Profile: Kenta Shima, J-STAR

The Drawdown (TDD): You’ve been with J-STAR since 2015. Can you describe the evolution of the Japanese private equity market in that time?

Kenta Shima (KS): The Japanese private equity industry is relatively new and still far from a mature stage. The first generation of PE firms launched in the late 1990s. By comparison, J-STAR is considered a second generation firm because it was established in 2006.

Given the timeline, there’s still only a limited number of GPs in the Japanese market and a small number of professionals with fund operations experience compared to other regions. This creates challenges when hiring someone for operational functions, as not many people outside this industry have our specific expertise. We tend to hire professionals from a complementary background such as accounting and teach them how we manage our PE operations.

Since the asset class is gaining traction, more and more young professionals are wanting to work in PE. They’re ambitious and love the energy and rewards of the deals and value creation side. I think over time, our talent pool will improve, but we’re not yet near the levels of the UK and US markets.

TDD: You started out as an investment manager at J-STAR, then pivoted to IR, and now incorporate operations and finance under your remit. How did these moves come about?

KS: I started incorporating IR into my remit because our CEO, Greg Hara, believes it helps to provide our investors with accurate investment information by having deal experience. I was also selected because I speak English more fluently than some of my colleagues, meaning I can communicate with a wider set of LPs, not to mention my previous experience working with investors at MUFG Union Bank.

I then added operations and finance because I’m heading up some mid-to-long term initiatives at J-STAR, including integrating the IR function with our operational functions. Prior to this, both functions were completely siloed. But given that our work and communications overlap, it makes sense for IR and ops to collaborate and work closer together.

Our operational functions currently comprise seven professionals: two accountants, one with legal & compliance experience, one with corporate planning experience and two assistants. With just 30 staff, J-STAR is too small to have a separate HR function yet, so one of our operational professionals focuses on those tasks.

Taking on board Greg’s (CEO) perspective of all of our team partaking across functions, we want to ensure our operational staff can cover each other at any time, should they need to, for whatever reason such as absence, annual leave, and so on. This includes HR. This will take time, but the long-term payoff will be worth it.

Overall, our team is planning to expand to about 50 people, so I’d imagine we’ll look to introduce a chief HR officer in the future, as then we’ll need to professionalise our HR function.

TDD: What has been challenging?

KS: Operationally, it’s completing our processes in an efficient manner, given that we’ve been working relatively manually for some time. Currently, J-STAR is recognised as one of the Japanese PE firms with the most investments. We’ve already got four vintage funds and executed more than 100 transactions, so our workload is constantly increasing.

However, introducing new technology systems isn’t enough to ensure we’re the most efficient we can be. We need the right outsource providers to relieve some of the pressure too, so we’re currently searching for appropriate third parties we can partner with.

Another challenge we have is language barriers. The majority of well-known tech providers’ solutions are based in English. Around two-thirds of our investor base is non Japanese, while the majority of J-STAR’s employees aren’t fluent English speakers. We need to find the right providers which enable us to maintain efficiency and improve our operations, so we can all use/work with them.

TDD: J-STAR closed its fifth fund on its ¥75bn hard cap in April. What was your role in this? How much did you outsource?

KS: During the fund formation process, I worked with our legal, finance and tax advisors to set up a Cayman Limited Partnership structure. It’s common for Japanese GPs to use Cayman and Japanese vehicles to accommodate a global investor base. For this particular fundraise, the majority of J-STAR’s LPs are non-Japanese so we only used a Cayman fund. Additionally, I liaised with our partners to finalise the investment strategy, including our next fund, targets and so on.

At this point, I put my IR hat on and created our marketing documents, such as our PPM, and I’ve been heavily involved in both operational and commercial due diligence alongside our tax and legal advisors. We met with about 50 investors through the process, but given that this fundraise took place during the pandemic, 99% of our investor meetings were online via Zoom, and questionnaires were sent via email.

In terms of outsourcing, we used a placement agent, and for the longer-term fund management, we work with a Jersey-based fund administrator who manages our Cayman vehicles. It’s common for most major Japanese PE firms to use at least one fund admin to spread the workload.

TDD: What is J-STAR’s tech stack?

KS: We do most work using Excel with lots of manual input. While our operational quality has improved in the last 15 years, we don’t have an expansive tech stack right now.

However, institutionalisation is the next priority for J-STAR, as the team is growing rapidly. We’re currently looking to improve three core areas. Reporting, as until now we’ve provided all LP reports via Excel. Our CRM, which will become even more integral as our IR and back office functions work closer together. And we want to introduce a HR system. Currently, we calculate everything including bonuses using carried interest as the source, manually with Excel, so we’re looking to bring in a system that can automate these processes for us.

TDD: How does J-STAR handle ESG?

KS: We were one of the first Japanese firms to become a signatory of the UN PRI back in 2014. However, we didn’t actively integrate ESG into our processes until recently.

At the beginning of 2022, we formed an ESG Task Force within J-STAR, which comprises our value creation team. They lead our ESG-related initiatives across the business and within our portfolio.

Going forward, I believe ESG will be a key focus for us. As part of this, we recently became an active sponsor of ESG-related industry events as we want to be a firm which leads by example.

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Changing priorities

Given that J-STAR has a global LP base, Shima has noticed some differences in investor queries. “ESG was definitely a more prominent topic from our European investors this time round, compared to our Asian LPs,” he says. “I also noticed cyber security was far more accounted for and diligenced than during our previous fundraise several years ago.”

Furthermore, Shima noticed changes to the side letter agreements. “We saw more investor demand around anti-money laundering and other prohibited investments as well as the importance of enhanced due diligence we have to perform. To achieve the latter, we’ve started using an enhanced DD database to comply with those LP requests.”