The Japan America Society of Chicago David Baeckelandt

The Japan America Society of Chicago David Baeckelandt February 24, 2011 Mercer 0

Who Is Dave Baeckelandt? What has he done (re Japan)? ? Why the heck is he here? ? ? Relevant Japan-Related Background: § Author, “Japanese Financial Art: An Overview of Japanese Scripophily” (2010) § Executive Board Japan America Society (2000 -Present) § President, Chicago-Pacific Capital Advisors (2002 -2005) § Private-Equity Investor – Tully’s Coffee Japan (2000 -2003) § Country Head, Japan – William Blair & Co. (1994 -2002) § Pension Investments Department, Bank of Tokyo Trust (1990 -1994) § Investment Management Dept, Mitsubishi Bank (1988 -1990) § Japanese History Graduate Student (MA, 1988) § Simultaneous Interpreter/Translator – Top Kogyo (1986) § Exchange Student in Japan (1983 -1984) Mercer 1

A brief word from our sponsor… Baeckelandt’s Current Responsibilities: § Director, Sales & Marketing at $7 bn AUM Investment Manager Segall Bryant & Hamill – Sell Investment Management to Large Pension Plan Sponsors (including Japanese, Asian, European and U. S. plan sponsors) Why Segall Bryant & Hamill? § $7. 3 billion AUM Chicago HQ’d investment manager § #1/#2 Information Ratio for 3 -5 -7 -10 years in Core & Intermediate FI § #1 Among peers in U. S. Small Cap Value (3 years) § Top decile performance in U. S. Small Cap Core § 1 of only 7 managers with 20 year record in U. S. All. Cap Mercer 2

Japan Has Endured More Than 20 Years’ of Financial Markets Malaise Mercer 3

Yet the Financial Underpinnings of Japan – Japanese Banks – Are Solvent…And With Better Capitalization Than U. S. Banks Mercer 4

Although Its Share is Smaller Today, Japan Remains a Major Factor in Global GDP Mercer 5

Yet Japan Still Has the 2 nd Largest % of Global Pension Assets Mercer 6

Mitsui – Example of Early Japanese Corporate Governance § Roots to 1568… § Established House Rules in 1600 s! § Rules Governed Obligations to Customers, Colleagues, Shareholders (Mitsui Family) § Most Japanese Companies Were Family-Owned/Operated § Nearly All Family Owned Companies Adopted House Rules § Japanese House Rules in Existence Before Western Corporate Governance Mercer 7

Hoshi Ryokan – World’s Oldest Privately Owned Business § Forty Six Generations of Same Family Since 717 AD Mercer 8

Japan’s Investment Origins § Deep Historical Origin of Private Equity…’Neither Borrower Nor Lender Be’ § Oldest Private Entity (Est. 538 AD; Acquired 2006) § Oldest Existing Private Equity (Est 717 AD; 46 Generations) § Oldest Continuing Entities (Mitsui, Sumitomo, etc. ) § Japanese Origins of Private Equity Found in Late 18 th Century § Modern Japanese Private Equity Resurrected in 1972 With JAFCO § Cultural, Economic, Political, and Legal Environments Influence Japanese Private Equity Growth and Development § Clear Corporate Governance Practices Back to 17 th Century (eg, Mitsui House Rules) § Long Term Corporate Tradition of Financing and Starting Spinout Firms Mercer 9

How Does Investor Disclosure Compare Between Japanese & U. S. Firms (Public & Private)? Mercer 10

Examples of Investor Disclosure – Starbucks US vs Japan Mercer 11

Examples of Investor Disclosure – Starbucks US vs Japan pp 2 & 3 Mercer 12

Examples of Investor Disclosure – American Fantasy vs Cyber. Coin Mercer 13

Examples of Investor Disclosure – American Fantasy vs Cyber. Coin p 2 Mercer 14

Examples of Investor Disclosure – American Fantasy vs Cyber. Coin p 3 Mercer 15

Is Japan Right For Investment Now? “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well. ” - Warren Buffett Mercer 16

Japan’s Public Equity Markets Have Held Up Best in Current Crisis Mercer 17

Japan As Investment Target § World’s 3 rd Largest Economy § Liberal Democracy, Civil Law System § Approximately $2 trillion in investable assets § Broad, Tranched Public Markets Tokyo, Osaka, Mothers, Hercules § Less Than 1, 000 Institutional Investment Managers in Public Markets § Highly Developed Patent Law § Vibrant Innovative Technology Sector § Excellent Academic Institutions § Strong Engineering & Manufacturing Sector § Large, Liquid Capital Markets § Long Private Equity History Mercer 18

Japanese Institutional Investors’ Allocations Are Still Conservative Mercer 19

What Opportunities Exist in Japan for Investment Now? § Generational Shift offers investors opportunities with family-owned firms § Japanese conglomerates, have weathered their harsh downturns and many have stronger balance sheets than their US & European counterparts § Platform companies exist in a number of industries that are poised for overdue roll-ups for strategic and financial acquirers § The playing field has very high barriers to entry but an economy half the size of the U. S. § Plenty of opportunities for those of more modest ambition, with a more operational bent. § Japan Inc. 's strategic relationships in the Asia Pacific region § Real countercyclical alternative to the US-Euro axis. Mercer 20

