Adoption of “Japan’s Stewardship Code”

November 28, 2014

JAFCO Co., Ltd. (“JAFCO”) hereby confirms its adoption of the Principles for Responsible Institutional Investors (the Japan’s Stewardship Code; hereinafter the “Code”) as a private equity investment company that identifies and provides continuous support for high-potential unlisted companies.

Based on its business philosophy of “Value Creation through Private Equity”, JAFCO aims to maximize returns of its investment funds through a private equity investment value chain -the creation of risk money through its funds; intensive investment in carefully selected companies; business development support for investee companies; and promotion of suitable exits.

We believe that our business philosophy share the same principle with “stewardship responsibilities” of the Code, the aim of which is to enhance the medium- to long-term investment return for clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth.

We will fulfill our stewardship responsibilities through steady implementation of the value chain process and creation of a virtuous cycle.

JAFCO’s policies on each principle of the Code are as follows.

Principle 1
Institutional investors should have a clear policy on how they fulfill their stewardship responsibilities, and publicly disclose it.

As an investment fund manager, JAFCO bears a responsibility to maximize returns for its fund investors within the management period of each fund.

Our funds’ investment targets are start-ups and other unlisted companies. Many of these companies have the potential to exploit a new growth market through innovative business models, technology, and products/ services.

Focusing on growth sectors, JAFCO identifies promising companies and makes selective investment based on evaluation from various aspects. We accelerate the growth and development of investee companies through deep involvement in management and proactive growth support. By enhancing the corporate value of the investees and maximizing fund returns, we will fulfill our stewardship responsibilities to our fund investors.

Principle 2
Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.

Based on investment partnership agreements, JAFCO has the power to perform all operations as the general partner, including investment decision making. If a conflict of interest may arise, we will take appropriate measures with due consideration to fairness and act in the best interest of our fund investors.

Our policies in addressing possible conflicts of interest include:

JAFCO, in principle, does not make direct investment in companies, but invests its own capital in the funds that it manages. Investment in unlisted companies is carried out through the funds. We avoid the possibility of conflicts of interest by sharing the same interest as our funds. JAFCO, in principle, does not permit transaction between JAFCO and its funds as well as between JAFCO-managed funds.

If such investment or transaction is necessary for a compelling reason, we will ensure fairness among parties involved by taking appropriate steps to the extent permitted by the partnership agreements, applicable laws and regulations.

Principle 3
Institutional investors should monitor investee companies so that they can appropriately fulfill their stewardship responsibilities with an orientation towards the sustainable growth of the companies.

Principle 4
Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.

Principle 5
Institutional investors should have a clear policy on voting and disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist: it should be designed to contribute to the sustainable growth of investee companies.

In illiquid private equity investment, the success of corporate value adding through involvement in the management of investee companies has a greater impact on performance than in investment in listed companies.

While many unlisted companies that our funds target have high growth potential, their profit bases are still unstable, internal structures are weak and information disclosure is insufficient. We work to grasp the situation at an investee company through day-to-day communication and information sharing with the management team, employees and other parties involved, not to mention attending important meetings at the company.

Through sincere engagement with the management team of investee companies, we come to share management issues and risks, and work together to solve problems. We also provide business support suitable for different growth stages with the aim of accelerating growth and raising corporate value.

We exercise voting rights based on such engagement with investee companies and following thorough assessment of their proposal to see if it is in the best interest of our funds.

It is our policy not to disclose our voting results, as the majority of our investees are unlisted companies.

Principle 6
JAFCO reports on fund management status and investee companies’ performance/ outlook to our fund investors by dispatching periodic reports and at the annual investors meeting. We will make timely reports on our stewardship activities through these occasions.

JAFCO reports on fund management status and investee companies’ performance/ outlook to our fund investors by dispatching periodic reports and at the annual investors meeting. We will make timely reports on our stewardship activities through these occasions.

Principle 7
To contribute positively to the sustainable growth of investee companies, institutional investors should have in-depth knowledge on the investee companies and their business environment and capabilities to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.

Knowledge and insight into new business/ growth sectors and high-level expertise to allow corporate analysis are required to properly carry out stewardship activities in private equity investment. In addition, in-depth understanding of companies and businesses, strategic initiatives that lead companies to growth, risk management and other extensive capabilities are also essential.

JAFCO’s investment staff work to enhance such capabilities by gaining the experience of deep involvement in management at investee companies.

In addition to the investment division, JAFCO has separate divisions that specialize in due diligence of investee candidates, business development support and administrative consultations. This allows us to carry out investment activity and value adding support from a wide perspective.

By sharing and accumulating profound experience and expertise on a company-wide basis, JAFCO will work to build a mechanism that allows us to provide more effective growth support.