Q&A: Bain Capital’s David Gross-Loh

Q: It is unusual for any private equity firm to open an office beyond Tokyo, let alone a global manager. What’s behind the decision to establish a presence in Osaka?

A: The main impetus here was the Japan middle market business, which is much more focused on direct proprietary sourcing opportunities, especially situations with families and founders. Increasingly, we found there is a network of local relationships on that side of Japan that’s different and can’t be reached as effectively from Tokyo. We’ve hired a senior advisor from the western region who will be based in Osaka. This means we can go directly to private wealth advisors and founders in Kansai and offer them local resources. We can offer something that’s even more local than most Japanese private equity firms, and on top of that, we have what normally differentiates us – the ability to help companies expand outside Japan and to bring in expertise from overseas.

Q: Without the middle market business, there wouldn't be an Osaka office?

A: That made it much more logical, but we are also looking at doing more in real estate and that is very much locally sourced. The Osaka office can be helpful in that respect. Showa Aircraft Industry was an operational deal with a lot of real estate attached. Our hot springs business [Ooedo Onsen Monogatari Resorts & Hotels] involved a lot of operational aspects like procurement, marketing, and customer acquisition, but it was essentially property. We also have a lot of capabilities in real estate through our special situations business.

Q: Why the interest in real estate?

A: When large corporates want to rationalise their portfolios and reinvest in their core businesses, it’s a relatively easy decision to sell some buildings or the land underneath a factory. There are a lot of orphan real estate assets within Japan’s conglomerates.

Q: Would you need a dedicated fund for those deals?

A: Fund strategy – and whether it’s a Japan fund, an Asia fund, or a global fund – is a separate question. These are hard assets, so you can finance them to high levels, and while the equity returns might be lower, they are more stable and predictable. It helps to have pools of capital that can address operationally intensive deals and more passive situations where you are buying buildings.

Q: How is Bain developing its on-the-ground capabilities in Japan more broadly?

A: Japan is still a people-intensive market. It’s not a place where an investment bank serves up a fully formed deal, you acquire the company with financing from several bank groups that give you identical term sheets, and you have a CEO who is ready to go and incentivised through stock options. Even for the big carve-outs, there is so much pre-work and relationship-building. Financing is usually bespoke and complicated. Post-deal, we send in our own resources, either in traditional roles until we find new management or in COO-type roles where they complement the CEO. We have about 50 people working in investment and operations in Japan.

Q: You recently acquired Hitachi Metals for JPY 816.8bn (USD 5.6bn), the second-largest private equity buyout in Japan after Kioxia (formerly Toshiba Memory Corporation). How much more heavy lifting is required for a USD 5bn deal than a USD 1bn deal?

A: With smaller companies, you don’t have the same management resources and maybe you can’t attract the same level of talent. But then Hitachi Metals is a mammoth, multi-divisional and cross-geography. It’s like six deals in one. Kioxia is somewhat unique. It has a single product line – memory chips – and seven customers who make up a huge portion of sales and there are approximately 10,000 employees. In some respects, Kioxia is larger than all our companies in Japan combined. But it’s not like the company is 20 times more complex than Hitachi Metals. We have big teams working on these deals, not just in Japan, but in the US, Europe, and China. We’ve acquired some domestically oriented Japanese companies – Mash Holdings, an apparel company, was a USD 1.4bn deal – and there’s no difference in the resources we would put into those. But Hitachi Metals is like a little village, a portfolio of businesses. We understood that when we took it on. There are opportunities in unlocking all the pieces, like the mini conglomerate-type of realignment you saw in the 1980s.

Q: You worked with Japan Industrial Partners (JIP) and Japan Industrial Solutions (JIS) on Hitachi Metals. In contrast, the other consortium members for Kioxia were largely foreign. How important is it to have local partners on carve-outs?

A: There were various reasons why the Japanese government didn’t want to wade into Kioxia. Almost everything about that deal came down to scale. Why couldn’t a Japanese strategic buy Kioxia? It was too big. Why couldn’t the government save it? Why couldn’t Toshiba buy it back? It was too big. The real feat there was figuring out how to finance it. I wouldn’t say you absolutely need Japanese strategic partners on deals, it’s very situation specific. In the case of Hitachi Metals, our partnership with JIP goes back to Hitachi Hard Disk in 2007. We looked at Hitachi Chemicals with them and came close to buying it. We had both been talking to Hitachi about Hitachi Metals – we had one channel covered, they had another covered – and we decided that we’d have a better chance of success if we worked together. JIS was a bit different; that’s a relationship we were trying to build.

Q: Is it becoming harder to finance deals in Japan?

A: It’s all relative. We can’t finance much at all in Europe right now and the US is challenging. Japan has become harder because, for the biggest deals, there are really only three banks that finance them. Whenever there are problems with a particular transaction, they issue new terms for LBO financing. This year, they have also become very selective in what terms they give to whom. I am confident we still get preferential financing terms, but they aren’t as good as they were three years ago – covenants aren’t as flexible and leverage levels aren’t as high. That’s not necessarily a bad thing. If leverage falls from 6x to 5x or 4.5x and there’s a little more interest rate, it might help keep prices down. A large deal failure is not good for Japan’s private equity industry. We’ve seen that happen before. The most important deal we did was Skylark [Bain acquired the restaurant chain in 2011, after a previous private equity buyout resulted in a restructuring]. It was large, it did well, we took it public, and everyone was happy. There were other large deals around that time, and they were important in building credibility and validating the market.

Q: What is the investment environment like in the rest of Asia?

A: Financing is harder to pull together and we must do more legwork, but we can get it. The divot is China, where everyone seems to have hit the pause button. We have slowed down as well, but we would still look at select opportunities that are mispriced because everyone is running away from the market. Other parts of Asia are benefiting from the pressure on China. Asia is interesting because it is uncorrelated but a bit symbiotic; push one thing down and demand must go elsewhere. Asia has population growth, GDP growth, and a need for capital investment. If there are difficulties in China, Japanese companies we thought weren’t competitive become more interesting. It’s the same in Korea and India, certainly as it relates to the manufacturing footprint. You do have to be very nimble and sensitive to these changes. If you watch them carefully, and the second-order effects of those changes, there are opportunities. The market might slow for a bit – it’s hard to say that anyone would be immune to a global economic downturn – but there are more bright spots in Asia than maybe anywhere else in the world right now.

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• Topics
• North Asia
• Buyouts
• Buyout
• GPs
• Japan
• Asia
• Bain Capital Asia
• Leveraged finance