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Secretive Hedge Fund Ends Years of Silence to Take On Japan Icon

(Bloomberg) — It was the rarest of public appearances. At Toshiba Corp.’s extraordinary general meeting in March, a lawyer, who didn’t give his name, talked for four minutes about why shareholders’ rights should never be infringed.He was speaking on behalf of Effissimo Capital Management Pte, a secretive hedge fund that had avoided the spotlight for almost 15 years. Now it was coming out into the open, if only slightly, to spearhead a campaign to bring change at the conglomerate and by extension corporate Japan.Effissimo’s victory over Toshiba’s management in that March 18 shareholder vote was a landmark moment — both for Japan Inc. and the hedge fund whose guarded actions have long been the subject of intrigue.It preceded the resignation of Toshiba’s chief executive officer, turned the iconic manufacturer into a takeover target and caused a surge in the value of Effissimo’s $1.9 billion stake. It may also herald a new era of corporate accountability in Japan, one that international investors say is needed to unleash 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 the brokerage Monex Inc. that advises an activist fund. But it has won “acknowledgment for Effissimo’s position and legitimacy.”The hedge fund has come a long way since it was born amid a scandal in 2006. Back then its founders Takashi Kousaka and Yoichiro Imai were young fund managers in their 20s working for Yoshiaki Murakami, the controversial father of activist investing in Japan.Imai, the son of a senior official at Japan’s powerful trade ministry, joined Murakami’s firm after working at Japanese investment house Nikko Asset Management Co. Kousaka, a U.S. citizen, arrived via a more circuitous route through several tech startups and a U.S. investment fund.Murakami, himself a former elite trade ministry bureaucrat, aggressively pushed for change at Japanese companies before they were ready to listen, ruffling many feathers. But in June 2006, Murakami was arrested for insider trading, a development that would force him to close his multibillion-dollar fund.That same month, Kousaka and Imai set up Effissimo in low-tax Singapore. The firm was seeded by a U.S. university that remained one of its top-five investors as of 2018, according to a memo that year from Aksia, an advisory firm that provided observations on the hedge fund to the Pennsylvania Public School Employees’ Retirement System.By February 2007, Kousaka and Imai had brought on board Hisaaki Sato, who was a former chief financial officer for Murakami’s company Mac Asset Management.The new fund was secretive from the start, refraining from giving interviews. Into that vacuum, media reports over the years almost always highlighted Effissimo’s ties to Murakami.But despite the recent spat with Toshiba, Effissimo’s investment approach was never as confrontational as Murakami’s. For the most part, the fund took big positions in a small number of Japanese companies that it considered to be undervalued and held them for the long term, sometimes making suggestions to executives on how to do things better.Effissimo’s management style is “long only, value,” a 2018 report on the website of Japan’s trade ministry said. The hedge fund has a five to 10-year investment horizon, it said.“When there is need for improvement in management, they communicate through documents or in-person meetings,” the report said. “When that doesn’t work, they opt for shareholder proposals or lawsuits as a last resort.”Effissimo’s leaders make reasonable suggestions to companies that aren’t taking obvious steps to improve, according to one executive who dealt with the fund and asked to remain anonymous discussing private information.“The image of a typical activist would be making a quick investment, raising an issue and swiftly exiting when the share price rises,” said Masakazu Hosomizu, a partner and portfolio manager at RMB Capital Management, which conducts activist campaigns at Japanese companies. “Effissimo is far from that kind of activist.”The fund has been an investment manager for a broad range of institutions, including retirement funds in Michigan, Vermont and North Carolina, public filings show. It was also a manager for Canada Pension Plan Investment Board as well as CERN, the European science body that runs the Large Hadron Collider. It also received investment from Harvard University’s endowment, Reuters has reported. Harvard told Bloomberg it doesn’t comment on individual investments.Effissimo held more than $10 billion of gross assets, almost all of which was in the firm’s master fund, according to a March regulatory filing to the U.S. Securities and Exchange Commission. Gross assets include leverage and capital commitments, among other things.At the Murakami fund’s peak in March 2006, it managed $3.8 billion, according to Aksia. Representatives for Effissimo and Murakami, whose prison sentence was suspended on appeal, didn’t respond to requests for comment.Effissimo’s two largest investments are Dai-ichi Life Holdings Inc., one of Japan’s biggest insurers, and Toshiba, according to data compiled by Bloomberg. The hedge fund is the top shareholder in both companies, with each stake worth at least $1.9 billion. Both stocks trade above the levels when Effissimo first disclosed a position.From 2006 through 2018, Effissimo delivered net annualized returns of 12.9%, according to the May 2018 investment memo published by the Pennsylvania retirement fund for teachers and other school staff, well above the 2% of the MSCI Japan Index. Its returns after that couldn’t be confirmed.The fund’s big investments fit its strategy of seeking improvements at companies, according to Justin Tang, head of Asian research at United First Partners in Singapore.“Size matters,” Tang said. Anyone holding a small stake “can write Mickey Mouse letters to the board demanding for change,” he said. “But when a guy holding 10% talks, everyone listens.”Still, owning such large stakes can have its own problems.Questions remain over how Effissimo will be able to exit its giant position in the shipping line Kawasaki Kisen Kaisha Ltd. 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 research fellow at Monash Centre for Financial Studies who has written on shareholder activism in Japan.With Toshiba, there are few such concerns.When Effissimo first disclosed a position in 2017, it was unclear whether Toshiba could avoid delisting. The company had overstated profits and disclosed multibillion-dollar losses at its Westinghouse U.S. nuclear unit that pushed it close to insolvency.Toshiba escaped that fate and its stock has more than doubled. It’s up 58% this year alone, as many investors expected a bidding war to break out for the company. Its unit Kioxia Holdings Corp. is also mulling one of Japan’s largest-ever listings.But Toshiba may have even greater significance for Effissimo. The hedge fund surprised many observers when it stepped into the spotlight to submit a shareholder proposal at the company. It called for the appointment of three people to investigate vote tabulation and alleged pressure on stock owners in relation to Toshiba’s 2020 annual general meeting.Even though Toshiba’s board opposed the motion, a majority of shareholders voted for Effissimo’s proposal. For decades, shareholders in Japan had almost unfailingly sided with management.It was an “eminently reasonable” proposal, said Nicholas Benes, an expert on Japanese corporate governance. “All Toshiba had to do was agree to an independent investigation,” he said. “But for some reason, they refused.”The action may come to define Effissimo. With the Toshiba case the hedge fund finds itself on the right side of a major issue, at least judging by investor support. By stepping 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.”More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

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