A model limited partnership agreement put forward by the Japanese government could boost efforts to develop the country’s fund finance industry.

A Ministry of Economy, Trade and Industry draft, published earlier this year, makes specific reference to subscription finance, giving managers the ability to create security interests over capital call rights. The prior 2010 edition of the model LPA did not make explicit reference to subscription facilities.

“This is probably the most significant development in the Japan fund finance [industry] to date,” Fi Dinh, head of fund finance for Asia-Pacific at MUFG Investor Services in Singapore, tells Private Equity International.

“The expected amendment to the model LPA to include, more specifically, subscription line and granting of security is a big step forwards to make these transactions more acceptable and accessible to new lenders, including the large population of foreign banks to enter into the Japan fund finance market. The amendments would also make Japanese funds better aligned with their international peers and thus more relatable to a broader group of LPs.”

The government’s apparent endorsement of fund finance is expected to increase acceptance of their use among both managers and investors.

“I think a lot of the GPs and LPs will take comfort in that and look to then have this in their fund documents, which would then mean [fund finance] will take off in Japan,” notes Soumitro Mukerji, a Singapore-based banking and finance partner at law firm DLA Piper.

Benchmarking boost

Enhanced use of subscription credit lines could enable domestic funds to compare more favourably with their international peers. According to MSCI data, the median sub line has inflated buyout and real estate fund IRRs by approximately 100 basis points relative to the same funds if they had not used such facilities.

“That’s what the GPs were telling us,” says Mukerji. “[That] we’re being put at a disadvantage to our international peers.”

Such a dynamic could prove a further tailwind for a market already considered by some to have entered its golden age. LP and GP appetites for Japan have soared, not least because funds in the country compare favourably in terms of DPI relative to those overseas. KKR, for its part, says the market is generating the firm’s best returns.

The addition of fund finance could further help LPs compare domestic and overseas funds on a like-for-likes basis.

“Once Japanese funds are able to adopt fund finance in a more systemic way, it would also allow more accurate benchmarking to be made both between the on- and offshore vehicles under the same fund,” says Dinh, “as well as with other regional or global funds to whom fund finance is an intrinsic part of operations.”

Ready for launch

At this stage, however, Japan’s fund finance industry remains comparatively nascent.

“Although there have been periodic sub lines being provided bilaterally in Japan in the last 10 years, the number is very small,” Dinh explains. “We actually only heard of less than 10 in 10 years.”

MUFG is among the lenders hoping to both catalyse and capture demand for subscription credit facilities in Japan, PEI reported last year. These efforts coincided with the Fund Finance Association’s first Japan conference in April 2024, hosted by MUFG. The second was held in May this year, hosted by fellow mega-bank SMBC.

“Since [the first conference], we have been speaking to many Japanese GPs about fund finance technology and how it can be incorporated into the next fundraise,” Dinh notes.

“To our pleasant surprise, the level of sophistication and understanding have jumped considerably in a very short amount of time beyond sub lines to include… discussions on NAV, GP financing, hybrid structure, etc. This was due to a number of tailwinds, including the increased activities of both Japanese GPs raising capital from international LPs who are used to seeing funds using fund finance in their other investments, to the rise of Japanese LPs into global funds.”

Banks dominate fund finance in the region, according to a 2023 report from law firm Mourant. Alternative lenders represent only 25 percent of the Asia market, compared with 80 percent in the US.

Japan’s financing landscape is already prepped for take-off due to its sizeable community of both local and global banks.

“Some of the largest players in the fund finance space globally are Japanese banks,” says Mukerji. “The three megabanks [MUFG, SMBC and Mizuho], and obviously the regional banks, would be in a good position to support that industry. So, the infrastructure, the ecosystem is all there.”