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Winners

Shinsei Principal Investments Ltd.

2015 15th Porter Prize Winner Investment bank for small- and medium-sized companies
An investment bank that focuses on small- and medium-sized enterprises in the Tokyo metropolitan area. Provides financial services that range from venture capital investment to asset restructuring. Services are tailored to meet each SME client’s specific needs, which vary widely depending on the life cycle stage.
Shinsei Principal Investments Ltd. (hereafter, Shinsei PI Group) is a wholly owned subsidiary of Shinsei Bank, Limited (a licensed bank listed on the Tokyo Stock Exchange). Shinsei PI Group targets small- and medium-sized enterprises (hereafter, SMEs) with annual sales of 1 billion to 5 billion yen in the Tokyo metropolitan area. This decision to target Tokyo-based SMEs as the main customer is a unique strategy, one that distinguishes this investment bank from western investment banks, funds and megabanks.

Shinsei PI Group offers a broad selection of services, and its time frame is longer than the usual investment time frames. Its services include private equity investment for start-up companies, financial support when the ownership of a company changes hands, and the purchase of receivables from companies that need restructuring.

Shinsei PI Group has a unique activity system that has resulted in superior performance. SMEs' need for specialized financial services is not new. Financial solutions tailored to the needs of SMEs have been provided in the financial services industry for many years. The financial techniques that Shinsei PI Group provides are not unique. The difference is that Shinsei PI Group has created an activity system that precisely fits the servicing requirements of SMEs. This is how Shinsei PI Group has been able to substantially improve its performance.

Shinsei Principal Investments Ltd. has three wholly owned subsidiaries: 1) Shinsei Corporate Investment Limited, which undertakes private equity investment, including venture capital investment, and buyout investment primarily for business succession (originally, the Private Equity Division of Shinsei Bank); 2) Shinsei Investment & Finance Limited, which purchases receivables and specializes in bridge finance and asset-backed finance. (This company inherited the monetary claims purchasing function of Shinsei Bank's Credit Trading Division, and the lending function of Shinseigin Finance Co., Ltd.); and 3) Shinsei Servicing & Consulting Limited, a licensed servicer that provides support for business turnarounds and business withdrawal, and undertakes the special servicing of real estate-backed commercial loans (originally, the Shinsei Servicing Company).

Shinsei Principal Investments Ltd., which functions as a holding company, executes a variety of administrative duties involved in the provision of financial services, and manages general affairs functions (i.e. compliance, human resource management, accounting and general affairs). These four companies, as a group, are called the "Shinsei PI Group," and the group's slogan is: "Beyond Finance -- You can expect more from financial services."

Unique Value Proposition

The services provided by Shinsei PI Group include: 1) equity investment (predominantly private equity) for SMEs from start-up to the growth stage; 2) pre-IPO investment; 3) investment in monetary claims (such as loans held by financial institutions) and the purchase of accounts receivables from mature SMEs, to help improve their balance sheets and provide cash; 4) investments for buyouts (a service that makes business succession a smoother process by enabling the ownership of more than half of the voting rights and improving business performance) and bridge financing to make the succession of business ownership a smoother process.

The target customers of Shinsei PI Group are SMEs based in the Tokyo metropolitan area, with annual sales of 1 billion to 5 billion yen. To be more specific, the target customers for equity investment are SMEs with annual sales of 2 billion to 10 billion yen, and total assets of 2 billion to 5 billion yen; for the purchase of monetary claims, the target customers are SMEs with annual sales of 2 billion yen, a total debt of 10 billion yen, and original loans of 5 billion yen. Companies of this size tend to have diverse needs and require much hand-holding. However, due to the small size of their business transactions (on a value basis), Western investment banks will not usually offer their services to SMEs, and Japanese megabanks do not consider SMEs to be a main customer.

