Mercuria Holdings Co.,Ltd. Q2 FY2025 earnings call

• Company Milestone and Strategic Positioning

  • Mercuria was founded in 2005, listed in 2016, and is celebrating its 20th anniversary in 2025, standing at a key inflection point for building a growth foundation for the next 10 years, with a target to grow AUM from the current 344.5 billion yen to 500 billion yen.
  • The company's mission is to break down "market barriers" between high-liquidity public markets and illiquid real business/real assets, create capital circulation for risk capital, and meet demand for risk capital amid rising macro uncertainty driven by geopolitical risks.
  • Competitive advantage: As a domestic Japanese player, Mercuria has deep understanding of local resources, unique capabilities in supporting business succession and governance transition for Japanese companies, and a diverse workforce with nearly 50% non-Japanese employees supporting a global perspective.

• Governance and Operational Improvements

  • The company became an audit and supervisory committee company in March 2025 to strengthen corporate governance, and is currently working on expanding fair value measurement disclosure to address stakeholder questions about the value of illiquid investments, and upgrading portfolio company monitoring to improve investment quality for LPs.

• Investment Segment Progress

  • Business Investment: The business investment division covers buyout, structured minority investment, and growth/venture investment, a unique combination in the Japanese market, and actively pursues synergies across funds: minority investment expands deal sourcing access, and venture portfolio company services are deployed in buyout/structured fund portfolio companies.
  • Asset Investment: Aircraft investment has seen rapidly growing institutional investor interest, recognized as an attractive alternative asset with strong risk-adjusted returns in industry publications, and the company aims to grow it into a core strategic business. For supply chain resilience real estate, the company is leveraging its local and cross-Taiwan networks to develop industrial infrastructure supporting TSMC's Kumamoto fab entry.
  • Southeast Asian consulting business for Japanese joint ventures is expanding steadily from Thailand to Vietnam, with growing M&A transaction experience.

1. Business Investment Segment: Centered on the 65 billion yen level buyout funds (Buyout Fund 1 and Buyout Fund 2), this segment prioritizes upside from carried interest. Buyout Fund 1, with a total size of 21.3 billion yen, has completed exits for 5 out of 10 investments, reached a DPI of 1.22x exceeding 1x, and is already in the carried interest stage where Mercuria captures 20% of profits above the hurdle rate. 4 remaining investments are expected to generate carried interest primarily in H2 2025. Buyout Fund 2, which is twice the size of Fund 1, has completed 8 investments with a 60% investment progress rate, evaluated as on track. Other sub-segments: The Structured Equity Fund (En Fund) is a minority investment fund co-sponsored by DBJ and CP Group, with a 30% stake in Styling Life Holdings; BizTech Fund (co-established with Itochu) has completed 17 investments and is pursuing exits; Supply Chain Venture Fund has completed 5 investments since launch in April 2024, with 2 portfolio companies (Hutch Work, Toyoco) already listed, and Toyoco's stock price is performing strongly. The segment's management fee base (excluding En Fund) has grown steadily, with preparations for Buyout Fund 3 now underway. Carried interest from Buyout Fund 1 contributed 1 billion yen in the prior fiscal year, and additional carried interest is expected from H2 2025 exits.
2. Asset Investment Segment: This segment prioritizes scale growth from management fees, centered on the 220 billion yen Hong Kong-listed Spring REIT, which contributes approximately 2 billion yen in annual combined revenue from management fees and dividend income from self-investment. In the 2nd quarter, Spring REIT recorded a 240 million yen market value impairment loss, with a large gap between its 0.4x P/B market valuation and appraisal value. The segment is currently focused on two new growth areas: expanding aircraft investment, where a new fund is expected to be launched by the end of 2025, and supply chain resilience real estate investment focused on the Kumamoto semiconductor supply chain ecosystem, where consortium formation is progressing. The overall annual stable profit contribution from Buyout funds and Spring REIT exceeds 80% of total annual stable profit, and the two segments account for less than 60% of total invested capital on the balance sheet, with approximately 20% of capital allocated to long-term growth planning projects.

