Capital Market Report｜Structural changes in the stagnant economy
The exclusion of Chinese companies such as TikTok and Wechat in countries such as the US and India is a topic of great debate. The world economy is in a state of great turmoil over economic development due to technological innovation and national security issues, and real GDP (April to June 2020) has fallen sharply. United States: -32.9% (compared to the previous year/annual rate) Euro: -40.3% (compared to the previous year/annual rate)
At the same time as responding to the new coronavirus, how to recover the economy from the recession period is a major focus. In Japan, the financial results of major companies have been announced. While the business performance of the tourism and food business has fallen sharply, Nintendo, Mixi, Square Enix HD, etc. have expanded significantly due to the increased demand for digital entertainment due to the expansion of work from home.
The World Economic Forum announced on the basis of information from the World Bank and the IMF that Asian countries will rise with the increase in disposable income and China will become the world’s largest economic power by 2024. It is expected that the center of the world economy will shift to Asia in the future.
・Comparison of GDP between 2008 and 2024
1 United States → China
2 Japan → USA
3 China → India
4 Germany → Japan
5 United Kingdom → Indonesia
China, which drove the global economy in the 2010s, is expected to slow down its growth due to rising labor costs and an aging population. There is great interest in how exclusion from the global economy affects China’s development.
Blackstone, Goldman Sachs and others are participating in the bad debt market in China, where prices are declining, and it is thought that the economic market will undergo structural changes in China as well. In China, the digitization of industries using the latest technology such as blockchain and the introduction of it into urban infrastructure have already been carried out.
It will also play a central role in the international stage in the 2020s, such as reviewing the order of the international monetary system due to the spread of the digital yuan. Although global monetary easing in the 2010s created a gap between the real economy and the stock market, it is expected that large-scale monetary easing will continue as a measure against the new coronavirus. Not only in China but also in other countries around the world is about to see the time when the collapse of the bubble such as bankruptcy of banks and companies will become apparent.
PE Fund and Japanese Market｜Large-scale investment for structural changes in the stagnant Japanese economy
In Japan, PE funds have often had a bad image as “vulture funds”.
・Ripplewood has used the Defect Warranty Clause (request for purchase of debt to the government) to handle bad debts of the Long-Term Credit Bank of Japan (Shinsei Bank).
・The investor group made huge profits when Shinsei Bank was listed.
However, in recent years, the utilization of PE funds has made it possible for companies to actively enter the global market and acquire excellent management personnel, thus increasing the corporate value.
Many Japanese companies have been forced to implement corporate management based on a new growth strategy after the growth phase, but it is necessary to accept major changes in order to build a new business model by carving out the business. The entry of PE funds into the Japanese market has led Japanese companies to optimize management resources and restore growth potential.
Recently, it was announced that “Yukiguni Maitake”, which was funded by Bain Capital, will be relisted for the first time in five years. “Yukiguni Maitake” had problems such as improper processing of accounting and disagreement between the founder and management. With delisting and support from Bain Capital, it has built up its brand value as a “premium mushroom manufacturer”, and sales and recurring profit have also increased significantly.
・March 2016 → March 2020
comparison Sales: 15.274 billion yen → 328.89 billion yen
Ordinary income: 1.612 billion yen → 5.031 billion yen
Given that companies in Japan and other countries are faced with major changes, it is expected that the PE fund will play an even greater role in the future. Carlyle, a major US PE fund, has announced that it will invest 1 trillion yen into Japanese companies over the next three to five years. Carlyle has participated in the management of Japanese companies that have potential, such as Orion Beer, Tsubaki Nakajima, and Solasto, and is promoting management reforms that take advantage of the company’s strengths such as the “100-day plan.” With a track record of supporting the sustainable growth of companies, there are great expectations for efforts to revitalize the Japanese capital market.
As business succession and rapid changes in the social environment are required, active investment in the Japanese market by PE funds is extremely important in overcoming the stagnation of the current economy.
Japan Economic growth forecast for April-June 2020: -27% (YoY/annualized)
※ Scheduled to be announced on August 17
About SPAC (Special Purpose Acquisition Company) Market | US IPO Market Changes and Investor Protection
In the US, the preliminary figures for the economic growth rate for the April-June quarter recorded a large decline of -32.9% (annualized rate) from the previous year. In Japan, there is an urgent need to respond to the economic crisis, as economic policy discussions toward the recovery of the real economy have become difficult.
