Sparx Bruised But Not Bloodied by JASDAQ

"The only limits are, as always, those of vision"

James Broughton

It seems that one large hedge fund complex after another has been hitting the headlines as well as the IPO jackpot over the last 6 months- whether in the U.K. or most recently on U.S. public markets. The managers love it as they can release some of the enterprise value of their respective firms at a time when equities are hitting all time highs; investment bankers love it as they represent a new source of fee income; and, judging by successful first day rallies, investors appear to love them too...and then you look at Japan and the recent experience of one of the most mature publically list hedge fund firms located in Japan - Sparx Group.

Back in October 3Q06 redemptions fell over 14% as the portfolio manager of Asia's largest asset management and hedge fund complex resigned. AUM at the Sparx Active Strategy Fund fell 29% to Yen 442 billion. At that time presumably the prospect of key-man risk was not sufficient to trigger the pullback of a long-time investor and supporter: CalPERS. But the same was not true of Sparx's European institutional investors who bolted en masse. Not helping matters was last year's particularly brutal performance of Japanese small cap markets, a sector in which Sparx has been able to ride out the bad times during previous market cycles.

Ironically, it was the activity of hedge funds that resulted in the temporary "beat down" of Sparx to a low of Yen62,000 on Nov 16 2006. Since then, stock price of Sparx on JASDAQ has nearly doubled to Yen 120,000 on Jan 22, 2007 before the current consolidation around Yen99,500.

Interestingly, with Japan's broad equity market TOPIX Index at 15-year highs (up 6% YTD)and the Nikkei 225 Index at its highest levels since May 2000 (up 4% YTD) as long as actions of the BoJ do not surprise (which they did not today), one might see another leg up in Sparx Group performance - especially if the trend of consolidation among banks and hedge fund firms in the US and Europe eventually makes its way to Japan.

Remember too, that when the head of Steel Partners Japan's Tokyo office recently left (a US$4 BLN activist fund) they did not see any significant fall-off in investor appetite for the fund. In fact, Kuroda the former head has already set up his own fund structure focusing on so-called friendly Japan activist opportunities in Fugen Capital.

Not ironically then, what this tells me is that contrary to short term price action I would look closely at Sparx as an interesting upside opportunity. After all, the firm is the owner of alternative investment "product", is building some sort of regional franchise and is only missing domestic Japanese distribution platform to soak up the juiciest mainstream Japanese institutional investor assets (read: pension plan money). Maybe a merger with an established Japanese bank might not be too far away, especially if the acquirer can wrest control of the 60% of stock that is held by insiders (read: CEO and founder Abe). Mahalo.