Mercuria Holdings Co.,Ltd. Q4 FY2025 earnings call

Company Strategic Positioning

• Mercuria operates as an alternative investment manager focused on connecting illiquid real assets (private companies, real estate, infrastructure, aircraft, commodities) to public capital markets, a role that is increasingly valuable amid the global adoption of fair value accounting standards, which creates new business opportunities for the firm.
• Core long-term goal: Grow AUM from the current ~350 billion yen to 500 billion yen, supported by strengthened organizational governance and operational infrastructure.
• Competitive advantages: ~half of employees are foreign nationals with cross-border expertise, and strategic partnerships with core strategic shareholders including DBJ, Itochu, and Sumitomo Mitsui Trust Bank to develop thematically aligned funds.

Core Fund Operational Updates

• Existing Core Funds: Buyout 1 Fund is in the carried interest stage and performing very well, contributing to 2025's record profit. Spring REIT and solar energy projects face downward market pressure on valuations, so repositioning to highlight intrinsic value is a key priority.
• New Fund Development: Open-ended Aircraft 3 Fund is ready for launch, and fundraising for Buyout 3 Fund will begin in 2026. A new fund focused on electronic industry supply chain resilience in Kyushu, spurred by TSMC's entry into the region, is in preparation, and the "Centenary Brand Project" partnership with Takashimaya for small business succession is also in early preparation.

Organizational and Governance Strengthening

• At the end of 2025, Mercuria narrowly missed the Prime Market listing maintenance requirement for tradable shares market capitalization (9.94 billion yen vs the 10 billion yen requirement), so the firm will prioritize meeting this requirement by improving profitability and communicating new business value to investors.
• Recent governance improvements: completed PRI signatory review and transitioned to an audit committee-structured company to strengthen governance. The firm will also expand disclosure of fair value valuation information to improve investor communication.

New Business Expansion

• Overseas Business: Singapore remains a strategically important hub connecting Western and Chinese markets. Consulting services for Japanese companies expanding into ASEAN, launched in Thailand, has been successfully expanded to Vietnam, supporting cross-border joint ventures and M&A with local talent integration, creating new fee-based revenue.
• Geopolitical Risk Alignment: The firm is advancing initiatives to strengthen industrial resilience and supply chain security in Kyushu in response to ongoing US-China geopolitical tensions, while also identifying new cross-border investment opportunities from shifting trade relations between Japan and middle-income economies including Taiwan, Singapore, and ASEAN nations.
• Investor Base Expansion: The firm aims to expand alternative investment access to underpenetrated investor groups including university endowments, pension funds, high-net-worth individuals, and family offices, which is critical to hitting the 500 billion yen AUM target. The firm will also strategically adopt AI tools where compatible with its financial expertise.

Balance Sheet and Capital Allocation

• As of fiscal 2025 end, total consolidated assets are 23.5 billion yen, with 15.8 billion yen in self-investment, 5.2 billion yen in cash and cash equivalents, and 18 billion yen in equity capital, resulting in a sound financial position. Cash is allocated to self-investment in new Buyout 3 Fund and Aircraft 3 Fund, plus strategic investment in new growth initiatives.
• Dividend policy targets a 30% payout ratio based on 5-year average net income, with a planned 22 yen per share dividend for fiscal 2025.

Overall consolidated fiscal 2025 results: Total gross operating profit hit 6.74 billion yen, and ordinary profit reached 2.55 billion yen, both record highs. Total assets under management (AUM) reached just under 350 billion yen, up from 100 billion yen at IPO.

1. Business Investment Segment: Centered on 65 billion yen in total buyout funds. The segment contributed more than 80% of annual stable operating profit, holding just under 60% of total invested capital.

• Buyout 1 Fund: 21.3 billion yen total fund size, achieved 6 successful exits by 2025, with a DPI (Distribution to Paid in Capital) of 1.66x. Delivered 1.92 billion yen in carried interest and 1 billion yen in self-investment profit in 2025. Three remaining portfolio companies are expected to push DPI over 2x.
• Buyout 2 Fund: Completed 1 exit in 2025, currently holds 8 investments with 400 million yen in self-investment profit recorded in 2025. A new investment is expected to close within the month.
• Structured Equity Fund (En Fund): Focused on minority investment, developed in partnership with Japan Development Bank (DBJ) and Thailand's Charoen Pokphand Group, positioned as a strategic growth segment.
• BizTech Fund: Investment period complete, entered exit phase with 17 portfolio companies including NOT A HOTEL, Luup, and Bitkey, currently pursuing exits via IPO or M&A.
• Supply Chain Fund: Grew fund size with participation from Senko, currently has 9 invested companies including publicly listed Toyoco, with one portfolio company already listed.

