How the IPO structure in Japan affects the strategy of startups entering into the market in Japan [Entry into Japan 2]

Kyumin Na

February 26, 2024

‍Previous Post｜Why Japan is rising as a hot spot for global startups? Here's the reason behind the trends [Entry into Japan 1]‍

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IPO. What an exciting word to hear!

It's the ultimate way to exit, and a clear demonstration of a company's success.

Today, with the help of Ayaka S., IPO/IB Specialist at MUFG in Japan & Younsun Ko and Tomomichi Takao(髙尾知達), CLO at Funds, let's unravel the IPO structure in Japan.

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Attracting startups from all over the world to Japan

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"The average daily trading volume of the Tokyo Stock Exchange Growth Market is over KRW 2 trillion."

That's more than the 1.5 trillion average daily trading volume of the Standard Market, the KOSDAQ equivalent, and close to the 6 trillion average daily trading volume of the KOSPI/KOSDAQ.

Tokyo's GrowthMarket is growing steadily, and the number of listed companies has also surpassed 560,000. Compared to 1500 companies listed on KOSDAQ, this is a huge difference.

With a 300x difference in the number of stocks, what kind of market is this Growth Market, and what do the Japanese market think about it?

Datarize has been proposed for an IPO in Japan. Even for a company that takes at least three years to six years to list on the Tokyo Stock Exchange, it's an attractive proposition.

As a company that has raised KRW 11.5 billion in Series A funding, it's undeniable that Datarize is going about its business in Japan as smartly and precisely as any company.

Japanese banks are very strategic. Having run the world's number one stock market in the past, they have data and experience navigating the asset markets. So what do they lack or need, on the flip side?

The answer is: companies to list/IPO. Japanese IBs are eagerly looking for a firm that can list on the Growth Market and bring them to the Standard Market.

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Why does Japanese banks rush to IPO market?

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Recently, as I've been doing business in Japan, one of the topics I've been discussing with officials from the three largest Japanese banks is their request to identify companies they can take public in Japan.

Japan's economy has stalled after the 'lost 30 years'. Government-driven 0% interest rates have made it impossible for banks to survive without transforming into IBs. Rates of less than 0.5% for even home mortgages and 2% for credit loans have created an environment where investment is the only way to go.

So, what's the best place for a bank that can't leverage interest rates to invest? It's the IPO market.

The Japanese government's initiative to invest 100 trillion yen in startups by 2030, as well as the lowering of listing standards for Growth Market IPOs to boost liquidity of assets, has left IBs/Mega Banks with no choice but to participate.

Also, is it possible for all 100 trillion yen to come from the government? Financial institutions will need to cooperate. As a result, major banks have to protect their assets.

What does it take for an IPO? Market valuation is a must. However, in the case of manufacturing and real estate, as well as biotech and energy, a professional valuation is essential. Moreover, the stability of the valuation is too often dependent on the company's transparency.

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IT startups are rising but also lacking in Japan

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The IT business requires "only talent and an office". It has the highest net worth of any industry and is the perfect industry for due diligence.

Unfortunately, many of Japan's leading IT companies have already gone public. Even overseas giants like LINE and NXC are already listed on the TSE.

The only option then is to search for a startup to take public.

However, the Japanese IT market hasn't yet fully moved away from the SI ecosystem, so it's time to look offshore. That's why Japan's mega banks started focusing on IPOs of overseas startups from the start of DT/DX, which began in 2020 due to the pandemic.

From 2020 to 2023, more than 500 global companies listed on the Tokyo Stock Exchange. The number of firms executing corporate inversions (CIs), commonly called "flips", into Japan is also on the rise, with Taiwan, Singapore, and the U.S. leading the way.

The Growth Market represents a trend in Japan's financial markets.

The government has lowered the listing requirements for corporations to increase cash flow and transformed the market to allow Japanese subsidiaries to list even if the headquarters does not do a CI in order to attract international capital. It generated the liquidity in the stock market that enabled the exchange to move from Growth to Standard.

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Wrapping up about landscape of IPO in Japan

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Therefore, seriously considering an IPO on the TSE may be a profitable proposition for Korean startups. Japanese major companies and IBs have already started Strategic/Financial Purpose Investment simultaneously for the IPO market. In either direction, if they are IPOed, mega banks will take the listing fee, and the giant companies will be able to monetize the financials based on SI/FI.

This is one direction of 'Open Innovation' in Japan. They are ready to work with Korean companies, and they are the ones who want to benchmark and collaborate with Korea more than anyone else.

One sentence to summarize this column.