Shinsei PI Group adopts a longer time frame than its competitors. For equity investment, the standard time frame is three years; and for the purchase of monetary claims, five years. Although a longer investment period means a lower internal rate of return (IRR), issues involving SMEs tend to require longer time frames. Also, a flexible time frame provides Shinsei PI Group and the SMEs with options in determining how to exit, taking into account the client company's internal and external environment. In contrast, private equity funds that collect capital from others determine the fund's duration at the time that the fund is formed. Consequently, there is less flexibility with regard to the length of the investment period. Despite the use of longer time frames for its services, Shinsei PI Group assigns one team to the project, and makes that team fully responsible for providing services for the duration of the investment term. This way, the assigned teams, being held responsible for the results, tend to adopt a more disciplined investment approach.

Owners of SMEs have diverse needs. The owners all have different priorities, and their diverse needs include the protection of current employment levels, and the demonstration of appropriate consideration for long-time suppliers and customers. Some owners may want to keep the company name, or preserve certain technologies and craft skills. Others might want their son or daughter to succeed the company, and keep land that has been inherited. Considering that the performance of an SME is highly dependent on the owner, Shinsei PI Group makes the owner's needs its priority, and creates customized solutions. When Shinsei PI Group provides hands-on support, it sometimes assigns employees to temporarily work on-site with employees at the client company, and participate in the client company's in-house training sessions to experience first-hand the learning process involved.

Out of the 60 companies to which Shinsei PI Group has provided pre-IPO financing, more than 20 companies were already listed or were going to be listed within a year. The success rate is more than 30%. (For those companies that are already listed, the success rate also exceeded 30%. The industry average would be about 10%.) More than 90% of client companies for whom Shinsei PI Group purchased monetary claims from other financial institutions saw an improvement in their creditworthiness and a return to "normal debtor" status. The number of companies that filed for bankruptcy was quite low.

Unique Value Chain

Fundraising
Shinsei PI Group conducts principal investments through its own accounts because it enjoys a stable funding source in its parent company, Shinsei Bank. It does not have to raise funds in the capital markets, and can be flexible in terms of its investment strategy.

Customer acquisition
There are three routes by which Shinsei PI Group finds and acquires customers. The first route is a "network approach," consisting of personal introductions from the lawyers and tax accountants that serve SMEs. Introductions also come from start-up companies that went public after receiving an investment from Shinsei PI Group. The second route is a "targeted approach," (i.e. a proactive search). Shinsei PI Group lists potential customers, taking into account economic trends, stock prices, foreign exchange rates, public policies, and changes in regulations and the tax system. Shinsei PI Group sales staff then visit potential customers to gain an understanding of their needs. The third route is one in which customers approach the group directly. Shinsei PI Group has established a very favorable reputation among start-up companies that have a high likelihood of going public. Among these companies, it is said that, "after Shinsei PI Group has made an investment, the other venture capitalists will likely join in."

Investment decision
Shinsei PI Group conducts thorough quantitative analysis, utilizing indexes, matrixes, and scoring, prior to making the decision to invest. However, what is unique to Shinsei PI Group is its emphasis on qualitative analysis. Through numerous meetings with owners and employees, involving thorough discussions, Shinsei PI Group identifies the client's key issues and specific needs, and highlights the owner's typical concerns. For example, is it employment? Or maybe the company's impact on its business partners?

Quantitative analysis is supported by a wealth of data that is proprietary to the company. Shinsei PI Group has developed a database that includes both client projects in which it has invested, and others in which it has not invested. Staff members can access this database only if necessary. With regard to equity investment, Shinsei PI Group, utilizing its vast collection of data, has studied in depth the cases of 150 companies (out of 3,000 candidates), and has made the decision to invest in 60 companies. Shinsei PI Group's investment strategy is selective, and priority is given to quality over quantity.

Shinsei PI Group internally conducts real estate evaluations and servicing, rather than outsourcing this function. This allows the company to conduct in-house all the steps necessary for due diligence.

Creation of solutions
Shinsei PI Group develops customized solutions tailored to the needs of individual companies, to identify and address all foreseeable risks. By having the owner understand all possible scenarios, Shinsei PI Group can move quickly and gain the owner's consent promptly whenever unexpected risks emerge. In this way, Shinsei PI Group to able to achieve a return on investment even amid an unfavorable external environment.

