Mandated to support global expansion of domestic companies in the information and communications technology space, Fund Corporation for the Overseas Development of Japan’s ICT and Postal Services (JICT) spent its first seven years focusing on hard infrastructure. Data centres, fibre-optic cables, and telecom towers were its stock in trade.

In 2022, however, JICT expanded its scope to include software. Cloud computing, blockchain, and generative artificial intelligence (AI) are now on the agenda, marking a switch in strategy that mirrors Japan’s increased emphasis on digital transformation at a national policy level.

“Japanese companies are striving to catch up with emerging technologies, particularly in the areas where the US and China are making significant developments. Our institutions are also adjusting to this trend,” said Amane Oshima, president and CEO of JICT.

“We aim to provide more efficient services and support to Japanese companies in these areas, although hardware-based infrastructure investment is still important for us.”

This strategy shift led to a flurry of LP commitments to funds that back start-ups in areas like financial technology, the Internet of Things (IoT), cybersecurity, and 5G and 6G technologies. Recipients span multiple geographies, ranging from a pan-African fund launched by Verod-Kepple Africa Ventures (VKAV) to a vehicle under Itochu Group’s [TYO:8001] corporate venture capital unit.

JICT writes cheques for these funds of USD 10m-USD 25m. While co-investing in start-ups alongside portfolio managers is prohibited, it considers making introductions to Japanese ICT companies that may participate in funding rounds as part of the value-added offering.

Shifting mandate

The organisation is the manifestation of a joint investment programme featuring public sector and private sector capital. The Ministry of Finance is the majority shareholder, while the Ministry of Internal Affairs and Communications (MIC) has oversight responsibility. Corporate backers include Dentsu Group [TYO:4324], Fujikura [TYO:5803], Japan Broadcasting Corporation, Mizuho Bank, and Panasonic Holdings [TYO:6752].

JICT was founded in 2015 and has a fixed lifespan, which expires in March 2036. Its budget for the 2024 financial year was JPY 60bn (USD 394m), a nearly one-third increase on 2023. The Japanese government is the sole source of funding, via allocations from treasury accounts and bond issues.

There are four core modes of investment: overseas joint ventures or operating subsidiaries established with Japanese companies; direct investments in overseas ICT businesses alongside Japanese partners; providing expansion capital for existing overseas subsidiaries of Japanese companies; and LP commitments to funds managed by independent and captive VC firms.

“We act as a bridge between start-ups and Japanese conglomerates through our fund investments,” Oshima added.

“Leaders of Japanese companies are aware of what’s happening abroad. The challenge lies in turning investment opportunities into reality. A public-private fund can open doors, connecting both parties and facilitating conversations with the Japanese government in the background.”

Hard infrastructure investments still comprise 85%-90% of JICT’s balance sheet – which amounted to JPY 109.2bn as of March 2023 – reflecting the still-nascent status of the fund investment programme. However, once MIC revised its guidelines in 2022, JICT moved quickly.

The first commitment, made later the same year, was to Sony Innovation Fund 3, a vehicle managed by Sony Group’s [TYO:6758] venture arm that primarily invests in Europe, the US, India, and Israel. A final close of JPY 26.5bn came in early 2023. JICT put in JPY 2.5bn, with the balance coming from domestic financial institutions, corporates, and a couple of endowments.

Next up was a fund managed by US-based Translink Capital and anchored by NEC Corporation [TYO:6701]. JICT contributed USD 25m to the USD 140m corpus. Japan Industrial Partners, a domestic private equity firm that has carved out numerous assets from NEC and established joint funds with the company, joined the usual retinue of domestic financial institutions in the LP base.

JICT put USD 10m into VKAV’s USD 60m debut fund in 2023. The manager is a joint venture between Verod Capital Management and Kepple Africa Ventures, an Africa-focused offshoot of Tokyo-based investment firm Kepple Capital. Oshima regards the commitment as a shortcut, relatively low risk means of helping Japanese companies build knowledge and exposure to Africa.

A JPY 2.2bn contribution to Exeo Innovation Fund, managed by a Singapore subsidiary of Tokyo-listed Exeo Group [TYO:1951], is intended to achieve the same effect in Southeast Asia. The Itochu commitment – to a US-focused fund, now in its sixth iteration – was announced in September.

Treading a fine line

JICT operates under certain limitations. All investments must be outside Japan, and it cannot be either the sole investor or the largest Japanese investor. For fund investments, it invites domestic ICT or trading companies to participate.

Oshima describes this approach in terms of treading a fine line between responding to industry demands and avoiding becoming an active investor. “We strive to harmonize their business plans with the Japanese government’s policy objectives,” he said.

Frequent engagement is part of this process. JICT meets with shareholder companies and other leading names in corporate Japan for updates on business plans and to share investment ideas. As the organisation’s track record has lengthened, it increasingly receives inbound enquiries from corporates as opposed to opening doors for itself.

“It has taken time, but with more transactions closing, we get calls from companies asking if they can join the projects,” Oshima added.

JICT also leverages government-level relationships, often through foreign embassies in Japan and Japanese embassies overseas. For example, it often provides information on risk management and local regulations to Japanese companies looking to penetrate certain markets.

Geographic outreach is ultimately directed by Japanese government policy. Immediate priorities include infrastructure and technology investment in the US, while Southeast Asia and India are key targets because of their rapid growth, according to Oshima. Geopolitical tensions and global economic dislocation are very much top-of-mind.

“We need to create more value for projects, and in this sense, we’re highly attuned to potential changes arising from geopolitics. From an economic security perspective, Japan needs to act as a G7 member and work with like-minded countries, while also strengthening its economic relationships with its counterparts in Southeast Asia and India,” he added.

JICT invests across 5-10-year horizons with no fixed guidelines in terms of return objectives. However, there is a general expectation that developed markets like the US and Europe will deliver single-digit-percentage IRRs while emerging markets may achieve 15% or more. But success is judged on the achievement of policy objectives as well as financial returns.

“Funds like ours enable the government to provide access to risk-tolerant capital,” said Oshima. “Traditional private equity funds may focus more on profitability. As a long-term capital provider, we are also encouraging Japanese companies to focus on specific areas.”