By taking over Toshiba, secret hedge fund Effissimo ended years of silence

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It was the rarest of public appearances. At the extraordinary general meeting of Toshiba Corp. in March, a lawyer, who did not give his name, explained for four minutes why shareholders’ rights should never be violated.

He was speaking on behalf of Effissimo Capital Management Pte, a secret hedge fund that had avoided the spotlight for nearly 15 years. Now he was stepping out into the open, if only slightly, to lead a campaign to bring change to the conglomerate – and, by extension, to Japanese companies.

Effissimo’s victory over Toshiba’s management in the March 18 shareholder vote was a watershed moment for Japan Inc. and for the hedge fund, whose cautious actions have long been the subject of intrigue.

The vote preceded the resignation of Toshiba’s CEO, made the iconic manufacturer a takeover target, and caused the value of Effissimo’s $ 1.9 billion stake to rise. It could also herald a new era of corporate responsibility in the country, an era that international investors deem necessary to unlock the potential of the world’s third largest economy and its more than $ 6 trillion stock market.

“A public campaign puts a lot of burden on the investor behind it,” said Emi Onozuka, chief operating officer of Japan Catalyst Inc., a unit of brokerage firm Monex Inc. that advises an activist fund. But he won “the recognition of the position and the legitimacy of Effissimo”.

The hedge fund has come a long way since its inception, in the midst of a scandal, in 2006.

At the time, its founders, Takashi Kousaka and Yoichiro Imai, were young fund managers in their twenties working for Yoshiaki Murakami, the controversial father of the activist investing in Japan.

Imai, the son of a senior official in the powerful Ministry of Commerce, joined Murakami’s company after working for the Japanese investment house Nikko Asset Management Co. Kousaka, an American citizen, arrived by a more circuitous route. via several technology startups and an American investment fund.

Murakami, himself a former elite Commerce Ministry bureaucrat, vigorously pushed for change in Japanese businesses before they were ready to listen, ruffling many pens. But in June 2006, Murakami was arrested for insider trading, a development that would force him to shut down his multibillion-dollar fund.

The same month, Kousaka and Imai set up Effissimo in Singapore at low tax rates. The company was started by an American university that remained one of its top five investors in 2018, according to a note from the same year from Aksia, a consultancy firm that provided commentary on the hedge fund to the system. Pennsylvania Public School Employees Retirement.

In February 2007, Kousaka and Imai recruited Hisaaki Sato, former CFO of Murakami’s company, Mac Asset Management.

The new fund was secret from the start, refraining from giving interviews. In this void, media reports over the years have almost always highlighted Effissimo’s connection to Murakami.

But despite the recent row with Toshiba, Effissimo’s investment approach has never been as confrontational as Murakami’s. For the most part, the fund took large positions in a small number of Japanese companies that it considered undervalued and held them for the long term, sometimes making suggestions to executives on how to best make them. things.

Effissimo’s management style is “long only, value,” a 2018 report on the Japanese Ministry of Commerce website said. The hedge fund has an investment horizon of five to ten years, he said.

“When there is a need to improve management, they communicate through documents or face-to-face meetings,” the report says. “When that doesn’t work, they go for shareholder proposals or lawsuits as a last resort.”

Executives at Effissimo make reasonable suggestions to companies that aren’t taking obvious steps to improve, according to an executive who has dealt with the fund and asked to remain anonymous while discussing private information.

“The image of a typical activist would be to make a quick investment, raise an issue and quickly pull out when the stock price rises,” said Masakazu Hosomizu, partner and portfolio manager at RMB Capital Management, who leads activist campaigns in Japanese companies. “Effissimo is far from being that kind of activist.

The fund has served as an investment manager for a wide range of institutions, including retirement funds in Michigan, Vermont and North Carolina, according to public documents. He was also director of the Canada Pension Plan Investment Board as well as CERN, the European scientific body that manages the Large Hadron Collider. It also received an endowment investment from Harvard University, Reuters reported. Harvard told Bloomberg it does not comment on individual investments.

Effissimo held gross assets worth more than $ 10 billion, almost all of which was in the company’s main fund, according to a regulatory filing filed in March with the US Securities and Exchange Commission. Gross assets include, among others, debt and capital commitments.

At the top of the Murakami fund in March 2006, it managed $ 3.8 billion, according to Aksia. Representatives for Effissimo and Murakami, whose jail terms were suspended on appeal, did not respond to requests for comment.

Effissimo’s two biggest investments are Dai-ichi Life Holdings Inc., one of the country’s largest insurers, and Toshiba, according to data compiled by Bloomberg. The hedge fund is the largest shareholder in both companies, with each stake worth at least $ 1.9 billion. Both stocks are trading above their levels when Effissimo first disclosed a position.

From 2006 to 2018, Effissimo generated net annualized returns of 12.9%, according to the May 2018 investment note released by the Pennsylvania Retirement Fund for Teachers and Other School Staff. This is well above the 2% of the MSCI Japan index. His subsequent returns could not be confirmed.

The fund’s big investments are in line with its strategy of seeking improvements in businesses, according to Justin Tang, head of Asian research at United First Partners in Singapore.

“Size matters,” Tang said. Anyone who has a small stake “can write letters from Mickey Mouse to the board asking for a change,” he said. “But when a guy who owns 10% speaks, everyone listens.”

Yet having such high stakes can have its own problems.

Questions remain as to how Effissimo can emerge from its giant position in the Kawasaki Kisen Kaisha Ltd. shipping line. The fund owns 39% of the company and put an Effissimo executive, Ryuhei Uchida, on the board in 2019. The stock is up more than 6% since Effissimo first disclosed a stake in September 2015, according to data compiled by Bloomberg.

Selling the shares “could be a problem,” said Nga Pham, a researcher at the Monash Center for Financial Studies who wrote on shareholder activism in Japan.

With Toshiba, there are few such problems.

When Effissimo first disclosed a position in 2017, it was not clear whether Toshiba could avoid the delisting. The company had overstated its profits and revealed multibillion-dollar losses on its US nuclear unit at Westinghouse, which pushed it close to insolvency.

Toshiba escaped this fate and its inventory more than doubled. It rose 58% this year alone, as many investors expected a bidding war to break out for the company. Its unit, Kioxia Holdings Corp., is also reflecting on one of the largest listings ever in Japan.

But Toshiba may be of even greater importance to Effissimo.

The hedge fund surprised many observers when it stepped into the spotlight to submit a shareholder proposal to the company. He called for the appointment of three people to investigate the vote compilation and alleged pressure on shareholders at Toshiba’s 2020 annual general meeting.

Although Toshiba’s board of directors opposed the motion, a majority of shareholders voted for Effissimo’s proposal. For decades, Japanese shareholders had almost always sided with management.

It was a “eminently reasonable proposition,” said Nicholas Benes, an expert on corporate governance in Japan. “All Toshiba had to do was agree to an independent investigation,” he said. “But for some reason they refused.

Action can define Effissimo. With the Toshiba deal, the hedge fund is on the right side of a major problem, at least judging by investor support. Coming out of the shadows after almost 15 years, Kousaka and Imai may have finally developed their own identity.

Effissimo and Murakami “have the same root,” Tang said. But “the similarities end there”.

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