Maximizing the value of investments and credit
Through the cultivation of a close relationship with its customers, Shinsei PI Group can provide advice on governance, compliance, and ways to strengthen the financial base. Shinsei PI Group respects the customer's autonomy, and is careful not to damage top management's motivation and sense of ownership. It provides support in the style of a fellow traveler, someone who shares the journey, and who works together with the customer.

In loan servicing, Shinsei PI Group tries to maximize the value of the credit it has purchased by managing the credit properly, while at the same time it tries to help customers recover "normal debtor" status. Shinsei PI Group spends 70% of operating hours on meetings with customers.

Portfolio management
In equity investment, Shinsei PI Group chooses customers in a wide variety of industries in order to diversify risk. In credit purchasing, Shinsei PI Group controls the balance between capital gain through lump-sum repayment and income gain through consistent cash flow repayment by postponing lump-sum payment when the real estate market or financial markets are not favorable. Therefore, even when the external environment is unfavorable, Shinsei PI Group is able to maintain profitability.

Human resources management
At Shinsei PI Group, the same team remains in charge of the same customer for the duration of the project, which usually lasts for a period of three to five years. It is for this reason that Shinsei PI Group does not rotate its employees. One drawback of this approach is that it does not allow the company to rely on a few outstanding performers who might have focused their efforts on the early part of numerous projects. Consequently, Shinsei PI Group must cultivate a large staff of capable employees.

All the staff members at Shinsei PI Group were transferred permanently from Shinsei Bank when Shinsei Principal Investment Ltd. was incorporated. No members of Shinsei PI Group's staff are on loan from Shinsei Bank.

All hiring is conducted by Shinsei PI Group independently of Shinsei Bank. In hiring, the company looks for individuals who share common values, and who understand the importance of teamwork. For example, any person recognized as not sharing these values (i.e. unable to be a team player) would not be considered as a candidate, despite having superior skills.

Performance evaluations encourage the optimization of the entire group by allocating 70% of the employee's performance grade to the task at hand, and 30% to the contribution that individual makes to the entire group. The evaluation of task performance also encourages teamwork by giving more weight to team performance than to individual performance.

Shinsei PI Group has created only three layers of management, and people in the middle layer are also given the authority to take initiative. In this way, one's position does not prevent a person from taking a leadership role. Leaders are chosen based on the fit with a particular case (client project), and throughout the duration of that project, different members of the team take leadership.

The following is the composition of the company's staff: senior staff, 10%; mid-level staff, 80%; and junior staff, 10%. Mid-level staff members who are above the age of 55 are expected to contribute to development of the other staff members.

The team in charge of a project is responsible for developing solutions for a particular customer, and these solutions must be approved by the top management of Shinsei PI Group. This shorter reporting line to the top management enables top management to monitor the team's performance, especially with regard to the status of the customer relationship, and whether the project is being handled effectively.

Employees can take up to one year of paid leave as sick leave or time off to take care of children or other family members who require special attention.

The average tenure for employees is more than ten years (the company has been in operation for only 14 years). The five-year average employee turnover rate is 4.2%, which is lower than the industry average.

Firm infrastructure
Shinsei Principal Investments and its three 100% subsidiaries are all required to independently manage risk and sensitive information. At the same time, staff members belonging to the different companies are required to work together to develop solutions and offer a combination of services. In order to encourage teamwork among the companies while ensuring that management is being properly conducted, Shinsei PI Group has created an office space that uses glass walls to separate the four companies, which are all located on the same floor. In addition, there are no pillars that might block visibility. Common spaces (such as hallways, the cafeteria, and meeting spaces) are situated outside of the glass walls, and these common spaces are used extensively for communication and collaboration among staff members of the four companies.

The slogans that express the values shared by group members are: "Think about solutions from the customer's perspective," "Draw out the customer's latent potential," "Practice disciplined investment with a long-term perspective."

Fit among Activities

In Shinsei PI Group, activities are selected and coordinated in order to support the growth, revitalization, and smooth succession of SMEs in the Tokyo metropolitan area by drawing out each company's latent potential through customized solutions that have been carefully developed. The core activities are: 1) "Funding through its own accounts"; 2) "human resource management" that enables the development of specialists; 3) the sharing of know-how; 4) collaboration outside one's area of expertise; and 5) knowledge management that "nurtures tacit knowledge" and "drives the organization to try something new." (Please refer to Shinsei Principal Investments Ltd.'s activity system map, which appears at the end of this report.)

