conditions remain difficult for IPOs, especially those involving large fundraising.

As for business performance, there were two domestic IPOs and one overseas IPO. Capital gains on the sale of listed and unlisted shares combined were only JPY2.5 billion. Additions to investment loss reserves stood at JPY1.6 billion in Q1 and JPY1.9 billion in H1.

The total amount invested globally came to JPY20.2 billion. This is substantially lower than in the same period of the previous year due to a high pace of investment in the first half of the previous year.

The total amount of the SV7 Series, a new domestic fund for which we had been fundraising, has been finalized at JPY97.8 billion. The amount of external capital commitments are JPY71.3 billion and our own commitments are JPY26.5 billion.

Our share of the total fund amount was 27%. We believe that we have made a step forward in our fundraising activity, which is one of the axes of our basic policy for enhancing corporate value.

As I will discuss in detail later on at page 15, we issued zero-coupon CBs with a five-year maturity and raised JPY15 billion.

Last but not least, in June of this year, we formulated our basic policy on sustainability and decided to endorse the TCFD's recommendations.

The Integrated Report is scheduled to be issued at the end of October.

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From here, we will report the financial figures. Please turn to page five. Theses materials explain our business performance in the first part up to page 17. After that, the fund as a whole is covered.

Page five shows our performance. Capital gains were JPY2.5 billion, as I mentioned earlier. Success fees were only JPY156 million. Management fees have increased due to an increase in the amount subject to management fees as a result of fundraising for new funds.

Net additions to investment loss reserves were JPY0.4 billion. SG&A expenses were JPY2.3 billion, operating income was JPY1.9 billion, and net income was JPY2.3 billion.

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Continued on page six. Our profit and SG&A expenses. For each year, the bar on the left side shows income sources. The bar on the right shows SG&A expenses.

The upper orange of the left bar represents capital gains, the middle green represents success fees, and the lower bar represents management fees. The top part of the right bar shows business taxes, and the bottom dark gray part shows SG&A expenses excluding business taxes.

The bottom of this overall table shows the number of employees at the end of the fiscal year. In the last column, the administrative expense coverage ratio is listed. The degree to which the fund management fee covers the SG&A expenses excluding business tax is expressed in the form of the administrative expense coverage ratio.

Although the coverage ratio exceeded 100% in Q2 due mainly to an increase in fund management fees, it was only possible because we retroactively recorded the fund management fees for the SV7 Series between July 2022, when it was established, and March 2023 in Q2. Considering an increase in new hires, we have yet to reach a level where the coverage ratio exceeds 100% on a regular basis.

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Page seven shows the capital gains and investment multiples as a breakdown of profits.

The bars represent capital gains. It is divided into two tiers. The upper green part shows the gain or loss from listed sales and the lower part shows the gain or loss from unlisted sales.

The orange line graph represents ROI. The target is 2.5 times shown on the right. Compared to the target, the levels for the fiscal year ended March 31, 2023 and the six months ended September 30, 2023 are low.

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The Appendix on page 31 of the document shows the ROI since 2008.

Continued on page eight. It shows capital commitments to funds in comparison to our fund management fees.

First, the amount of capital commitments to funds is shown in the left bar. The green in the upper part of the bar indicates funds being extended, the light blue in the middle part indicates newly raised funds, and the dark blue in the lower part indicates funds under management. The total is JPY463.5 billion.

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In contrast, the orange bar on the right side is the amount subject to management fees. This orange bar graph shows the amount of capital commitments to funds minus the Company's interests in funds, 'non-consolidated US funds, and the funds that are being extended.

The actual amount of fund management fees is shown in the orange line graph, which was JPY2.5 billion. The amount subject to management fees increased to JPY189.8 billion due to fundraising for new funds.

Please skip one page. Here is the operation term of the flagship funds and the timing of capital gain realization.

As written at the top, SV4 is being extended until the end of December 2024. Regarding SV7, the total amount of the fund has been finalized, but operations began last year. The table shows the balance of unlisted holdings as of the end of September. The pie chart below shows the breakdown of the balance of unlisted holdings by flagship funds.

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Next, page 11. Here is our asset composition and the total amount of funds under management. The table on the left is the asset composition of JAFCO itself. The table on the right provides an overview of the fund assets corresponding to asset components in the left table and JAFCO's interests in fund assets.

Of JAFCO's interests in the right table, JAFCO's interests in uncalled commitments to funds, which stand at JPY41.1 billion, are shown at the very bottom. With the aim of covering this amount with available cash and deposit, we issued JPY15 billion in CBs.

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Page 12. Next, the table shows the balance of unlisted operational investment securities and additions to investment loss reserves.

The orange line graph shows additions to investment loss reserves from the past. The blue bar on the left is the balance of unlisted holdings and the green bar on the right is the balance of reserves.

The balance of investment loss reserves is shown in the table on the right, broken down by region. As stated above, the reserve ratio in the U.S. increased, but the domestic reserve ratio fell as investment progressed, so overall, the level is almost the same as in the fiscal year ended March 2023.

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Next, page 13. Fair value valuation and valuation multiples of unlisted operational investment securities are shown here. These figures are provided as reference.

Fair value valuation is also shown in the fund management section after this. That is the valuation that represents the funds as a whole, and this is the valuation based on JAFCO's performance.

The US funds and the Asian funds are audited on an annual basis, but funds in Japan are not audited. Hence, these are reference values.

In addition to the so-called markdowns, the fair value valuation also includes markups, which reflect the unrealized gains on unlisted shares, known as the fair value basis.

In the chart on the left, the valuation of unlisted operational investment securities is shown by comparing March 2023 and September 2023. Considering the acquisition cost of JPY89.4 billion for September 2023 as 1x, the valuation after markdowns of JPY74.4 billion comes to 0.83 times. The 17% reserve ratio, which is shown on the previous figure, appears in this form.

The JPY124.1 billion to the right of that figure is the fair value valuation of JAFCO's unlisted shareholdings. Its valuation multiple is 1.39 times. Compared to the end of March 2023, it has improved, but compared to the end of March 2022, when the multiple was 1.41 times, it has declined.

In Japan, we are now in the process of developing rules for venture companies and buyout firms to ensure that fair value valuations can be appropriately applied.

If we consider the valuation after markdowns as the starting point, or 1x, the 1.39 times in fair value valuation is divided by 0.83, resulting in the valuation multiple 1.67 times.

Next, the chart in the middle. It represents the valuation multiples of shares being held. The holding period of the shares being held is 4.1 years. The holding period is being slightly extended. Looking at the past five years, the average exit multiple is 2.58. Over the past 15 years, it is 1.89 times.

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