Land of the rising fund

Fundraising for Japanese buyouts has been forging ahead in anticipation of the country’s hitherto cool attitude towards private equity warming up, even if economic uncertainty keeps the gas on low for a while longer.

Longreach Group, the private equity firm launched in 2003 by former UBS Securities Japan chief executive Mark Chiba, is launching a second fund aimed at North Asia but anchored largely in Japan.

“I think the next few years will bring the best value buying opportunities that we are ever likely to see in Japan,” he said. “People who have strategic and operational reasons for doing deals will continue to get them done and valuations will be exceptionally attractive for buyers.”

Hong-Kong based Longreach has invested much of the US$750m fund that it raised in 2006, said Chiba. His focus remains on deals of more than US$1bn for established, mature companies in the financial services, industrial and technology, and consumer sectors.

By late October, Unison Capital, one of the largest local players in Japan, was already two thirds of the way to raising ¥200bn for Unison Capital Partners III, a domestic fund that had its first close in August.

John Ehara, partner and co-founder, declared himself “cautiously optimistic” that the fund would reach its target, though the original closing date, the end of 2008, appeared to be in doubt.

“Clearly, a lot of prospective LPs that we use to see have either disappeared or are having very significant problems of their own,” Ehara said.

“I would say that activity for the remainder of the year will be very slow, and we’ve received a lot of requests from prospective investors for closing to be delayed into next year.”

Advent International, the global private equity firm, closed its first ever Japan fund at ¥60bn in September after more than a year of fundraising (see page 28 for more details).

The new funds are all dressed up, but will they have anywhere to go? Superficially, signs are that Japan is on the verge of opening its mind if not exactly its heart to private equity.

Positive indicators include upward buyout trends, the testimony of senior Japanese financiers who have made the once unthinkable leap from major banks and corporations into private equity, the experience of PE houses that have patiently built relationships that are now starting to bear fruit, and encouragement from the powerful and influential Ministry of Economy, Trade and Industry (METI).

The first Japan-only buyout fund was launched as recently as 1997 with ¥3bn. Since then, and particularly from 2004 onwards, such funds have multiplied to the point where a total of 128 had been launched by the end of 2007 and ¥2.4trn had been committed.

These figures, from Dr Keiichi Sugiura at the Tokyo based Japan Buyout Research Institute, knowingly underestimate the capital available as they exclude global funds, special purpose funds, and Pan-Asia funds.

Attitude change

Senior figures report a marked shift in perceptions towards private equity.

When Shusaku Minoda resigned in July 2007 as managing executive officer of Mizuho Corporate Bank, where he was in charge of the global investment banking group, colleagues and friends raised their eyebrows.

Not only was he leaving a high status position, he was joining KKR Japan, the local presence of a large, foreign private equity house with designs to help Japanese firms to internationalise through its global network, contacts and experience.

“Many people were very surprised, asking why I was leaving a ‘good’ mega bank to join a ‘fund’, which even at that time were perceived negatively,” recalls Minoda, now CEO of KKR Japan.

PE’s bad press in Japan is centred on perceptions that high profile deals done after the Japanese bubble burst were contrary to the Japanese business ethos. A so-called ‘Shinsei tax’ on buyouts by foreigners was imposed following media uproar over US private equity firm Ripplewood paying no capital gains tax when it listed Shinsei Bank.

“But since the middle of this year, we’ve been very busy visiting companies – at their own request, through introductions, and using my own personal relationships,” said Minoda. “They want to know what ideas we have that might help them to globalise or otherwise grow.”

Beyond borders

Internationalisaton is once again the mantra of Japan, a mindset encouraged by METI. Few Japanese companies can focus concentrate solely on the domestic market, which will be constrained by future population decreases and modest growth.

Says Minoda: “I am talking with companies across a wide range of sectors that are interested in buying abroad, to secure distribution for example. There are no exceptions (among sectors).”

KKR and Permira, another major foreign player that has been building up a team and contacts in Japan, both pitch as ideal private equity partners for globalisation on the strength of their international infrastructure, networks and experience.

“The larger the company, the more a global fund will have an advantage because larger companies tend to have more than domestic issues,” says Alex Emery, a principal at Permira’s Tokyo offices.

He cites the recent example of Arysta LifeScience Corporation, Permira’s near ¥250bn pharma, medical and biotech acquisition from Olympus Capital Holdings via Permira’s Irish registered subsidiary, Industrial Equity Investments Limited.

“Something like 80% of Arysta’s revenues come from outside Japan. How is a purely domestic fund going to help in terms of opportunities, hiring people and so on,” Emery asks.

Rising sun

KKR and Permira anticipate more such opportunities. Japan’s economy is stagnating. But its corporations sense that the credit crisis and recessions will have a greater impact on potential acquisition targets overseas.

“I think we’ll see a period when Japanese confidence is back,” Emery predicts in allusion to the glory days of Japanese investment abroad, in the 1980s and 1990s, before the bubble burst at home and the ‘lost decade’ saw firms quit or downsize foreign operations.

“They will be more cash rich and less indebted than their peers overseas and will therefore be in a position to take advantage,” he says.

KKR’s Minoda notes that the yen’s likely relative strength going forward against a number of other key currencies is another reason for running the slide rule over targets in the USA,UK, Europe and the rest of Asia.

For example, cash rich Japanese insurers and private equity houses are considering acquisition opportunities in Western non-life insurance companies, according to M&A advisers at KPMG.

