Japanese capital pours into South-east Asia, seeking growth

THE planned acquisition of insurance provider Singlife, valued at S$4.6 billion, by Sumitomo Life in December 2023 sent a strong signal that Japanese investors are still on the lookout for opportunities in South-east Asia, as they capitalise on their low cost of funds.

Major banks have poured money into Indonesia, with Mitsubishi UFJ Financial Group (MUFG) investing US$100 million in lending platform Home Credit in December 2023, and a new 20 billion yen (S$181.2 million) fund with commercial Bank Danamon to focus on investing in the Indonesian market.

In January this year, Tokyo Century Leasing’s Singapore subsidiary made a strategic investment in car services platform Motorist, valuing the business at US$60 million.

Coming out of Japan, financial institutions operating in the country’s negative interest rate environment hold an edge over their international competitors with their ultra-low cost of funds.

The favourable demographics in South-east Asia with a growing appetite for financing makes the region very attractive to Japanese investors, Yasuhiro Maeda, partner at Japan-based consultancy Atlas Technologies Corporation, told The Business Times.

The negative interest rates maintained by the Bank of Japan have led to a pile of cash in savings accounts, which has a low cost to maintain. But lending to businesses in Japan would require institutions to lower their own interest rates to compete.

“Outside Japan, it is a world with interest rates; while in Japan, it is a world without interest rates,” said Maeda.

The arrival of Japanese money in South-east Asia is also funnelled by other factors, such as the saturation of capital in Australia and New Zealand, and geopolitical tensions with China and South Korea.

“In terms of market opportunity, there’s a lot that’s happening in South-east Asia, and the returns can be better in this part of the world,” said Zennon Kapron, director of consultancy Kapronasia.

Kapronasia was acquired by Atlas Technologies in July 2023 for 550 million yen.

Big banks MUFG and Sumitomo Mitsu Banking Corporation (SMBC) are no strangers to the region, having started investing in the early 2010s, said Atlas’ Maeda. MUFG invested in Vietinbank in Vietnam, and Security Bank in the Philippines. SMBC invested in VP Bank in Vietnam, and started a US$200 million fund to invest in fintech startups in Asia.

Familiarity with Asian cultures also means that investing in the region is “not uncharted territory for them”, said Roshan Raj Behera, partner at consultancy Redseer Strategy Consultants.

MUFG moved out of its comfort zone in financial services to pump US$796 million into Grab in 2020, noted Maeda. “They are trying to expand, and not miss any opportunities if possible,” he added.

The next tier of Japanese financial institutions have now started to spread their wings, said market observers.

Venture capital (VC) firms are seeing more Japanese companies show an interest in their fintech portfolio companies. Herston Powers, managing partner at early stage fintech VC firm 1982 Ventures, reported a recent uptick of interest from Japanese tech companies looking to gain a foothold in the region.

The large Japanese banks have been historically attracted to lending companies, and Powers expects this trend to continue as fintech lenders and digital banks begin to scale up in the region.

“We are starting to see more Japanese strategic investors look at embedded fintech, digital payments, wealthtech and enterprise tech companies in South-east Asia,” he said.

But investing in South-east Asia is not as simple as just writing a cheque. The fragmented nature of the region requires different strategies for each market.

Not only does each market in South-east Asia have its own quirks and nuances, each has its own regulator. Local players are also likely to fare better with regulators in their home countries.

Japanese companies, not unlike other international investors, have struggled with this in the past.

“Many companies have come to the region and struggled to make inroads because they assume that it is one region to have one strategy for,” said Kapron.

Then there is a proximity issue, as Japanese companies tend to be corporates, which are not getting exposure to opportunities they want to venture into.

This results in them competing with other late-stage investors for limited allocations into deals, which might not give the kind of access they want in order to understand the business and the market.

Japanese limited partners (LP) are showing interest in early-stage funds focused on fintech, said 1982 Ventures’ Powers. While the Japanese LPs have been getting exposure to growth and late-stage investments, getting access to earlier stage deals requires partners in that space.

“We expect a new set of Japanese LPs to begin deploying into South-east Asia-based VC funds for access to co-investment and to increase their knowledge of the local fintech ecosystems,” said Powers.

Startups, on their part, have little issues dealing with Japanese investors, compared to navigating the current geopolitical situation between the US and China.

For instance, Sea had its free-to-play game Free Fire banned in India in February 2022, over fears that it was sending data to China.

The Singapore-based tech company is backed by Chinese giant Tencent.

“In taking money from US or China-based investors, startups would have to think through if there are any strings that come with it,” said Redseer’s Behera.