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The Japan America Society of Chicago

David Baeckelandt

February 24, 2011

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Who Is Dave Baeckelandt?What has he done (re Japan)??Why the heck is he here???

Relevant Japan-Related Background:

Author, “Japanese Financial Art: An Overview of Japanese Scripophily” (2010)

Executive Board Japan America Society (2000-Present)

President, Chicago-Pacific Capital Advisors (2002-2005)

Private-Equity Investor – Tully’s Coffee Japan (2000-2003)

Country Head, Japan – William Blair & Co. (1994-2002)

Pension Investments Department, Bank of Tokyo Trust (1990-1994)

Investment Management Dept, Mitsubishi Bank (1988-1990)

Japanese History Graduate Student (MA, 1988)

Simultaneous Interpreter/Translator – Top Kogyo (1986)

Exchange Student in Japan (1983-1984)

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A brief word from our sponsor…

Baeckelandt’s Current Responsibilities:

Director, Sales & Marketing at $7 bn AUM Investment Manager Segall Bryant & Hamill – Sell Investment Management to Large Pension Plan Sponsors (including Japanese, Asian, European and U.S. plan sponsors)

Why Segall Bryant & Hamill?

$7.3 billion AUM Chicago HQ’d investment manager

#1/#2 Information Ratio for 3-5-7-10 years in Core & Intermediate FI

#1 Among peers in U.S. Small Cap Value (3 years)

Top decile performance in U.S. Small Cap Core

1 of only 7 managers with 20 year record in U.S. AllCap

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Japan Has Endured More Than 20 Years’ of Financial Markets Malaise

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Yet the Financial Underpinnings of Japan – Japanese Banks – Are Solvent…And With Better Capitalization Than U.S. Banks

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Although Its Share is Smaller Today, Japan Remains a Major Factor in Global GDP

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Yet Japan Still Has the 2nd Largest % of Global Pension Assets

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Mitsui – Example of Early Japanese Corporate Governance

Roots to 1568…

Established House Rules in 1600s!

Rules Governed Obligations to Customers, Colleagues, Shareholders (Mitsui Family)

Most Japanese Companies Were Family-Owned/Operated

Nearly All Family Owned Companies Adopted House Rules

Japanese House Rules in Existence Before Western Corporate Governance

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Hoshi Ryokan – World’s Oldest Privately Owned Business

Forty Six Generations of Same Family Since 717 AD

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Japan’s Investment Origins

Deep Historical Origin of Private Equity…’Neither Borrower Nor Lender Be’

Oldest Private Entity (Est. 538 AD; Acquired 2006)

Oldest Existing Private Equity (Est 717 AD; 46 Generations)

Oldest Continuing Entities (Mitsui, Sumitomo, etc.)

Japanese Origins of Private Equity Found in Late 18th Century

Modern Japanese Private Equity Resurrected in 1972 With JAFCO

Cultural, Economic, Political, and Legal Environments Influence Japanese Private Equity Growth and Development

Clear Corporate Governance Practices Back to 17th Century (eg, Mitsui House Rules)

Long Term Corporate Tradition of Financing and Starting Spinout Firms

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How Does Investor Disclosure Compare Between Japanese & U.S. Firms (Public & Private)?

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Examples of Investor Disclosure – Starbucks US vs Japan

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Examples of Investor Disclosure – Starbucks US vs Japan pp 2 & 3

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Examples of Investor Disclosure – American Fantasy vs CyberCoin

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Examples of Investor Disclosure – American Fantasy vs CyberCoin p 2

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Examples of Investor Disclosure – American Fantasy vs CyberCoin p 3

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Is Japan Right For Investment Now?

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

- Warren Buffett

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Japan’s Public Equity Markets Have Held Up Best in Current Crisis

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Japan As Investment Target

World’s 3rd Largest Economy

Liberal Democracy, Civil Law System

Approximately $2 trillion in investable assets

Broad, Tranched Public Markets Tokyo, Osaka, Mothers, Hercules

Less Than 1,000 Institutional Investment Managers in Public Markets

Highly Developed Patent Law

Vibrant Innovative Technology Sector

Excellent Academic Institutions

Strong Engineering & Manufacturing Sector

Large, Liquid Capital Markets

Long Private Equity History

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Japanese Institutional Investors’ Allocations Are Still Conservative

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What Opportunities Exist in Japan for Investment Now?

Generational Shift offers investors opportunities with family-owned firms

Japanese conglomerates, have weathered their harsh downturns and many have stronger balance sheets than their US & European counterparts

Platform companies exist in a number of industries that are poised for overdue roll-ups for strategic and financial acquirers

The playing field has very high barriers to entry but an economy half the size of the U.S.

Plenty of opportunities for those of more modest ambition, with a more operational bent.