“Tokyo is one of the most powerful insurance centres in the world. To date, Japanese insurers have executed quality, local deals but are now realising the time is right to diversify internationally,” said Mark Flenner, head of non-life insurance at KPMG corporate finance. He cited Tokio Marine’s recent acquisition of insurers in the UK and the US.


Drivers of deal flow inside Japan include sales of non-core assets by conglomerates, and family/founder owned firms cashing in. Many companies have strong products, technology and good staff, but would benefit from improved management.

Says Alex Emery at Permira: “Japanese corporates tend to delay taking strong action. But it means that when companies need cash, they do have the platform to push through change. That would include selling non-core assets. With share prices down, I think some corporates will put it back on the agenda.”

John Ehara at Unison Capital reports continued and consistent deal flow from family businesses, though he reflects that some prospective sellers may delay because of lower pricing issues in current markets.

While excited by the value that is likely to be on offer in general, Longreach’s Mark Chiba warns against expecting bargain basement sales. “I don’t think we’ll see ultra-distress opportunities. It will be deep value buying of fundamentally strong or high potential businesses.”

Competition for deals is intense and has been exacerbated by foreign entrants to the extent that auctions have been fiercely contested and pricing buoyed in recent years. Longreach for one concentrates on proprietary deal flow.

Chiba says it typically sifts through around 100 opportunities a year, does serious work on 30 or 40, true due diligence on maybe 10 to 15, and makes one to three investments annually. “So we see no paucity of deal flow, but we’re not trying to deploy a US$5bn fund.”

Investor caution

While private equity firms in Japan have a more positive story to tell these days, some LPs consider that the jury will remain out until they see incontrovertible evidence of change to back up encouraging words.

“You could say that I am very ambivalent about Japan,” says Bruno Raschle, CEO of Swiss fund-of-funds Adveq, whose Asia fund invests in venture capital, development capital and buyout opportunities primarily in Japan, India, China, and Australia.

“On the positive side, it is the second largest economy in the world and the universe of companies is huge, with many deals going un-publicised.”

But his view is tempered by Adveq’s own market analysis. He does not see Japan endowed with a large pool of talented GPs, and Adveq’s research underlined how significant regulatory, legal and fiscal concerns remain.

Poison-pill cross shareholdings designed to repel foreign acquirers during Japan’s decade of economic stagnation remain common, and tax remains an issue.

Permira’s Alex Emery views the poison-pill phenomenom as a symptom of a deeper problem, of corporate governance.

“The real issue is whether we see reforms to say that boards should not be made up entirely of full-time employees of the company. There should be some external perspective with a fiduciary duty to look after stakeholders other than management.”

Government push

Ehara, who in 2005 became the first chairman of the Private Equity Association of Japan, sees positive changes at the governmental and political level, helped by industry lobbying.

“METI supports us extensively – we walk hand in hand and they clearly recognise that although there may be some image issues, these are created more by the media,” he says.

“There’s a continuing challenge on communications, but we’ve made good progress on tax. There’s growing recognition that the Shinsei tax has if anything been counter-productive by discouraging foreign investment in Japan.”

METI and Japan’s Financial Services Agency have recommended tax changes to increase inward investment and to improve the functioning of markets.

Private equity is waiting to see if the recommendations, which would improve the tax environment for foreign PE investors, will be incorporated by the governing Liberal Democratic Party in its proposals for tax reform, which are due in December. Reforms are usually enacted by the end of the following March.

Bruno Raschle hears reassurances, and stresses that Adveq’s Asia fund of funds will invest in Japan as its institutional investors expect it to do in the interests of diversity. But his ambivalence is highlighted by his candid view that if Adveq had only high net worth individuals invested in the fund, he would maybe think, “why bother about Japan, go to China”. Adveq’s Asia offices are in Beijing.

That said, with Japanese companies intent on globalisation and the government knowing that it will face an increased threat from China for investment, he expects movement on key issues. “The Japanese know themselves that they have to open the market for foreign direct investment, but the threat from China is not yet strong enough.”

“Japanese shareholders don’t like to sell,” says Permira’s Alex Emery. “So there’s a huge amount of hand-holding. You have to persuade people that you’re going to look after the company, that you’re not going to fire people or embarrass sellers.”

Says Chiba: “Your have to originate deal flow off long-term trust relationships, proven execution, and being thought of as a committed player, which can take some years.”

Part of being committed is being there and proving that private equity can be a good citizen. KKR Japan’s recent appointment of Yoshiharu Fukuhara as senior adviser was a coup in this respect. He is viewed as a business role model and philanthropist in Japan, and is also widely respected in China and France.


If the Japanese private equity train is about to leave the station, then latecomers could be left standing on the platform. The carriages are full of Japanese funds and the foreigners who have jumped on board during the past five years.

With international firms such as Permira, KKR and Advent luring rainmakers from Japanese business and finance, indigenous PE firms clearly face increased competition. But Japanese houses believe they retain local player advantages because of their in-country experience, exclusive sourcing capabilities, and willingness to hand craft deals.

“Just hiring a few individuals alone will not be a sufficient answer to developing capabilities in Japan,” reckons John Ehara at Unison. “Most of the people recruited do not have prior PE experience. In some cases, they have recruited experienced people, but teams are still new. When it comes to our own PE space, you just cannot use international expertise as leverage in generating opportunities. 80% to 90% of the deals we see are domestic”

Also, while foreign entrants may be well known in the financial world, corporate Japan is less likely to have even heard of them.

When it comes to international deals that require global networks, Ehara concedes that local players at a disadvantage.

“How many of those deals are there? Not many. But I’m willing to bet that international expertise will become more important in the future. That’s why we’ve established a number of good relationships with GPs outside Japan.”