Key Takeaways from the second annual Tokyo Fund Finance Association Conference

The second (and hopefully) annual Japan Fund Finance Association (FFA) conference was held in Tokyo on 29 May, 2025. The event saw strong participation from Japanese and international GPs and LPs as well as leading banks, financial institutions, legal advisors and rating agencies. From around 100 participants in 2024, there were around 250 registrations this year showing a marked increase in interest in fund finance within the Japanese market. DLA Piper was represented by Singapore Partner, Soumitro Mukerji. Below is a summary of the key findings and observations from the conference.

 

Japan: key themes

Participants noted a marked increase in investor appetite for the Japanese market, being one of the standout performers currently in the APAC region. Some of the factors supporting this include the volatility caused by "liberation day" tariffs, international funds shifting to Japan as part of a "de-dollarisation" trend, Japan being seen as a safe haven and a largely stable market, significant improvement in corporate governance standards over time, capital optimization by Japanese companies and focus on shareholder return. In this backdrop, there has been an increase in private capital raising and deployment in Japan and consequently the growth in the demand for fund finance.

"The Japan fund finance market continues to grow year on year with SMBC seeing this translating into real conversations/deals with clients both onshore and offshore. The event was a testament to how the Japan market is moving with many attendees from Japan and overseas coming together from GPs, bankers, and lawyers in fullforce" notes Darren Choy, SMBC, Head of Fund Finance, APAC ex-Japan.

 

Challenges for Japanese fund finance

Historically, subline facilities have not been used in the Japanese market. This has been due to a number of factors. Japanese fund documents have not typically permitted borrowings and collateral. Domestic GPs have not been sufficiently educated on the use of fund finance facilities. There have been concerns around the use of fund finance to boost fund IRR – this being seen as not in line with core fund management principles. Depending on the structure of the fund and the related financing and collateral, there have been concerns around adverse tax consequences for overseas LPs.

In a poll of audience members conducted at the conference, 41% of the audience felt the biggest hurdle to the growth of the fund finance market in Japan is the inability to get a buy-in from LPs. That said, this is now starting to change with GPs seeing fund finance as being key to remaining competitive in the market.

 

Features of Japanese fund finance deals

Panelists noted the following key features of Japanese fund finance deals. The financings are typically governed by Japanese law as opposed to English or New York law. The fund structure often involves parallel funds (Japanese and non-Japanese). The pool of Japanese investors tends to be quite concentrated and in order to mitigate concentration risk, lenders seek investor letters. However, these are usually challenging to obtain from LPs. Fund financing transactions tend to be more bilateral in nature. The market is only just warming up to sublines and none of the panelists were aware of a NAV financing having been completed in the Japanese market.

 

New model LPA – a game-changer?

The Japanese Ministry of Economy, Trade and Industry (METI) has proposed a new model agreement for an investment limited partnership agreement (Model LPA). The Model LPA is intended to reflect terms which are typically seen on international investment fund transactions and would, amongst other things, permit fund-level borrowing and the grant of collateral. The draft Model LPA is now available (in English) on METI's website. Please see the link here.  

The draft Model LPA Section 1 refers to "Subscription Finance". Sections 7.6 and 7.8 contemplate security over capital call rights and the collateral account. If the draft Model LPA is approved by METI, this should support wider market adoption and could potentially be a game-changer for the Japanese fund finance market.

 

Domestic fund-raising market

Panelists observed that the number of domestic GPs is increasing and there is a lot of competition, especially in the mid-market space. Interestingly, pricing in the mid-markets is more competitive than in the large-cap space. This is due to regional Japanese banks supporting mid-market players at very competitive pricing. There is an on-going push to bring the retail sector into the alternatives space. This trend is likely to continue given the rise in inflation and investors looking at higher yielding investments. Given the size of the Japanese economy, the investment funds industry is still relatively under-developed. However, based on Preqin's survey, Japan is still the most favourable investment destination within the APAC market.

 

Private capital and buy-outs

Panelists noted that there has been steady growth of private credit in the Japanese market. In the buy-out space, other than the three Japanese mega-banks, there are not many other significant liquidity providers for buy-out funds. This creates an opportunity for private credit. However, private credit investments also require careful tax structuring to avoid withholding tax risk for investors.

Proposals are being mooted to make the listing criteria for companies more stringent. If this happens, the IPO market will be harder to access for certain companies. For e.g. 80% of venture capital exits in Japan happen through an IPO and if the listing process gets harder, this will create further opportunities for buy-out funds.

 

Broader Fund Finance Market Developments

• Despite a slowdown in the fund-raising market, on average, a trillion dollars are still being raised year-on-year. As an indication of the growth of the fund finance market, in 2000, 10% of private capital players used fund financing while 90% of the market did not. As at 2023, that statistic has fully reversed whereby 90% of funds use fund finance and only 10% did not.
• On pricing, there currently remains a 50-75bps pricing delta between the US and Asian subline market.
• Fund finance credit ratings have not generated much interest in the APAC region but they are being used in the US and Europe. In the US market, this is part of a distribution strategy. In Europe, banks are using ratings for regulatory capital relief.

We hope you find this note helpful. The DLA Piper global team remains at the forefront of the fund finance market. Do reach out to us if you would like to discuss any aspect of this note.