Japan Inc.'s strategic relationships in the Asia Pacific region

Real countercyclical alternative to the US-Euro axis.

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Practical Considerations For Investment in Japan

"I love you, yen. You are so orderly, so loyal, like your country."

Victor Niederhoffer, The Education of a Speculator, (New York: John Wiley & Sons, 1997), p.4

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Practical Considerations For Investment in Japan 1

Legal

Civil Law vs Common Law

Administrative Guidance instead of Common Law Statutes

Possibilities instead of Definitive Opinions

Negotiations

Junior Staff vs Senior Players

Absence of Legal Counsel

Junior vs Senior Staff Delegated to Negotiate

Staff Often Note-Takers and/or channels instead of Decision-Makers

Delayed Decision-Making (to reach a broader internal consensus)Source: http://www.asialaw.com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments.html

By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law

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Practical Considerations For Investment in Japan 2(continued)Review and Approval

Absence of Legal Counsel

More Time-Consuming

May Require Last Minute Review of Items Deemed Closed by Internal Legal Staff (who may not be licensed)

Final Review May Require a Re-opening of Issues Deemed Close to Accommodate Other Senior Management

Due Diligence

Usually Conducted By Japanese Law Firms

Limited versus Comprehensive (Focus on Documents and Factual Matters rather than Issues, Risks and Solutions)

Publicly Available Information Does Not Include Areas Common in the U.S. (eg, Liens and Security Interests)

Source: http://www.asialaw.com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments.html

By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law

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Practical Considerations For Investment in Japan 3 (continued)Other Concerns:

Language

Jurisdiction

Governing Law

Documentation

Financing

Liabilities of Affiliates

Financial Issues

Stamp Tax Issue (% of total transaction value)

Key Role of Japanese Bank (approval needed for assignment issues)Source: http://www.asialaw.com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments.html

By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law

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Practical Considerations For Investment in Japan 4 (continued)

Cultural Confusion

Different Concepts of the Rights of Management & Shareholders

Different Expectations of Due Diligence and Approval

Different Expectations in Outcome and Process

Different Expectations in Terms of P&L vs Social Contract

Finite Number of Experienced Advisors (therefore Conflict of Interest)

TranslationsSource: http://www.asialaw.com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments.html

By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law

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ResourcesPractical Sources of Information

JETRO’s Market Research: http://www.jetro.go.jp/en/market/ JETRO’s Setting Up Enterprises in Japan:

http://books.jetro.go.jp/cgi-bin/bookdata/db.cgi?cmd=dp&num=450&dp=detail2.html

American Chamber of Commerce of Japan publications: http://www.accj.or.jp/content/offerings/pub

Japan Inc. Magazine: http://www.japaninc.com/ Terrie’s Take (Biz trends synopsis): http://www.japaninc.com/terries_take The Nikkei Weekly: http://www.nni.nikkei.co.jp/FR/TNW/ Tokyo IPO.com: http://www.tokyoipo.com/top/en/index.php?j_e=E Japanese Financial Terminology & Translations: http://www.fincom.jp/ Japan Yellow Pages: http://www.yellowpage-jp.com/ Japan Times: http://www.japantimes.co.jp/ Great Stories of Foreigners’ Success in Japan: www.sayingyestojapan.com Official Stats on Japan: http://www.stat.go.jp/english Financial Stats on Japan:

http://www.stat.go.jp/english/data/chouki/14.htm

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ResourcesCultural, Social, and Unofficial Sources of Information

Steven Gan Story: http://www.japanentrepreneur.com/200403.html#2

Japanese Financial Translations http://www.jfti.org/

Private Equity Trailblazers:

http://www.j-seed.com/

http://www.asiainvestmentpartners.com/en/

Other Popular Blogs I Like On Japan:

http://japanjapan.blogspot.com/ Japan Economy Watch

http://www.japanconsuming.com/ Japan Consuming

http://www.japundit.com/ Japundit

http://nihoncassandra.blogspot.com/ Cassandra Does Tokyo

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ResourcesSources of Information – Recommended Books

Recommended Reading:

They Came To Japan: An Anthology of European reports on Japan, 1543-1640 by Michael Cooper (Berkeley: University of California Press, 1981)

Japan’s Financial Revolution – And How American Firms Are Profiting by Stephen M. Harner (Armonk: M.E. Sharpe, 2000)

Saying Yes To Japan – How Outsiders Are Reviving A Trillion Dollar Services Market by Tim Clark and Carl Kay (New York: Vertica, 2005)

How To Do Business With The Japanese – A Strategy For Success by Mark Zimmerman (New York: Random House, 1985)

How To Do Business With The Japanese – A Complete Guide To Japanese Customs and Business Practices by Boye Lafayette DeMente (Lincolnwood, IL: NTC, 1993) 2nd Edition