Deal focus: OSI fills the labor gap

Japan's labor shortage is as acute as it is well-documented. According to government projections, the workforce will decline from 66.3 million in 2010 to 56.8 million in 2030, based on a scenario of near zero economic growth and a falling labor force participation. Even in a more positive macroeconomic environment, the number of available workers is still likely to fall.

However, it is not just an issue of demographics. A 2016 survey by global recruitment firm Hays found that Japan is one of the most inefficient labor markets in Asia - i.e. companies cannot find the workers they need to carry out specific projects. Hays warned that this mismatch contributes to wage pressure in high-skill occupations, causing increasing unfilled job vacancies and undermining economic growth.

Not all companies are complaining. Outsourcing Investments (OSI), a business services provider that specializes in supplying engineering staff to manufacturers, is a beneficiary of the shortage. "The company has so much demand it doesn't have enough capacity to meet that demand. We are trying to ramp up the number of engineers," says Ray Yamaguchi, senior vice president at CLSA Capital Partners (CLSA CP).

The PE firm recently acquired a 100% interest in OSI for an undisclosed sum after prevailing in a limited auction. As is the case with every portfolio companies in CLSA CP's second Japan-focused fund - which closed at $210 million in 2014 - the opportunity came about as a result of a succession-planning issue.

OSI employs 2,500 permanent and part-time employees across nine subsidiaries, and claimed JPY10 billion ($97 million) in sales for the fiscal year ending August 2015. Its client base numbers more than 100 companies, but includes a selection of core names to which staff are assigned on very long-term contracts, if not permanently.

"One of the country's top-tier manufacturing companies outsources a crucial part of the R&D process entirely to OSI for a specialized battery, while another company outsources almost all the labor used to manufacture its core products to OSI. It would be high-risk for the company to try and outsource all the production to someone else because they need to maintain the quality," Yamaguchi explains. He adds that OSI is not among the top tier companies in the industry by revenue, but it ranks highly in terms of profitability, partly due to the highly specialized products its employees work on.

With Japanese companies facing increased competition for talent and ever more pressure to control costs, demand for OSI's services is expected to remain robust. Yamaguchi compares the business to BayCurrent Consulting, which went public earlier this year on the back of a ramp up in scale. "We were able to do that successfully by hiring more consultants and as a result we were able to acquire more contracts," he says. "Around OSI there is a very active M&A market so we could potentially acquire some other companies."

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• Topics
• North Asia
• Support services
• Buyouts
• Japan
• CLSA Capital Partners
• professional services