Practical Considerations For Investment in Japan "I love you, yen. You are so orderly, so loyal, like your country. " Victor Niederhoffer, The Education of a Speculator, (New York: John Wiley & Sons, 1997), p. 4 Mercer 21

Practical Considerations For Investment in Japan 1 Legal § Civil Law vs Common Law § Administrative Guidance instead of Common Law Statutes § Possibilities instead of Definitive Opinions Negotiations Junior Staff vs Senior Players § Absence of Legal Counsel § Junior vs Senior Staff Delegated to Negotiate § Staff Often Note-Takers and/or channels instead of Decision-Makers § Delayed Decision-Making (to reach a broader internal consensus) Source: http: //www. asialaw. com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments. html By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law Mercer 22

Practical Considerations For Investment in Japan 2 (continued) Review and Approval § Absence of Legal Counsel § More Time-Consuming § May Require Last Minute Review of Items Deemed Closed by Internal Legal Staff (who may not be licensed) § Final Review May Require a Re-opening of Issues Deemed Close to Accommodate Other Senior Management Due Diligence § Usually Conducted By Japanese Law Firms § Limited versus Comprehensive (Focus on Documents and Factual Matters rather than Issues, Risks and Solutions) § Publicly Available Information Does Not Include Areas Common in the U. S. (eg, Liens and Security Interests) Source: http: //www. asialaw. com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments. html Mercer By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law 23

Practical Considerations For Investment in Japan 3 (continued) Other Concerns: § Language § Jurisdiction § Governing Law § Documentation § Financing § Liabilities of Affiliates Financial Issues § Stamp Tax Issue (% of total transaction value) § Key Role of Japanese Bank (approval needed for assignment issues) Source: http: //www. asialaw. com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments. html By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law Mercer 24

Practical Considerations For Investment in Japan 4 (continued) Cultural Confusion § Different Concepts of the Rights of Management & Shareholders § Different Expectations of Due Diligence and Approval § Different Expectations in Outcome and Process § Different Expectations in Terms of P&L vs Social Contract § Finite Number of Experienced Advisors (therefore Conflict of Interest) § Translations Source: http: //www. asialaw. com/Article/1989017/Issue/68536/Practical-Considerations-for-Private-Equity-Investments. html By Daniel C. Hounslow and Kazuya Yamamoto of Atsumi & Partners, August, 2007 in Asia Law Mercer 25

Resources Practical Sources of Information § JETRO’s Market Research: http: //www. jetro. go. jp/en/market/ § JETRO’s Setting Up Enterprises in Japan: http: //books. jetro. go. jp/cgi§ § § Mercer bin/bookdata/db. cgi? cmd=dp&num=450&dp=detail 2. html American Chamber of Commerce of Japan publications: http: //www. accj. or. jp/content/offerings/pub Japan Inc. Magazine: http: //www. japaninc. com/ Terrie’s Take (Biz trends synopsis): http: //www. japaninc. com/terries_take The Nikkei Weekly: http: //www. nni. nikkei. co. jp/FR/TNW/ Tokyo IPO. com: http: //www. tokyoipo. com/top/en/index. php? j_e=E Japanese Financial Terminology & Translations: http: //www. fincom. jp/ Japan Yellow Pages: http: //www. yellowpage-jp. com/ Japan Times: http: //www. japantimes. co. jp/ Great Stories of Foreigners’ Success in Japan: www. sayingyestojapan. com Official Stats on Japan: http: //www. stat. go. jp/english Financial Stats on Japan: http: //www. stat. go. jp/english/data/chouki/14. htm 26

Resources Cultural, Social, and Unofficial Sources of Information § Steven Gan Story: http: //www. japanentrepreneur. com/200403. html#2 § Japanese Financial Translations http: //www. jfti. org/ Private Equity Trailblazers: § http: //www. j-seed. com/ § http: //www. asiainvestmentpartners. com/en/ Other Popular Blogs I Like On Japan: § http: //japan. blogspot. com/ Japan Economy Watch § http: //www. japanconsuming. com/ Japan Consuming § http: //www. japundit. com/ Japundit § http: //nihoncassandra. blogspot. com/ Cassandra Does Tokyo Mercer 27

Resources Sources of Information – Recommended Books Recommended Reading: § They Came To Japan: An Anthology of European reports on Japan, 1543 - 1640 by Michael Cooper (Berkeley: University of California Press, 1981) § Japan’s Financial Revolution – And How American Firms Are Profiting by Stephen M. Harner (Armonk: M. E. Sharpe, 2000) § Saying Yes To Japan – How Outsiders Are Reviving A Trillion Dollar Services Market by Tim Clark and Carl Kay (New York: Vertica, 2005) § How To Do Business With The Japanese – A Strategy For Success by Mark Zimmerman (New York: Random House, 1985) § How To Do Business With The Japanese – A Complete Guide To Japanese Customs and Business Practices by Boye Lafayette De. Mente (Lincolnwood, IL: NTC, 1993) 2 nd Edition Mercer 28