Japan fundraising: Sink or swim?

Japanese mid-cap PE firm J-Star began laying the groundwork for its second fund in 2007. The GP reached out to foreign investors so that when it next came calling for capital they would be able to put a face to a track record.

J-Star's strategy appears to have paid off. According to market sources, the firm is on course to reach a final close of JPY20 billion ($210 million) on Fund II in the next few weeks, and there is foreign representation among the LPs. While J-Star gained overseas backers for its first fund via the secondary market, securing foreign LPs from the outset required a concerted effort. It is a reality facing every mid-market firm.

"With onshore LPs, there's not much going on compared to a few years ago. Maybe more institutions are thinking about investing but aren't there yet," says Akihiko Yasuda, managing director at Asia Alternatives. "If you want to raise $200-300 million it's not easy targeting onshore LPs alone. It is totally different from 2005-2006."

Assuming J-Star reaches its target, it will be the first independent domestic GP to cross the $200 million threshold since Mezzanine Corporation closed its latest vehicle at $225 million in May 2012. Industry participants see it as evidence that sentiment towards Japanese PE is finally turning, but their optimism is guarded.

"Investors are definitely more interested in Japan in general," says Kazushige Kobayashi, managing director at Capital Dynamics. "J-Star may be about to close and they have attracted more foreign capital than previously, but the fund size is still quite small. We are not sure how serious foreign investors are about Japan."

These sentiments are echoed by one Asia-focused placement agent, who claims to see "more real activity rather than just talk, but it's not an easy or excessively fruitful market just yet."

In the pipeline

The picture will become clearer as The Carlyle Group markets its third Japan-focused buyout fund, which reportedly has a target of $2 billion, although some industry sources put it at a more modest $1 billion. The firm's predecessor vehicle received commitments of JPY215 billion ($2.2 billion) in 2006, but the corpus was subsequently reduced to JPY165.6 billion.

Japan Industrial Partners is also in the market seeking at least $600 million, while Advantage Partners is raising a JPY20 billion bridge fund as a prelude to a fifth full buyout vehicle. Unison Capital is expected to launch Fund III towards the end of the year, with a target of around $1 billion.

According to AVCJ Research, Japan fundraising has already reached $3.2 billion so far this year, up from $2.5 billion in 2012, but government entities have played a key role. Nearly half the capital committed in the first five months of the year went to Development Bank of Japan's Competitiveness Strengthening Fund.

Neither are the preferences of LPs who opt for large-cap buyout exposure via regional funds reflected in the data. Bain Capital closed its second pan-Asia fund at $2.3 billion last July and there are at least four more large regional vehicles currently in the market, all expecting to be more active in Japan than in recent years.

Carlyle's Japan fund represents a bellwether of investor attitudes towards the buyout space because pan-regional vehicles at least have the option to deploy elsewhere if deal flow is not as expected. Even in the boom period of 2005-2007 there were only eight deals of $1 billion or more.

While the economic reforms introduced by Prime Minister Shinzo Abe have certainly pricked LPs' interest, they are looking beyond the monetary and fiscal pillars that have sent the stock market up and the yen down. "PE investors are more concerned about the long-term outlook and so the third pillar - structural reform - is particularly important to them," says Capital Dynamics' Kobayashi. "They are waiting to see how the government implements this strategy."

The wait-and-see approach also applies to mid-market PE firms, but it is more to do with a lack of experience attracting foreign investors.
There is an appreciation of the need to diversify LP bases but firms still struggle to penetrate leading institutions.

Two possible explanations are given: a lot of Japanese GPs are captives and therefore unpopular with foreign investors; and many are too small to be of interest to placement agents. It is also argued that few agents really understand the Japan market, although this notion is readily dismissed by some industry participants.

"If you don't understand international PE capital well and don't have an agent, you are dead in the water," says one Hong Kong-based fund formation lawyer. "It's easy to say no agent will touch it but at the end of the day an agent will do most things if you pay them properly."

Asia Alternatives' Yasuda offers a different take, arguing that domestic GPs are simply unfamiliar with the processes and costs involved. "There are only a few global standard placement agents in Japan - historically, it has been more about informal introductions, so the fee structure and value-add is different," he says. "Japanese GPs aren't used to it so when they see the fee structure they get scared."

Greater international sophistication will come with time. The question is will Japanese mid-market private equity be flavor of the month when it does.

 

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• Topics
• Fundraising
• North Asia
• Buyout
• J-Star
• Japan
• Capital Dynamics
• The Carlyle Group
• Asia Alternatives Management
• Fundraising