Q&A: J-Star's Gregory Hara

Q: Healthcare has featured prominently in J-Star's recent investments. Why is the sector attractive?

A: The attractiveness is pretty obvious. Regardless of the low-growth macroeconomic situation, healthcare is one of the promising growing sectors, backed by demographic trends, such as the aging populace. In addition, there are lots of roll-up opportunities in this area, because the industry is still very fragmented. Therefore increasing efficiency is the key, but people need to reach a certain size in order to achieve this, and that's difficult for the small players. Japan's unemployment rate is now 3.2%, it's challenging to secure decent labor, and so size does matter.

Q: What other sectors do you find appealing at the moment?

A: BPO [business process outsourcing] is important for a similar reason to healthcare. There are fewer people in the economy, so the only way to maximize profit is to increase efficiency. Therefore outsourcing to another corporation is becoming a popular choice for many large Japanese corporations. They used to do pretty much everything in-house, but now they've started to utilize these outsourced services. In addition the service provider is generally a smaller company, which means that the cost structure is cheaper than the big guys. So there is always a need for the big guys to outsource some of the operation to be handled by smaller guys, whose cost structure is reasonable and efficient. Therefore we really like this outsourcing sector.

Q: What specific types of businesses do you target in the outsourcing sector?

A: We do see some manufacturing segments, like automotive, construction machinery, or industrial machinery, that have relative strength over others. These are companies like Toyota or Nissan, or Komatsu and Hitachi in the construction machinery segment. They are great global companies; our target can be a supplier to these big guys who continue to do business in other countries.

Q: How does a firm like J-Star support these businesses?

A: Japan's domestic economy is stable, but it's low growth. Therefore demand to increase the business outside of Japan continues to be key, and these companies need suppliers to provide the services, parts or products. They want their Japanese suppliers to accompany them overseas and continue to provide these services, but it's not easy for a small manufacturing company to cross the border. A firm like ours can be a good sponsor for them.

Q: To what extent is this kind of situation unique to Japan?

A: Many manufacturers seem to want to do everything by themselves, but Japanese industries are not so vertically integrated. Therefore we see many smaller players in the industry, the tier-one or tier-two suppliers to these big manufacturers. And because of that structure, when the big manufacturers go global these suppliers come along. But it's not easy to achieve that kind of strategy - not from a sales standpoint, but the standpoint of human resources and capital, they have scarce resources to take such a risk.

Q: What are your priorities once an acquisition is made?

A: What we work on at the very beginning, post-acquisition, is goal-setting. What we do is tell people that we are sort of interim shareholders or tentative shareholders. Some would take that as a bad thing, but we are communicating with our investee companies - we will be there for the next three to five years, but because of that short period, we can concentrate on goal setting. We also heavily focus on ESG issues to create value. These are particularly important for small businesses

Q: How do you make sure your goals are aligned with those of the portfolio company?

A: They understand that they are doing it for themselves, rather than to make us fat or rich. Their performance is our performance, so therefore it cannot be a one-time thing, it has to be permanent. And in most cases the portfolio companies understand that. We do also understand that they need a reward if their performance is better, and so that's part of the package. We're not just hiring outside consultants to set the midterm goals, we form and facilitate the discussion within the portfolio companies. So the core members of the portfolio companies are involved in the goal-setting process.

Q: What factors are most important in sourcing new investments?

A: Rather than any specific route, what's more important is the reputation of the firm itself. People see us as not only the investment source, but also sellers really care about our reputation, investment philosophy, track record, and - probably most important - our 10 years of consistent investment pace. We are sponsoring two to five companies every year, which gives comfort to not only the seller of future prospective portfolio companies, but also the intermediaries. They think, ‘These guys must be good, because many people are consenting to be sponsored by J-Star, so there must be something.' We wouldn't get that from making one investment every two to three years.

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• Topics
• North Asia
• Buyout
• GPs
• Japan
• J-Star