Q&A: Advantage Partners' Emmett Thomas

Q: Advantage set up its Hong Kong office in 2008. What was behind this decision?

A: Fundamentally, we had two ideas. The first was that a number of our Japanese mid-market portfolio companies had an imperative to expand into Asia. We have since helped two thirds of these companies access value from Asia either through greenfield expansion into new markets, through partnerships with local firms, or through bolt-on acquisitions. There have a dozen bolt-on acquisitions. Our Asian portfolio companies have been also been active in regional expansion but not as aggressively as the Japanese portfolio companies. The second idea was that we could invest in Asian companies and enable them to leverage Japan. Value could be created by helping them enter the Japan market, by helping them acquire Japanese businesses, or by helping them leverage some source of competitive advantage in Japan, like brands, technologies or advanced management techniques. We have subsequently made investments in three Chinese companies and one company in Guam, which all fit this model.

Q: Why are cross-border capabilities becoming more important to Japanese GPs like Advantage?

A: If we look at the sectors and the types of companies in which we are investing, mid-market founder succession deals and corporate carve-outs are our two sweet spots. In Japan, it is sometimes hard for these companies to achieve growth domestically. They usually have strong brands or technologies, and they have some competitive advantage, but it is not always fully monetized because they are only domestic in nature. We see a very strong value proposition in helping these companies grow overseas, and we have now created a variety of success stories in our portfolio. We need to configure ourselves to deliver that value to investee companies or else our competitiveness as a GP in Japan will be undermined. Having the ability to help companies move overseas is an important part of Advantage being successful.

Q: Is there always an overseas expansion angle?

A: Not always. Some businesses are targeting a purely domestic market, and don't have anything to leverage overseas. Probably a third of our Japanese portfolio companies over the last two funds never did anything overseas.

Q: What are the other benefits to having operations outside of Japan?

A: Increasingly we are helping Japanese businesses that have to deal with more competition from Asia, especially from China or Korea. So often when we make an investment, not only do we look at opportunities to expand that company into Asia, but we also look at the threats to the company from Asian firms looking to expand into Japan, or compete in other countries. Whether a potential competitor is Chinese, South Korean, or Southeast Asian, we have to understand how strong that company is and the nature of the threat to our potential portfolio company. So there is also a bit of defensive angle to it.

Abenomics is very important and so far it has been a success. It perhaps has not gone as far, or as fast, as some would like but compared to the many years of disappointing political leadership, it has had a huge impact

Q: What is your take on the current macroeconomic environment in Japan?

A: Abenomics is very important and so far it has been a success. It perhaps has not gone as far, or as fast, as some would like but compared to the many years of disappointing political leadership, it has had a huge impact. The mood in the private sector right now is better than at any time I have seen in the last 20 years - people are feeling better, and companies are investing. Abenomics will also deliver long-term benefits for the private equity industry. If you look at the third arrow of the Abenomics package, it is targeting corporate performance and getting big companies to focus on return on equity (ROE) and creating shareholder value. That will ultimately result in more deal flow for private equity, as big companies look to shed assets to improve performance. There are new corporate governance guidelines such as requirements for independent directors at listed companies. Also, there is a new stock market index requires a minimum 10% ROE, which many big Japanese companies don't fulfill.

Q: How important is legislation such as the corporate governance code in this context?

A: The legislative change provides a trigger and offers some direction but ultimately the private sector has to reform itself. No one is going to legislate for companies to start making more money or doing share buybacks. But if the political leadership is there and companies recognize that change is good for them from a business standpoint, then at some point the private sector will reform itself. That is the way it should work. That way you get more sustainable change.

Q: What kinds of deals you expect to see in the future?

A: The recovery of the economy should create some tailwinds and opportunities. There are several themes. One we currently are pursuing is low cost innovation. In 2013 we invested in a massage parlor chain called Riraku. The company has developed a new business model where they deliver a 30-minute massage at half the prevailing market price. It is tapping into a cost-sensitive segment, and as a result growing more than 20% per year.

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• Topics
• North Asia
• Buyouts
• Japan
• Advantage Partners
• buyout
• Outbound investment