Innovation that Enabled Strategy

  • Flat organization. Shinsei PI Group has only three layers of management. Performance is rewarded through remuneration, not by promotion.

Trade-offs

  • Does not provide ready-made financial services. Focuses on the provision of order-made financial services that are customized to precisely meet each customer's specific needs.
  • Does not take on more client projects than can be properly handled. The total number of client projects is controlled, so that there will be adequate time to spend with existing clients.
  • Does not make investment decisions based only on quantitative factors. Puts an emphasis on qualitative factors to gain a thorough understanding of customers.
  • Does not cross-sell financial products or services from outside the scope of investment banking activities.
  • Does not compete on price. Does not select client projects in which the critical factor is price or the interest rate. Focuses on client projects that will allow Shinsei PI Group to add value by engaging in face-to-face communication with representatives of the client company and by working closely with the company's employees.
  • Does not make short-term profitability its unequivocal focus. Does ask itself whether Shinsei PI Group is trying to maximize its own profits to the detriment of the customer's best interests. With regard to loan servicing, Shinsei PI Group prioritizes helping customers improve their repayment capabilities and their business performance over making efforts to sell off the collateral.
  • Does not change its priority of supporting SMEs when economic conditions suddenly worsen. Shinsei takes a long-term perspective, and understands that economic conditions, being cyclical, are bound to worsen. It remains committed to helping customers ride out the economic downturn, and instead works to draw out the SME's latent potential, which cannot be recognized just by looking at numbers. Solutions are found through a process that entails frequent face-to-face communication with representatives of the client company.
  • Does not increase the number of branches. (The group operates in one location only.) Makes its priority the development of a strong corporate culture, and ensures that skills are shared among employees.
  • Does not seek to increase the scale of business operations. Keeps the size of the organization small enough to make possible the sharing of tacit knowledge, which is critical for maintaining service quality.
  • Does not accept employees who are on loan or parachuted in from its parent company, Shinsei Bank. Does not conduct a rotation of personnel with Shinsei Bank.
  • Does not rotate personnel within Shinsei PI Group. Develops specialists who can collaborate with colleagues that have different specialties.
  • Does not force employees to compete for higher positions by creating numerous layers and having a pyramid-shaped organization, which results in fewer positions at the higher levels. Shinsei PI Group finds that intense competition makes employees less inclined to share their knowledge, contribute to the development of others, and collaborate with others.
  • Does not encourage the standardization of operations. Tries to create customized solutions.

Consistency of Strategy over Time

Shinsei PI Group has consistently targeted SMEs in the Tokyo metropolitan area. Its lineup of services, meanwhile, has been gradually expanded to meet customers' specific needs. Shinsei PI Group has shown consistency with regard to maintaining a long-term investment policy, encouraging the customization of solutions centered on the needs of the SME owner, and a hands-on approach.

Shinsei Bank's Principal Transactions Sub-Group, which later became the core of Shinsei PI Group, was created in 2001. The group started out as a servicer, purchasing the monetary claims of bankrupt companies (or near-bankrupt companies) from the original creditors--other banks responsible for the disposal of the non-performing loans. (The group would receive repayment from the company after helping it to improve its business performance.) These loans, classified as "bad" loans, were sold at a steep discount. If the division could receive repayment, it would be able to make a profit.

The group started to purchase slightly better loans (i.e. loans to companies that could be restructured). Through the provision of consulting services, the group succeeded in improving the borrower's cash flow and increasing the amount of the repayment. In the process, the group accumulated extensive consulting know-how related to SMEs. Since 2005, the group has been calling on SMEs directly, which is contrary to the standard industry practice at the time, which was to leave the sale of loan credit to the sellers of the credit, i.e., financial institutions. In 2009, the group began providing financial services to SMEs that had sound assets but low credit ratings. In 2011, the group expanded its services to include venture capital investment and buyout investment.

Profitability

Both the return on invested capital and the return on sales exceed the industry average by a wide margin. (Profitability analysis was conducted by PwC Japan.)

Activity System Map

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