An industry still standing

The resulting damage has been well documented around the globe, and more than a week later, the disaster is still playing out. The entire world has gathered together to support Japan, as is illustrated by the so far JPY22 billion ($271.7 million) the Red Cross has raised for disaster relief.

Meanwhile in Tokyo, one of the global economic hubs of the world sits around 370 kilometers away from the epicenter. Not as severely impacted, rolling blackouts, food shortages and general worry about the rest of the country is heavy in the air. Further, the economic ramifications for the rest of the world are of paramount concern - not just for Japan but for countries near and far.

An example of strength

At the time of the earthquake, AVCJ was meant to contact Mr. Fukuzaki, Vice President of Marunouchi Capital, the Tokyo-based buyout firm, for a discussion about their latest deal: the purchase of Seijo Ishii, a high-end supermarket in Tokyo, from Advantage Partners-controlled food business operator Rex Holdings. With phone lines down, Mr. Fukuzaki took the time to email AVCJ and explain the situation. Still, he called AVCJ when he could get through, saying, "It is okay for me to answer the questions for a short time, but I do not know how long I will be in the office. I too am shocked by the earthquakes."

We would like to thank Mr. Fukuzaki for taking the time to answer questions, even under such circumstances. It was not until after our conversations that further news reports indicated the full extent of the damage. But as this particular conversation highlights, it is the strength of the Japanese people, and their dedication to their country and to their work that will help the economy overcome what will be a long and difficult uphill battle.

The start of something good

During this discussion, he explained that Japan's private equity industry was re-gaining its energy, with deal flow up considerably since the end of last year. In part he explained that it is about time to exit portfolio companies purchased in the years 2005 and 2006. There are other reasons as well, including transactions likely prompted by lower valuations of the companies and depressed share prices of local groups after ongoing negative impacts as a result of the GFC. An industry source told AVCJ that generally, if the average share price for companies stagnates for some time, the likelihood of PE involvement and purchase is higher.

From January 1 through the end of February, there were nine new investments totaling $1.9 billion; 12 exits were reported. New investments included Carlyle's Tsubaki Nakashima deal (a maker of precision ball bearing), Unison Capital's purchase of wine seller Enoteca; and exits deals, including Advantage Partners and Citic's Pokka stake sold to Sapporo Holdings, and Nippon Mirai Capital's Rescue Network, a roadside service company, sold to Park24.

According to a Brightrust report, considering the number of Japan-focused GPs and GPs with Japan allocations, the buyout market should be viewed as healthy if it has 60 to 80 new transactions per year. The report further noted that exits are occurring at a more rapid pace and that with around 600 buyouts completed and around 50% exited, the trend should continue.

Getting back to normal

In the wake of last week's devastation, the Nikkei average dropped to JPY8,962 ($109.65), while the yen appreciated to its highest in 16 years: JPY76 against the US Dollar. It had been trading at JPY82.80 at the time of the earthquake. The rapid rise prompted the G7 countries to stage a currency intervention to quell potential damages.

In light of the seemingly never-ending bad news, we have seen shifts in the private equity world as well. Distressed consumer lender Takefuji Co. has extended its deadline for a takeover bid to March 31 from March 22. TPG Capital, Cerberus Capital Management, domestic trade player J-Trust, Tokyo Star Bank and Korea's A&P Financial had previously been in the running. Local newspapers have reported a suspension of financing for Bain's $3.4 billion buyout of domestic restaurant manager Skylark Co. by Mitsubishi Financial UFJ, Mizuho Financial Group, Sumitomo Mitsui Financial Group and Shinsei Bank.

Industry still cautiously positive

Despite these reactions, the immediate moves do not appear to be a telling indication of the PE industry's future. One LP source said to AVCJ, "We are observing the economic situation until the chaotic mood is at least settled. Investors are under pressure to out money in China, but they are not fully aware of possible risks there." Japan is still very much in the mix. Another source said that real estate investors and construction related firms have been seen this environment as a potential catalyst for investment opportunities.

Warren Buffet visited a portfolio company in South Korea earlier this week, and commented on possible impact on the Japanese economy. "The current economic impact was a temporary one and... will not change in the economic future of Japan." He also said that he believes Japan's devastating earthquake is the kind of extraordinary event that creates a buying opportunity for shares in Japanese companies.

Industry players in Japan conclude that the investment cycle in the PE industry will remain unchanged, and the succession related operational problems and the need to seek overseas growth will remain. PE firms will continue to find opportunity in the approximately JPY 2 trillion ($24.7 billion) market space. AVCJ looks forward to covering their movements.

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• Topics
• North Asia
• Exits
• GPs
• Investments
• Marunouchi Capital
• The Carlyle Group
• Unison Capital
• Advantage Partners
• Nippon Mirai Capital Co.
• TPG Capital
• Cerberus Capital Management
• Bain Capital Asia