Many of Japan’s SMEs have been family-run for generations and face an uncertain future because there is no family member to take over the business.
A Japanese consortium has launched a billion-yen ($8.7 million) search fund to help small and midsize enterprises (SMEs) without apparent successors find the next generation of leaders.
The Development Bank of Japan, the Nihon M&A Center, Career Incubation and other firms created joint venture Search Fund Japan and launched it in November 2021, reported M&A Online.
The fund seeks to tackle a thorny problem: Many of Japan’s SMEs have been family-run for generations and face an uncertain future because there is no family member to take over the business. The fund will seek business school graduates with the potential to manage these mature companies.
However, delivering on the promise of a search fund will not be easy, according to one insider. After all, business succession discussions are a sensitive topic, requiring knowledge of the target business and finding a best-fit candidate for the company—and/or family.
Under such mechanisms, searchers raise funds via investors to fund the talent search, acquire a target company and install new leadership. The new team then is expected to increase the company’s value during the investment period, while the investors seek an exit.
Search Fund Japan, which has a ten-year operation period, targets companies with sales worth several hundred million yen and those with a steady cash flow. A 20% internal rate of return is typical, according to the fund, which expects a 2.5-times return on investment within five years.
Similar funds have decades-long histories in North America and Europe, which see more businesses that lack leader-ship successors. Although the problem is also apparent in Japan, to date such funds have not been widely used in the domestic market.
Yamaguchi Bank, the Momiji Bank and the Kitakyushu Yamaguchi Bank launched the first such mechanism, the YMFG Search Fund, in early 2019. The fund is managed by Yamaguchi Capital and the Japan Search Fund Accelerator. In early 2020, Shiomigumi, a civil-engineering company with a 64-year history, was the YMFG Search Fund’s first acquisition.