AVCJ Awards 2018: Fundraising of the Year - Mid Cap: Japan Industrial Partners

The protracted pursuit of Hitachi Kokusai Electric ended in December 2017 when a KKR-led tender offer for the Japanese manufacturer received enough shareholder support to proceed. Hitachi Kokusai duly repurchased parent company Hitachi’s majority stake and the business was then split in two: KKR assumed full ownership of the thin-film division and 60% of the video and communication division. Hitachi and Japan Industrial Partners (JIP) each took 20% of the latter entity.

JIP was a bit-part player by necessity. The tender offer valued Hitachi Kokusai at JPY322 billion ($2.9 billion) and required an equity contribution of around JPY49 billion. The private equity firm was investing out of a JPY67.4 billion fund; solo participation would not have been an option.

However, the landscape shifted slightly with JIP’s fifth fund, which closed earlier this year at JPY148.5 billion, including JPY46.2 billion for a co-investment vehicle. A transaction the size of Hitachi Kokusai might still be out of reach in the absence of a supporting partner, but JIP is now comfortably the largest domestic player in Japan and well-positioned to capitalize on the growing corporate carve-out opportunity.

“As Japan’s private equity market continues to develop, the more we see larger deals taking place,” says Hironobu Wakabayashi, a managing director at JIP. “Therefore, we have expanded the fund commitment in order to match those increasing needs from the market.”

Carve-out capabilities

The private equity firm was founded in 2002 when corporate Japan was undergoing widespread restructuring in the aftermath of the Asian financial crisis. It established itself as a carve-out specialist (although there have been a few management buyouts along the way), securing assets from the likes of NEC Group, Nippon Steel, Toyota Motor Corporation, Asahi Glass, Yamaha Corporation, Olympus Group, and Sony Corporation.

The increase in fund size over the previous vintage – and the speed of the fundraise – speak volumes for JIP’s track record. The firm closed the offshore portion of the vehicle in March 2018 with JPY76.3 billion in core equity and almost all the JPY46.2 billion for the co-investment pool. Onshore LPs completed the process several months later, contributing a further JPY26 billion to the main fund.

JIP also benefited from growing LP interest in Japanese divestments. Private equity investment in the country reached a record JPY24.9 billion in 2017, although much of this came from the $18 billion acquisition of Toshiba Memory Corporation (TMC) by a Bain Capital-led consortium. TMC was one of five deals of $1 billion or more announced in 2017, compared to six during the six years to September 2016. Four of the five are corporate carve-outs, including Hitachi Kokusai.

There are various driving factors: governance reforms that prioritize return on equity (ROE) over scale, a recognition that being globally competitive means concentrating on core competencies, and a general appreciation that private equity can be a good partner. Wakabayashi sees all these as relevant, but he questions whether they are significant enough to drive widespread change. 

“Japanese corporates are more receptive to carve-outs. In the past, they didn’t necessarily welcome calls from private equity and they were often too nervous about our proposals. Now they are somewhat more inclined to listen to us and the number of carve-outs has increased in recent years – but it has gone from mid-single digits per year to low teens. Opportunities are still limited,” he says. “We hope that more successful outcomes from carve-outs will lead to more deals in the coming years.”

While TMC is seen as an exceptional situation, given the size of the deal and the political considerations, technology conglomerates are the primary source of carve-outs. One of JIP’s most recently disclosed transactions involved Alaxala Networks, a joint venture between Hitachi and NEC that produces switches and routers. According to AVCJ Research’s records, it was the third JIP carve-out from NEC in four years, following Biglobe and NEC Tokin. 

This is no coincidence. The firm completes relatively few investments each year because the sourcing process is gradual. For the most part, JIP builds relationships with conglomerates at group level, holding discussions and making proposals on an ongoing basis. 

Careful targeting

Fiduciary responsibilities often mean a corporate must run an auction, but JIP tends to focus on situations where this is seen as unnecessary or the process has only a handful of participants. “When a deal is highly complex, the seller wouldn’t really ask for bids from a lot of groups,” Wakabayashi says. “We like situations where a tailormade solution is required because there is a better chance to execute deals without unhealthy competition from industry peers.”

Once a transaction is completed, the major immediate challenges concern turning a business that was part of a larger group into a standalone entity. There are intellectual property and branding issues to address, notably how long and to what extent the newly independent company can continue operating under the brand of its former parent. Although accompanying agreements usually require the parent to remain a customer of the subsidiary for a certain period, building towards a sustainable future is essential.

This extends into the personnel arena. JIP often brings in new management to cover areas that were previously handled at group level, but establishing an alignment of interest with incumbent executives is another important area. It might not just be a question of economic incentives. The preexisting corporate culture becomes so ingrained in some individuals that, almost regardless of ability, they cannot function in a different ownership context.

“An executive who has worked for many years as a salaried worker are not used to taking ownership as a manager or thinking strategically. If suddenly they have to run a company on their own, they run into trouble,” Wakabayashi says. “Post-acquisition, it is important that we reach a clear agreement with management regarding the business plan, the KPIs [key performance indicators], and the strategic priorities. It may take a few months to get there, but that’s one of the most challenging part of carve-outs.”   

Pictured: Hironobu Wakabayashi of Japan Industrial Partners

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• Topics
• North Asia
• Fundraising
• Buyout
• Japan
• Japan Industrial Partners