Q&A: Advantage Partners' Richard Folsom

Q: What impact wil Prime Minister Shinzo Abe's economic reforms have on PE? 

A: Up until the events of the last few weeks it was generally all very positive and upbeat in terms of the economic situation. From a PE perspective, it has been a double-edged sword: it could have a positive impact on certain elements, which could lead to higher price levels for new acquisitions and it could also mean corporate parents are more confident in retaining businesses they may have otherwise thought about divesting. On the other hand, certain parent companies were considering divestments but found themselves constrained by balance sheet performance issues. With breathing room provided by the exchange rate weakening and a stronger market, they have more capacity to make these divestments.

Q: So to what extent does the situation create opportunities for Advantage Partners?

A: Over 15-17 years, regardless of positive or negative macroeconomic winds, the underlying fundamentals have meant large corporate parents still have an imperative to divest. We have maintained a dialogue with several corporate parents over long periods of time - most of the deals we've done with them have not come up all of a sudden but have developed over 6-18 months. We will continue these discussions.

Q: What other potential sources of deal flow are there?

A: It is not only in the large corporate divestments that we see momentum but also in public-to-private transactions and founder-owner succession opportunities. There is a large population of ageing founder-owners who need support and solutions to help them transition management and ownership. In the current environment it is easier for some of these founders to sell while the market is upbeat - they might be able to get a bit more value than 1-2 years ago.

Q: What sectors are you interested in right now?

A: We continue to have an interest in consumer products, especially in the retail and food services areas. We see room for consolidation and market development outside of Japan for some of these consumer products, especially branded fashion and apparel businesses. Our investment in Yasuragi last year tapped into another recent trend. The company buys homes, refurbishes them and sells them into the market. There is a shift from building new homes in Japan to refurbishing the existing inventory - which from a macroeconomic perspective makes sense because there is an oversupply of housing.

Q: Will demographics continue to provide attractive targets?

A: We certainly see opportunities in the healthcare sector. One of our recent deals is Hokuo Service, an assisted living facility operator. The ageing population trend and the business in and around this demographic will continue to create opportunities. Another interesting development is women participating in the work force. There are various products and services revolving around that; one growing sector is day care facilities for small children.

Q: How do you see the exit environment in Japan?

A: Around 80-90% of our exits will be to strategic buyers or via secondary sales, rather than IPO. There is stillstrong appetite for companies coming out of private equity ownership from both Japanese strategic and foreign buyers as well as secondary buyers. We've had four exits this year and are working on a fifth - four of those five are strategic sales and one of them a secondary sale. Restructuring of large corporates is a two-way thing, they are divesting certain businesses but also looking to become stronger in other areas and that will often involve them becoming more acquisitive. Three of our four strategic exits have involved consolidation in areas where these companies are already participating.

Q: So foreign strategic interest is strong compared to previous years?

A: I think this is the closest thing we've had to the period following the Asian financial crisis in terms of non-Japanese investors looking inwards to Japan. This time it is not only traditional US and European investors but also Chinese, Southeast Asian, Korean, Taiwanese investors looking to partner with or acquire Japanese companies. We are also seeing more interest from ex-Japan Asian parties wanting to work with PE investors in order to establish relationships with Japanese partners.

Q: Do you anticipate more domestic LPs committing to the asset class?

A: Until now the core Japanese LP group has been insurance companies. Over the years they have taken some hits to their balance sheets, so they have been constrained from making some investments, but now those constraints are beginning to fall away. The Japanese corporate pension funds have not been active in PE yet, though the Government Pension Investment Fund (GPIF) has taken steps to formally look at the asset class. The impact on the broader group of pension funds is significant and many are looking at how they are going to begin PE programs. This should create another subset of potential LPs.

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• Topics
• LPs
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• Exits
• Japan
• Advantage Partners
• buyout
• LPs
• Exit