Q&A: Unison Capital's Tatsuo Kawasaki

Q: What has been keeping you busy in recent months?

A: It’s difficult to get new initiatives to kick in, whether that’s fundraising or completely new investments, not things that have been in the pipeline for several months. Everything requires extra effort. We have been looking forward but also thinking about downside protection. We announced the acquisition of a hospital a couple of weeks ago, the third in a series of investments through our healthcare platform. At the same time, we have been looking at different kinds of financing to ensure that businesses facing weak demand – such as hotels and pub chains – have enough liquidity.

Q: How do you go about securing financing for businesses with uncertain outlooks?

A: It requires a lot of work, making sure our aims and those of management are financeable, whether we are dealing with banks or quasi-government institutions that are pumping liquidity into the system. The level of preparedness to deal with emergency situations, especially in March through June, was significant. In some ways it was better than normal times. Financiers were willing to accept very lenient covenants and extra layers of debt, and then pricing wasn’t necessarily crazy. Now the emergency phase is pretty much over, we are trying to find ways to address the new normal, which typically involves reduced demand and fewer openings. The path ahead is not easy.

Q: In 2016, Unison acquired a travel agency that caters to elderly customers. Are you resigned to a protracted holding period for this asset?

A: It was acquired with a view to initiating a fundamental business transformation, so even without COVID-19, we were in it for the long haul. There hasn’t been much change, although we have seen domestic demand pick up in September and October. As for the pub chain, I think we are prepared to hold it for longer. The hotels are seeing their share of difficulties, with occupancy rates still low. But that doesn’t necessarily translate into a longer holding period. It all depends on when demand comes back and what we can do to improve operations in the meantime. I think in general in Japan, businesses are staying in portfolios longer than anticipated, but a few companies are in the market despite COVID-19. I think this reflects the need to recycle some businesses. We are seeing some interesting dynamics.

Q: Is there any distress in Japan?

A: That is to come. Going into this period, people thought there would be a lot of distressed opportunities and firms were trying to raise massive distress, or hard asset-oriented funds. But the government is pumping so much liquidity into the system, the market is sugar-coated. We see businesses – some of them competitors to our portfolio companies – going belly up or in workout discussions. A lot of issues will surface over the course of 6-12 months and companies will become distressed or operating entities will just disappear. Japan doesn’t have a high yield play like the US and parts of Europe where distress investors come in, kick out the equity holders, and seize control of companies. I don’t know how it will play out in the end.

Q: Do you expect economic difficulty to drive more corporate carve-outs?

A: Carve-outs were somewhat on the rise, but by and large, corporates are still looking at how to take advantage of private capital. We continue to work with pharmaceutical companies that need to monetize their older drugs, which leads to quasi carve-outs. However, if you look around at the deals getting done in 2019, they weren’t happening at a super-fast pace. We were getting indications from large corporates with whom we held discussions that they needed the money and could lose some assets, but I don’t think there was significant momentum. It’s more of a sector-specific play for us.

Q: Unison created the Community Healthcare Coordination Platform to address opportunities in two sub-segments – pharmacies and hospitals. What is the thinking behind this approach?

A: The reason for having a separate brand is to create a user-friendly gateway. The platform is led by a chairperson who is a medical doctor and has a lot of business interests as well. Having someone like him working with us, we see less of the friction that financial sponsors in general might bring to the negotiating table. Unison is more behind the scenes and it’s better that way. The people who work for the platform have an alignment of interest with the platform, just as we do at Unison.

Q: How big could this platform become?

A: We already have more than 100 small pharmacies and there is a clear opportunity in pursuing scale. Once you achieve purchasing power, costs go down dramatically. It’s also a fragmented market – there are 50,000 pharmacies in Japan, greater than the number of convenience stores – and they have lots of succession issues. As for the hospitals, there could be a dozen more opportunities we can close over 3-4 years. We currently have 600 beds across our hospitals and maybe that could become 3,000-4,000. It is all about a mismatch between demand and supply. Demand is on the rise as Japan’s population ages, but the services and bed capacity needed for long-term care are decreasing. Some medium-sized regional hospitals don’t have the medical technology and staff to provide the services needed. We want to help them transition. There is also a lot of operational enhancement on the non-medical side – in procurement, staffing, finance.

Q: Is it a buy-and-build initiative that results in a public listing?

A: The hospitals are different to the pharmacies because we’re not looking at scale, although we do see combinations of hospitals yielding some benefits, such as on the procurement side. We treat each business differently and we start small. It’s not a classic roll-up situation where you have a sizeable operating asset and add smaller ones around it. If the businesses get large enough there could be an argument for public exit, but for the moment we are using the platform to provide services to the underlying assets.

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• Topics
• North Asia
• GPs
• Healthcare
• Buyout
• Japan
• Unison Capital