• Full-year 2025 annual budget and target of record high profit is maintained unchanged, despite the Q2 result coming in below budget due to un realized carried interest, yen appreciation impacts, and Spring REIT impairment losses, as carried interest from Buyout Fund 1 exits is expected to be realized in H2 2025.
  • Full-year profit guidance is maintained as a range, due to large potential variation in the amount and timing of carried revenue from Buyout Fund 1 exits.
  • The company targets to clear the Tokyo Stock Exchange Prime Market listing maintenance requirement (market capitalization threshold) by the end of the full fiscal year, through delivering budgeted profit and improving market valuation via IR communication on growth project progress.
  • Dividend guidance is maintained at 22 yen per share, aligned with the policy of targeting a 30% payout ratio based on 5-year average net income.
  • The company maintains its long-term target of growing AUM to 500 billion yen, focusing on maximizing carried interest from existing funds and growing management fee scale via aircraft fund open-ending and supply chain resilience initiatives.

• One portfolio company of Buyout Fund 1, JS Foundry (JSファンダリ), entered bankruptcy proceedings in July 2025, with no additional material impairment expected beyond what was already recorded in the prior fiscal year; management fees may see a slight decline, and carried interest from this specific investment is unlikely to be realized, but the overall fund remains on track to meet target returns.
  • Spring REIT's two assets in China have divergent performance: Beijing office property has seen falling rents due to foreign enterprise withdrawal amid changing Western sentiment toward China, leading to a large market valuation discount relative to appraisal value, creating quarterly mark-to-market volatility for Mercuria's consolidated results.
  • Current yen appreciation (approximately 10% against the USD from end-2024) created a negative impact on Q2 profit via foreign exchange losses on overseas subsidiary earnings.
  • Geopolitical risks from the Trump administration's tariff policies and US-China tensions create both opportunities and risks, requiring careful active management of the investment portfolio.
  • The company's current share price does not meet the TSE Prime Market listing maintenance threshold, requiring efforts to improve market valuation.
  • Expanding into personal investor access for alternative funds is constrained by strict regulatory requirements under the Financial Instruments and Exchange Act, following past industry incidents of improper fundraising.

Q: How does the Trump administration's tariff policy impact Mercuria's business, and how is the company managing related effects? / A: The policy will definitely impact global markets and supply chain reconfiguration, with both positive and negative impacts. The JS Foundry bankruptcy is partially a result of this shift: global demand for power semiconductors dropped sharply after the initial pandemic shortage, and test orders never translated into mass production, leading to the failure. The entry of TSMC into Kyushu creates large investment opportunities in related supply chain infrastructure, and Mercuria aims to play a role in helping more Japanese companies participate in this growth. For the company's Spring REIT, assets in Beijing and Huizhou show diverging trends: Beijing office rents are falling due to foreign enterprise withdrawal, while Huizhou's shopping center sees growing sales driven by rising middle-class consumption from AI and EV industry growth. The company notes that such changes can generate excess returns with bold, agile action, so careful active portfolio management is key.

Q: What is Mercuria's strategy for expanding access to individual investors, and what is the long-term vision for this segment? / A: Expanding direct individual investor access is challenging due to strict regulatory requirements, which have been tightened after past improper fundraising incidents in the industry, so all funds must operate under full FIEA compliance. The company's current priority is to build trust with institutional and professional investors first, and gradually expand funding from overseas investors, endowments, and pensions before focusing on individual investors. For individual access, the company prefers to work with specialized intermediary firms that can conduct proper due diligence and explain illiquid products to individuals, rather than direct fundraising. The first test will be open-ended aircraft funds: aircraft have clear pricing, fall under FIEA regulation, allowing for more transparent management than direct real estate investment for individual investors, so the company will start with institutional investors and open access to individual investors once the model is stable.

Q: What are the key lessons from the JS Foundry failure for Mercuria's future investment process? / A: The biggest mistake was insufficient macro environment analysis. The investment was evaluated in 2021-2022, when pandemic supply chain disruptions caused a temporary surge in panic ordering for semiconductors, and customer surveys consistently stated strong unmet demand. The company failed to anticipate how quickly demand would fall after the pandemic ended: EV sales slowed, demand for power semiconductors declined much faster than expected, and the investment decision relied too heavily on near-term customer feedback rather than updating the analysis for changing macro conditions. The second mistake was underestimating the speed of Chinese competitor progress: the company assumed Chinese foundries would take years to catch up, but government support accelerated their development far faster than expected. Going forward, the company will incorporate updated near-term market conditions and global competitive dynamics up to investment close, especially for global cyclical industries like semiconductors, rather than relying on older survey data.