China, Japan Entice PE Shops Amid Global Woes

U.S. buyout firms with well-established operations in Asia remain active, and are gratefully taking advantage of the economic idiosyncrasies unique to the various countries that make up the continent. In the Asia-Pacific region in particular (not including Australia, New Zealand and India) firms remain bullish on the two mainstay countries of China and Japan.

Though infinite differences lay between the nascent, booming economy of China and the mature, struggling economy of Japan, those two countries hosted 82 percent of all U.S. sponsor-backed acquisitions in the region over the past ten years, according to Thomson Reuters, publisher of Buyouts. The following are brief snapshots of recent U.S. sponsor activity in China and Japan, including observations and opinions from industry participants in those countries.


Around the world buyout shops stymied by shuttered capital markets have been chasing growth-capital deals that require little leverage. And that’s led many of them to one of the fastest-growing countries in the world: China.

Majority-stake deals are possible in China, with the exception of heavily-controlled industries like financial services and media. However, the country has proven much more fertile ground for growth capital deals, which typically involve equity investments in exchange for minority ownership. Even reserved forecasts for China’s economic expansion in 2009 call for GDP growth of 6 percent to 7 percent at minimum. Meanwhile, approximately 40 million people are expected to enter China’s middle-class every year for the next 10 years, creating a mass of consumers that will fuel domestic consumption in that country, according to Paul Edgerley, a managing director att Bain Capital.

Bain Capital is one of several U.S. buyout shops that have raised funds with significant allocations to China deals; others include The Blackstone Group, The Carlyle Group and Warburg Pincus. “China offers a great opportunity to invest capital in a growing market with attractive dynamics, and to do so at valuations that are now reasonable and are likely to stay that way,” Edgerley told Buyouts.

Many mid-market firms, too, have entered China. In August 2007, Francisco Partners, based in San Francisco, acquired an undisclosed interest in DarwinSuzsoft, an information technology consulting services provider, for about $48 million. Other mid-market shops, including American Securities Capital Partners, Arsenal Capital Partners, Baird Private Equity, Blue Point Capital Partners and Pfingsten Partners are well-positioned to execute deals, having set up offices in China in order to help existing portfolio companies identify add-ons in the region, take advantage of cheap manufacturing costs, and access a burgeoning consumer market.

On May 28, Boston-based Bain Capital was reported to be the frontrunner in an ongoing bidding battle with fellow mega-firms Kohlberg Kravis Roberts & Co. and Warburg Pincus for a 20 percent stake in Chinese electronics maker Gome valued at about $500 million.

TPG has also been active in the region. On May 26, the Fort Worth, Texas, based firm announced plans to make an $80 million investment in the form of convertible bonds in Daphne International Holdings Ltd., a retailer of ladies’ footwear with locations in mainland China. Upon conversion of the bonds, TPG would own approximately 14.5 percent of the Hong Kong-based company’s equity.


The slow pace of deals in economically-battered Japan has prompted many firms to seek greener pastures. But some observers believe the country could see a meaningful pick-up in M&A in the next 12 to 24 months.

At present, however, many retirement-aged business owners remain reluctant to sell their companies at today’s depressed valuations. The same goes for big conglomerates that have non-strategic assets to unload. The macro-environment in the country is an obstacle. GDP in Japan contracted at an annualized rate of 15.2 percent in the period ended March 31, 2009, thanks in part to an export-driven economy that depends on the buying power of countries like the United States.

For some U.S. buyout shops this year, maintaining offices in the deal-stifled nation became too big a resource drain to continue. Turnaround firm Sun Capital Partners, for one, closed its Tokyo office in February, after spending only two years in the country. In April, Merrill Lynch Global Private Equity disbanded its Tokyo digs after the firm reportedly struggled to no avail to find deals. Also in April, Asia-focused private equity firm Unitas Capital, formerly known as CCMP Capital Asia, said it has closed its Tokyo office to focus on deal opportunities in the rest of the region, according to Reuters.

But the retreat of some firms could benefit others. With fewer buyout firms in Japan looking for deals, competition will be thinner when deal flow does return to the island nation. And plenty of elderly owners of privately-owned companies are looking not just to cash out, but also to partner with someone who will both buy their interests and continue to build on their legacy, said James DeGraw, a partner practicing out of law firm Ropes & Gray LLP’s Tokyo offices.

Dallas-based Loan Star Funds is one of the most active U.S. buyout firms in Japan, having closed nearly 40 deals in the country in the last 10 years, according to Thomson Reuters. Other U.S. firms active there include Bain Capital, The Carlyle Group, and The Riverside Company.

The Riverside Company, which manages more than $2.7 billion in assets and has Asia offices in Tokyo and Seoul, is working on one Japan-based acquisition it hopes to close sometime next month. The Cleveland-based small deal specialist plans to acquire a Japanese software company from its elderly founder by the end of July, according to Stuart Baxter, a managing partner at the firm. The deal agreement stipulates that the founder keep a seat on the company’s board to help steer it through the transition phase.

Baxter, who also serves as the fund manager for the Riverside Asia Fund—the firm’s first Asia-dedicated investment vehicle—said the firm plans to close a total of four platform deals and two add-ons in Asia this year. Still in fundraising mode, the Riverside Asia Fund has a target of $100 million, which would be earmarked to acquire companies valued at up to $50 million.

Meanwhile, a deal struck on May 26 by SG Investments, an investment fund unit of Goldman Sachs, highlights the deal opportunity at the larger end of the market to rejuvenate and possibly consolidate companies as they reorganize. Through the deal, SG Investments and Hong Kong buyout shop MBK Partners will team up to acquire a 98.3 percent stake in underperforming theme park Universal Studios Japan, according to a Reuters story citing South Korea’s Maeil Business Newspaper.

Correction: Buyouts has removed a reference to Thayer Hidden Creek, a Washington, D.C.-based firm, from this story because of incorrect information. The shop owns PCT Inc., an Amsterdam, N.Y.-based maker of composite components for electrical generators, not PCT China Inc., as was stated in the prior version of this article.

The second sentence of the sixth paragraph of this story originally read as follows: Earlier that same year, Washington D.C.’s Thayer Hidden Creek acquired PCT China Inc., a provider of telecommunications services.