Integral closes third Japan mid-market fund at $670m

The vehicle launched in July of last year and a first close – at more than half the overall target – came in October, mainly comprising commitments from core existing local investors. Tsuyoshi Yamazaki, a director with Integral, noted that one of the reasons for including overseas LPs was they are generally more open to co-investment than their Japanese peers. The fund will selectively consider investments in large-cap companies, which would require additional capital.

When Integral closed its previous fund at JPY44.2 billion in November 2014, the firm was already seeing increased demand from regional banks. Their appetite remains strong, but the most striking difference between the Fund II and Fund III LP bases is participation from large institutional players such as life insurance companies.

“When we were raising Fund II those names were investing in global funds but they didn’t do mid-market Japanese funds,” said Yamazaki. “A number of mid-size GPs got hit as a result of the global financial crisis and so they held off committing to those funds. But in the last few years, the performance of mid-cap Japan-focused funds, including ourselves, has been good.”

In addition, Integral received commitments from a number of Japanese pension funds that are just starting to invest in domestic private equity. Other LPs include endowments, foundations, fund-of-funds, and financial institutions.

The new fund will follow the same strategy as its predecessors, pursuing control opportunities that involve succession, turnaround and growth capital situations as well as supporting management buyouts and corporate carve-outs. There was a relatively even split in Fund II by deal type, with management buyouts such as wig maker Aderans sitting alongside turnarounds such as airline Skymark.

Turnarounds are expected to be less prevalent in Fund III given the improvement in Japan’s economy in recent years, but succession opportunities, growth-oriented management buyouts and corporate carve-outs are likely to be well-represented. Yamazaki said that with large Japanese conglomerates like Sharp and Toshiba running into difficulty, other companies are thinking proactively about divestments with a view to avoid crisis-driven restructurings.

He believes Integral differentiates itself from other GPs in three main ways: the networks of its founders (Nobuo Sayama and Ray Yamamoto, the firm's representative partners, are pictured); the strategy of committing principal and third-party capital to investments; and its corporate value enhancement team.

Balance sheet participation in deals is referred to as “deal-inducing investment” (DII) – it is smaller than the proportion of capital the fund puts into each investment but is helpful in terms of deal sourcing.

“If we put the balance sheet money directly into the portfolio company, it is seen as a monetary commitment from our firm, and business owners who are thinking about succession and their existing management teams sometimes like this approach,” Yamazaki said. “It is also permanent money. While the fund has to exit after a certain period of time, the DII doesn’t have to exit. Management teams care about long-term relationships and sometimes they don’t see seven years as a long-term investment.”

Meanwhile, the corporate value enhancement team is seen as a necessity in Japan because management talent is not as mobile as in Western markets. It can be difficult to find the right senior executives for a company at the right time and so Integral has people on hand who can work on operational improvement across areas such as management and finance.

Integral currently employs about 35 investment and management professionals and it plans to add management bench strength for Fund III. Earlier this month it appointed retail industry veteran Tsuneo Okubo, formerly president of restaurant chain Seven & i Food Systems – which operates the 7 Eleven franchise in Japan – as a senior advisor.

Integral’s final close comes a fortnight after Tokio Marine Capital completed fundraising for its fifth Japan mid-market fund, receiving JPY51.7 billion. All of the capital came from domestic LPs, with regional banks accounting for just under one third of the total corpus. That followed CITIC Capital Partners closing its third Japan fund at the hard cap of JPY30 billion.

A host of other Japanese GPs are currently in the market raising new funds. They include Advantage Partners, CLSA Capital Partners, J-Star, NSSK, Polaris Capital, Ant Capital Partners, and The Longreach Group. In February Longreach achieved a first close of around $200 million on its third North Asia-focused fund, which was a particular focus on Japan.

Park Hill Group served as placement agent for Integral Fund III.

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• Topics
• North Asia
• Fundraising
• GPs
• Buyout
• Japan
• Integral Corp.