Surge in Japanese IPOs points to lack of venture capital culture

The small but ambitiously-named Institution for a Global Society Corporation made its debut on Wednesday on the Tokyo Stock Exchange Mothers market for start-ups. In the first 15 minutes of trading its shares had soared 26 per cent above the issue price; after 30 minutes, most of those gains had evaporated; after an hour, it had lurched another 13 per cent higher.

Beyond its nausea-inducing start, the Tokyo-based company, which sells human resources evaluation software to schools and corporations, may have a long and brilliant listed future ahead. But for now, IGS’s chief claim to fame is that this was the final initial public offering in Japan’s busiest month ever for new listings. Some 32 companies have come to market in Tokyo since the start of December; seven of those on Christmas Eve alone; 25 on the Mothers market.

This flurry keeps the Tokyo equities scene interesting (albeit only at the small-cap end of things). It makes profitable work for the IPO bankers. But it may also be a sign of something fundamentally skewed about Japan’s relationship with risk and the deployment of capital. There are gems in there but a lot of these companies, say investors, look woefully unready to be listed.

On the face of it, this extraordinary concentration of IPOs is suggestive of energetic capitalism at work. It also attests, on an optimistic viewing, to the vibrancy of Japanese entrepreneurialism despite its tarnished image.

The range of IPOs over the past four weeks has offered a broad choice of industries to bet on. In addition to fintech offerings and several claiming transformational “artificial intelligence solutions”, companies include a social media account manager, a firm that collates medical data, a producer of ready-made tea drinks and a start-up that manages beauty salon bookings.

And for the Japanese retail investors who concentrate most of their attention on Mothers stocks, the December IPO glut has generated exactly the sort of churn and tradeability that they have come to expect.

The best performer among the month’s IPOs (a provider of digital marketing solutions) is up almost 250 per cent; the worst (a provider of cloud architecture for brokerage apps) fell 35 per cent below the issue price on its debut — the worst first-day plunge for an IPO of that size in two decades.

But there is a considerably more pessimistic take on all this. The December IPO boom, admitted bankers involved in several of the new share issues, looked rushed. Almost panicked. Many of the companies, noted one broker, are way too immature for a listing. The Mothers market — notionally the most exciting end of Japan’s listed spectrum — has fallen almost 17 per cent since the start of 2021, far underperforming the broad Topix index of First Section TSE stocks, which has risen more than 11 per cent.

The fear, of which the year-end rush to IPO is a symptom and the Mothers underperformance a leading indicator, is that Japanese equities will fare badly in 2022.

Analysts at Mizuho Securities suggest several sources of that concern, but high among them is the November decision by MSCI to lower its weighting of Japan in its World Index from 6.9 per cent to 5.7 per cent. More and more US funds are deciding that Japanese equities are not worth researching. In the same December week that 23 new stocks came to market, foreigners extended their selling into a sixth week with a net dumping of $4bn worth of cash stocks.

When coupled with the fact that the Bank of Japan is no longer buying exchange-trade funds at pace, this has meant Japanese retail investors were the main net buyers of equities in 2021 for the first time in a decade. Market veterans — and the bankers advising companies on their IPOs — know that this is not a segment that has appetite for risk which can be relied upon over even the medium term.

But the greater problem, as illustrated by the IPO glut, is that Japanese start-up companies have very little choice but to list. Their decision to do so is made in Japan’s pernicious, long-term absence of a deep venture capital culture outside the large corporations.

Rounds of funding that would, in Silicon Valley and elsewhere, be met by VCs instead have to be met in Japan by a hope that stock investors will be better allocators of capital in the early life of a company than seasoned nurturers of start-ups. Add that to a swirl of sharp-suited bankers promising rapid wealth to the founders and reminding them that listed status makes it easier to recruit talent and the scene is set. For both investors and the newly-minted stocks, the December IPO party could quickly deliver a throbbing January hangover.

leo.lewis@ft.com