・Huawei
・ZTE
・Hike vision (surveillance camera company)
・Darfa Technology (surveillance camera company)
・High Terra (wireless communication company)
For security reasons, companies that do business with Chinese companies are prohibited from renewing contracts or new contracts with the US government, and it is expected that many overseas companies will also be affected.
Chinese companies, which have supported the growth of the world economy in the 2010s, are in a situation where they are forced to avoid expansion in the US market. Confusion has taken place in many areas, including Epic Games, which has just announced a $1.78 billion round of funding, has removed Fort Knight’s app due to a guideline violation. Under such circumstances, in the US capital market, the number of SPAC (Special Purpose Purpose Company) listings in 2020 exceeded 50 companies, and the fund was raised to approximately 2 trillion yen. Private companies can become listed companies through SPAC acquisitions or mergers without going through the traditional IPO process.
Although it is considered that many private companies do not have the level of corporate management itself, such as IR for investors, the interest in SPAC is growing due to the support of institutional investors and private equity funds. Large-scale financing and acquisitions/mergers of SPAC’s listings bring great potential and risk to the US capital market. WeWork’s overvaluation issue was widely reported around this time last year, but in 2020, many investors are attracted to “listed companies to acquire or merge companies” with a strange management structure. . It is also considered important for the spread of SPAC to secure investor protection through stricter acquisition and merger processes.
Private equity investment, also known as the IPO goal, is creating a new kind of covert boom in the US capital market. It may be necessary to discuss much about how to realize investor protection while improving liquidity by popularizing SPAC merger as a method of listing on the open market. Investors are reaffirming that private equity investment itself is a high-risk investment method, as Japan’s famous company SoftBank will suffer a large loss in 2019 due to aggressive investment in private equity. I will. In recent years, the maturation of the SPAC ecosystem has progressed, and the quality of SPAC and investors has improved, which has also led to the expansion of the SPAC market.
・Due diligence to assess the potential of private companies in the open market
・Educational support in the SPAC road show process
・M&A advisory service
The financial related company Cowen Group (COWN), which has a lot of experience as an IPO bookrunner, is also advancing the above initiatives. In order to recognize the changes in the US IPO market and the current state of private equity investment, I think it will be extremely important to investigate the trends in the SPAC market in the future.
Why is Digital Renminbi (DCEP) in the Greater Bay Area? US-China New Cold War and more efficient international trade
Digital Renminbi (DCEP) pilot tests are under way in Shenzhen and other areas, with the first areas to be deployed in Guangdong, Hong Kong, and Macau, which are promoting the “Greater Bay Area” concept. The Greater Bay Area started in May 2019 and promotes the construction of an economic zone connecting Guangzhou to Macau with the aim of transmitting the latest technology to the world. Shenzhen is positioned as the center of the city, and after the demonstration of the digital yuan (DCEP) in the special economic zone, there are great expectations for its commercialization in Hong Kong and Macau.
Many of the IT companies that utilize the latest technology exist in Shenzhen, China, and have achieved global success based on the huge capital of China and Hong Kong. On the other hand, in recent years, tensions between countries, which are also called the “US-China New Cold War,” have continued. How will China, which has been banning the services of foreign companies in Japan until now, come to terms with the world’s liberal economy? From the perspective of how the order of the international monetary system will change due to the spread of the digital yuan (DCEP), development in the “Greater Bay Area” is likely to have a major impact on the world.
The People’s Bank of China (Central Bank) and others announced financial support in May of this year to allow borderless investment, bank lending, and RMB-denominated financing in mainland China, Hong Kong, and Macau with the aim of developing the “Greater Bay Area”. The Greater Bay Area is said to have a population of approximately 67 million and an economic scale of $2 trillion in GDP, and HSBC Holdings Plc estimates that it will be the world’s fourth largest export region in terms of trade. Up until now, Beijing, Shanghai, and Shenzhen have been familiar areas for us Japanese, but based on the idea that “connecting is better than owning”, China is creating an economic zone that spans cities.
From this, I was able to understand “Why is the practical application of the digital yuan (DCEP) in the Greater Bay area?” It is also considered that future digital currency markets will need to take measures in anticipation of large-scale adoption of the digital renminbi (DCEP) to promote efficient international trade. As the tensions of the US-China New Cold War continue, increasing the efficiency of international trade using the digital renminbi (DCEP) appears to be a major contradiction. However, the digitization of currencies issued by central banks will bring great potential to future capital markets.
