Japan: Spring after a long winter?

Last month, local buyout firm Wise Partners and Development Bank of Japan decided to support Izumi Products Company, a manufacturer specializing in precision machining, which filed for Chapter 11 bankruptcy protection in August 2009. Meanwhile, Higashiyama Film, an industrial coatings company, was invested in by a vehicle owned by CITIC Capital, which took a 63.12% stake. And, Valiant Partners launched a tender offer for Fuji Food Corp., a prepared food maker, in partnership with Fuji’s management.

All of the above are mid-cap groups in need of specialist help in restructuring their business operations and producing healthy numbers. Stemming from several unique situations, these deals are precisely what private equity has been looking for in Japan.

Many key GPs in Japan have noted that there are numerous investment opportunities in the local SME market. At the same time, they added, “We need to convince foreign LPs to make commitments.”

From the point of view of long-term Japan market participants, the current market appears to be one rich in potential. Nevertheless, compared with other Asian markets such as Australia, where private equity investment is recognized and accepted as one of the key growth strategies for local corporates, acceptance by the business communitys in Japan is slow.

But one piece of good news could give greater hope and comfort to private equity players looking for opportunities in Japan.

METI’s new vision

With a vision for a new industrial structure launched in 2010 by Japan’s Ministry of Economy, Trade and Industry (METI), the government is putting forward a proposal to help domestic industries recover the catalyst that powered post-war growth. After reviewing the METI proposal, some international LPs outside Japan believe it will help private equity players to become more active in the local market.

The interconnecting policies proposed by METI, covering factors which may help open more doors for foreign PE groups, include facilitating industrial restructuring and consolidation conducive to profitability. Along with this comes the removal of institutional, financial, and personal/employment-related inhibitors on corporate activity. Within this policy, important factors for PE players include streamlined legislation for corporate organization via simplifying and diversifying M&A procedures, and possible financing by the government to support industrial restructuring.

Another attraction for GPs is the policy for industrial finance to foster growth, which could make a big difference to the scale of the current private equity market in Japan, currently around JPY1.5 trillion ($17 billion). This proposes to diversify the sources of risk capital by using foreign funds and public pension money, postal savings funds and personal financial assets. Japan’s public pension funds are said to amount to about JPY120 trillion ($1.3 trillion)

The plan also includes proposals to create a bond market for professional investors in order to strengthen financial intermediation functions to support corporate growth, as well as backing government policy on enhancing finance for SMEs.

As part of the overall proposal, METI has also approached the Legislative Council of the Ministry of Justice to modify corporate laws by adding new clauses, including promotion of TOBs by simplifying the current procedures, hitherto viewed as complicated. In addition, METI has proposed to institutionalize the “squeeze out” method to wholly acquire target companies.

One Japanese GP told AVCJ, “It will help stimulate PE players to make more TOBs, and METI’s proposal will help create more deal flow in Japan, particularly among SMEs.”

The local culture

Japanese corporate culture is quite unique, and it is fair to say that the country is a difficult market for investments, particularly for those who want to see quick results.
Because the buyout players active in Japan produced some highly-priced deals between 2006 and 2008, most industry figures believed that the country held some large gems. At that time, not only domestic institutional investors, but also global investors viewed Japan as one of the core destinations in Asia for private equity.

However, with the GFC exacerbating the stagnation of the local commercial industry, not enough deals were made. And with the market apparently set to remain challenged, many institutional investors have been disappointed in Japan, particularly foreign LPs who have already committed capital, and have now decided not to re-up. Once regular LPs stop making new commitments, in theory, there is a risk that no newcomer will bring in money to make up the difference.

As local LPs have also tightened their belts, Japan’s private equity players are struggling to find capital from an even smaller pool of investors.

On the target side, many Japanese companies are now facing succession issues due to Japan’s ageing population. Company owners who have built their own businesses are facing retirement or feeling the need to make operational and strategy changes.

With lackluster domestic growth, the nation must increase either its direct or indirect business dealings with neighboring countries, including the high-growth economic giants of China and India. However, recurrent problems include the mentality and pride of owners, and also poor communication skills with overseas markets.

Face and know-how

East Asian cultures, namely the Chinese, Japanese and South Koreans, are particularly sensitive to loss of face. The stereotype of the Japanese corporate patriarch may no longer apply across the board, but many businesspeople still remain reticent about adapting to new (foreign) ways. However, M&A and private equity investment are undoubtedly more accepted by the local commercial community than even a decade ago, as market changes compel corporate change. Business owners have realized the importance of absorbing fresh ideas and globalizing their companies in partnership with foreign entities.

Companies that have stable cash flow or are able to get loans from the limited number of local lenders could still seek further development of their businesses solo. But lenders are busy dealing with their own problems clearing balance sheets.

It may be optimistic, but given the current economic conditions, private equity players could be a key part of the salvation and development of some local companies that still have potential for growth. Firstly, private equity could provide sufficient capital for needy companies. And secondly, private equity firms understand how to employ business tactics to help grow companies, not only in domestic markets, but also overseas.

But in return of course, company owners have to give up some or all of the business they have built. The decision to work with private equity is not always an easy one to make. It is very difficult to change a deep-rooted corporate culture and ownership mentality, but the government’s policies to revive the economy could be the catalyst for real change in these areas. 

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• Topics
• North Asia
• Buyouts
• Performance
• LPs
• Regulation
• Industrials
• CITIC Capital Partners
• Valiant Partners Co.