Fund focus: CITIC rides the Japan wave

Should the half dozen or so Japanese middle market GPs currently in the market all reach their fundraising targets in 2017, capital entering Japan-focused funds would easily surpass $4 billion. If government-sponsored vehicles and venture capital are excluded, it would represent the highest annual total since the country’s pre-global financial crisis boom period.

This renewed sense of optimism is supported by private equity investment data. Capital committed to announced and completed transactions, not including venture capital, came to $9 billion last year, the most since 2007. The number of investments was also at a nine-year high, with 142 announced or completed deals, of which 73 were buyouts.

CITIC Capital Partners is an early beneficiary of this trend, last week announcing a final close on its third Japan buyout fund at the hard cap of JPY30 billion ($268 million). While the vehicle spent approximately one year in the market, the same as its 2010 vintage predecessor, it is nearly two thirds larger and has substantially more LPs, half domestic and half from overseas.

Hironobu Nakano, who leads the firm’s Japan operation, describes the fundraising process as far smoother than for Fund II. “We suppose that the relatively stable political situation of Japan and its economic recovery has helped attract overseas investors’ attention,” he says, when asked to explain the improved investor sentiment. “The strong performance of the Japanese PE market recently in terms of exits and distributions is also definitely a factor.”

CITIC targets the full scope of PE transactions, including succession planning deals, corporate carve-outs, privatizations and turnarounds. The common element is the pursuit of Japanese companies with strong China growth prospects, enabling CITIC to leverage ties to its sister PE business in China and to conglomerate CITIC Group.

“Almost half of our current portfolio companies had a certain level of China exposure when we invested while the rest had little exposure and have been expanded post-investment,” Nakano explains. “The former are typically manufacturing companies and the latter tend to be consumer goods and services companies. In line with the on-going shift of China’s economy to be more domestic consumption-driven, we expect the latter to increase further.”

The three investments already made from Fund III – apparel brand Mark Styler, women’s footwear retailer Akakura, and an unnamed diagnostic drug manufacturer – confirm this thesis. There are expected to be about 10 deals in total, with consumer goods and healthcare featuring strongly.

CITIC has made nine investments across its first two funds, with five exits to date, each one to a Japanese buyer. “Our results up to now show that Japanese strategic players can be very aggressive in targeting our portfolio companies due to their footprint in China and Asia,” Nakano adds. This proved to be the case last year when the PE firm more than doubled its money on the sale of packaging manufacturer Tri-Wall to Rengo, a rival business with aspirations to expand overseas.

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• Topics
• North Asia
• Fundraising
• Buyout
• Greater China
• CITIC Capital
• Japan
• China