1. Asset Investment Segment: Centered on 220 billion yen Hong Kong-listed Spring REIT, with growing focus on aircraft funds. This segment contributes approximately 20 billion yen in annual revenue from management fees and self-investment dividend income.

• Spring REIT: Holds Beijing office buildings and Huizhou commercial properties with an appraised value of 250 billion yen and net asset value of 129 billion yen, but trades at a market capitalization of 50 billion yen (PBR 0.39x) due to negative market sentiment. Recorded 650 million yen in dividend income but a 300 million yen mark-to-market valuation loss in 2025.
• Aircraft Funds: Aircraft 1 Fund recovered from COVID-19 disruptions, Aircraft 2 Fund is performing very well, and the newly structured open-ended Aircraft 3 Fund is fully prepared for launch in 2026 with a target size of 50 billion to 75 billion yen.
• Renewable Energy: Taiwan solar energy projects have slight investment delays, the second project is complete, and the third project is ready to start construction.
• Real Estate: New supply chain resilience-focused fund is in development for the Kyushu region, and Thailand/Vietnam managed projects are expanding from Thailand to Vietnam as planned.

1. New Planning Business: Holds 20% of total invested capital for mid-to-long term growth, focused on developing next-generation core funds and new business initiatives.

• Fiscal 2026 (December period) financial guidance: Expects gross operating profit of 4.9 billion yen and ordinary profit of 1.5 billion yen, a decline from 2025's record high, as the next major exit from Buyout 1 Fund is not expected until 2027 or later.
• Business Investment Guidance: Targets 2.5x investment multiple for Buyout 1 Fund and Buyout 2 Fund, and aims to complete fundraising for a 50 billion yen Buyout 3 Fund in 2026. The firm will continue to maximize carried income from Buyout 1 and advance Buyout 2 toward the carried interest stage.
• Asset Investment Guidance: Aims to realize the full appraised value of Spring REIT by reducing the valuation gap between market price and intrinsic property value. The open-ended Aircraft 3 Fund targets total fund size of 50 billion to 75 billion yen, with the goal of growing it into a new core business segment.
• Long-term AUM guidance: Maintains the target of growing total AUM to 500 billion yen from the current ~350 billion yen, with ongoing organizational strengthening to support management of this larger asset base.

• Geopolitical risk: Ongoing US-China geopolitical tensions create negative impacts on the firm's existing investments, particularly Spring REIT which holds China-focused real estate assets, and requires ongoing portfolio adjustment to address market sentiment impacts.
• Market valuation risk: Spring REIT faces a large valuation gap between its intrinsic appraised value and public market price, driven by the China real estate downturn and negative foreign investor sentiment toward the Hong Kong market, resulting in mark-to-market losses in fiscal 2025.
• Earnings volatility risk: By nature, carried interest from buyout funds is realized only upon portfolio company exit, leading to significant earnings volatility across periods depending on exit timing.
• Prime Market listing compliance risk: At the end of December 2025, Mercuria's traded market capitalization of 9.94 billion yen narrowly missed the 10 billion yen requirement for Prime Market listing maintenance, requiring corrective action to meet the requirement by the next assessment.
• Renewable energy investment delay risk: Renewable energy (solar) investments have experienced minor project delivery delays.

Q: Mercuria achieved record profit of 6.74 billion yen gross operating profit and 2.55 billion yen ordinary profit in fiscal 2025, but guidance for fiscal 2026 calls for a decline to 4.9 billion yen gross operating profit and 1.5 billion yen ordinary profit, as the next major exit from Buyout 1 Fund is not expected until 2027 or later. How will the company navigate this earnings lull, and how should shareholders and investors think about this volatility?

A: Large exits from buyout funds in the carried interest stage naturally create significant earnings volatility based on exit timing, which is an inherent structural feature of the buyout fund business that investors should expect. While this period is an accounting earnings lull without large realized exit gains, the remaining portfolio companies of Buyout 1 Fund are still being actively managed and are growing in value, with large unrealized gains still on the books. The company will improve disclosure of unrealized gains and portfolio potential through fair value valuation reporting to reduce investor frustration around quarterly earnings volatility. The long-term core priority is steady AUM growth: at this growth stage, most management fee revenue is reinvested to strengthen the management team and platform, but over time management fees will become a stable source of profit, which is the key long-term path to more consistent earnings. The company will also opportunistically pursue new fee revenue opportunities from adjacent consulting and other service lines as demand arises to offset periodic earnings dips.

(Note: Transcripts for two additional questions on tokenization of real assets and the current status of Aircraft 3 Fund were not included in the provided source text.)