AVCJ Awards 2020: Fundraising of the Year - Large Cap: The Carlyle Group

Japanese buyout fundraising hit a record $4.4 billion in 2020 essentially because a gradual re-engagement with private equity by global and local LPs was not derailed by COVID-19. The Carlyle Group, whose fourth Japan fund accounted for more than half of the national haul, has attributed this resilience in large part to the improving performances and outlooks for local companies – at least in certain sectors.

"IT, healthcare, and even some niche industrial areas such as in robotics have shown double-digit growth during COVID-19, but entertainment and hospitality are facing some challenges," says Kazuhiro Yamada, Carlyle's head of Japan. "We are more carefully looking at what's going to happen in the near future and expect a K-shaped recovery. When we look at our current pipeline, we are busier than before the crisis."

Carlyle Japan Partners IV (CJP IV) closed with JPY258 billion ($2.5 billion) in commitments in March 2020, more than twice the size of its predecessor and ranking as the largest-ever Japan-only fund raised by an independent manager. Although a broadening spectrum of LPs – such as Middle Eastern investors – has supported Japan fundraising this year in a general sense, Carlyle built its war chest with a familiar mix of existing backers, including banks, insurance companies, corporate pensions, and a public pension.

Staying power

Some of the increased demand for Japan exposure has been attributed to a desire to diversify allocations away from the US and China in light of ongoing trade and diplomatic standoffs. Still more incentive has come in the form of warming business sector sentiment for private equity, which in turn has driven corporate carve-out and succession opportunities. But Yamada pins the success of CJP IV squarely on a 20-year track record in local business building.

"Even if the market is mature and GDP growth is less than 1%, if a company has a top market share, we can leverage our global network and industry expertise to help consolidate its industry and transform old models into new platforms," he says. "Portfolio companies in our third fund have generated, on average, almost double-digit sales growth CAGR and EBITDA growth of 30-40% since our investment."

CJP IV will continue an established game plan targeting three core areas: consumer, industrials, and technology, media, and telecom (TMT). The consumer pipeline encompasses retail and healthcare, including medical devices and nursing care. The industrials strategy will pursue globally facing companies in niche manufacturing categories, while the TMT piece straddles media, software, and other B2B services.

Deal sourcing will consider the potential to advance companies' overseas expansion ambitions by enhancing operational efficiency and strengthening management. This is consistent with Carlyle's reputation as the only global GP with a series of yen-denominated buyout funds. CJP III raised JPY119.5 billion in 2015, while CJP II closed at JPY165.6 billion in 2006. Carlyle's first Japan fund launched in 2001 and raised JPY50 billion.

Indeed, corporate Japan's increasing appetite for global growth has become one of the key pillars of the expanding opportunity set. While government implementation of the Stewardship Code in 2014 and the Corporate Governance Code in 2015 was immediately effective in professionalizing back-end operations, they have had a more delayed impact in reshaping company culture. As Japanese executives adopt international standards, they have increasingly looked beyond their borders – playing into the Carlyle remit.

"CEO mentalities have totally changed from a traditional Japanese management style to a more rational global management style that includes a greater focus on growth overseas as the domestic market shrinks," Yamada observes. "That's one of the big boosters for creating deal flow and a tailwind for private equity."

Carlyle is building out its Tokyo-based team to catch these tailwinds. The 20-strong group managing CJP III has been expanded to 22 and there are plans to hire three more in the junior ranks. They will be sourced from corporates and consulting firms as the local talent pool for PE experience remains shallow.

The new fund will also benefit from a deeper bench at the senior level, with Takaomi Tomioka and Hiroyuki Otsuka having been promoted to deputy heads of the buyout advisory last March. Tomioka, who has been with Carlyle for 17 years, will be responsible for succession-related deals and other mid-cap buyout deals, while Otsuka, who has been with the firm for 14 years, will focus on corporate carve-outs and other large-cap buyout deals.

Keen to carve

CJP IV will primarily seek upper mid-market opportunities. Check sizes for succession deals will remain on par with CJP III in a range of $100-200 million, while carve-out deployments will double in size to $200-400 million. Where large-cap opportunities are seen as having potential to scale outside the country, support form LP co-investment and Carlyle's US, Europe, and Asia funds will allow the fund to target deals of more than $1 billion.

Larger carve-out transactions are hoped to proliferate on the back of a number of brand-name success stories where PE played a role, including a string of sizeable divestments by the likes of Panasonic and Toshiba, whose $18 billion sale of a microchip subsidiary to a Bain Capital-led consortium in 2018 remains Asia's largest buyout deal ever.

Hitachi Corporation to some extent has been the poster child for this trend, having pledged to reduce the number of group companies in its portfolio from 800 in 2009 to 500 by 2022. But does that mean investors can expect a significant hike in mega-deals in 2021?

"There are a lot of large corporate carve-out and large succession opportunities in our pipeline. Those deals are not going to happen overnight – they may take a few years. But they are the reason we decided to double the fund size," Yamada says. "We expect a lot of large deals in the next decade. We're not talking about single-digit growth in the Japanese private equity market – it will be double-digit growth or more."

Pictured: Kazuhiro Yamada of The Carlyle Group

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• Topics
• North Asia
• Fundraising
• Buyout
• Japan
• The Carlyle Group
• AVCJ Awards