Q&A: Unison Capital's Tatsuo Kawasaki

Q: The government wants to introduce a corporate governance code to improve board accountability within listed Japanese companies. What does this mean for private equity?

A: The government has been reasonably successful in the liquidity enhancement initiatives through quantitative easing and public spending. But for the economy to continue expanding there has to be sustainable growth in the employment base, so there is a desire to drive growth in mid-cap companies that provide most of the jobs. The corporate governance code is part of this effort in that it is intended to improve corporate performance. A good number of spin-off discussions are taking place because of this. And a lot of regional financial institutions whose typical approach is to provide debt-based solutions for mid-cap companies are becoming more proactive about working with people like us instead.

Q: So, with at least two fully independent directors on company boards, for example, decisions to divest assets to private equity will be taken more readily?

A: That is a fairly big departure from typical Japanese corporate practice. It is not going to be a night-and-day type difference - each step might have a small impact but there are so many different things buried in the policies to come. Although spinning off businesses is not part of many companies' natural business thinking, we are involved in a fair number of discussions with large conglomerates, and these companies are not from the electronics sector. If you look at spin-offs in Japan the first wave focused on automobiles and parts and then there was a period during which a host of electronics giants were selling businesses. The next wave of carve-outs will not necessarily be straightforward restructurings. We are close to announcing the acquisition of a business from a very large non-electronics concern.

Q: The corporate governance code is part of the structural reforms outlined in the third arrow of the government's economic strategy. What progress is being made?

A: The jury is still out. Progress has been slower than people expected in terms of concrete plans being drawn up and implemented. The near-term impact might come from a variety of special economic zones where corporate activity could be boosted through lenient tax or accounting treatment. There are also reforms in the agriculture sector. Old-style politics has made it difficult to implement change, but change is critical to the Trans-Pacific Partnership (TPP) negotiations. Agricultural cooperatives are being forced to alter their approach, creating a bit more competition. These are visible improvements, although the actual economic impact of TPP will not come this year or next year - it's more about opening up of opportunities over a number of years. However, once an agreement is in place it will be easier for certain industries to have greater predictability in trade.

Q: What are your views on the general health of the economy?

A: Outside of the consumption tax shock which took place about a year ago, we are seeing reasonably positive economic figures on a fairly consistent basis. There are always some minor ups and downs. We are seeing improvement in unemployment rates, reasonably inflationary trends on a quarter-on-quarter basis, and while consumer spending is slow to recover, the picture is quite different from 12 months ago. And then the yen is sticking at about JPY120 to the dollar, which is helping corporates and supporting a better psyche in the market. Given Japan relies on imports for over 90% of its energy needs, lower oil prices are also a positive.

Q: Against this backdrop Unison is about to make its first investment in about two years. Why the hiatus?

A: We have spent a fair amount of time selling businesses. We have also made a lot of proposals and put in occasional bids in auction situations but they were pushing beyond what we were prepared to spend. There have also been deals we decided not to pursue because we don't want to focus on a particular area. We want to have a fairly concentrated range of businesses and transaction sizes in our upcoming fund, which adhere to specific value creation themes. There is a consciousness on our part not to dance with just any girl out there on the floor.

Q: There have been five full or partial exits in the past 12 months. What trends do you see?

A: Enoteca [a wine retailer sold to Asahi Group] was an interesting case for us. It's a small business but wine is an interesting area for the alcoholic beverage companies. They are not making huge profits from their core beer businesses, and wine is high margin and has some reasonable growth opportunities. Enoteca was able to carve out a sizeable share of the market and it is also uniquely positioned in that it is a wholesale distributor and chain store operator as well as an importer. In addition, the company has a fairly sizeable online business. This was a succession opportunity for us - the founder and CEO wanted to remain involved in the company but eventually see changes. We agreed to help him transition out in a very forward-looking manner.

Q: Most recently, various assets held by Asahi Tec were sold to India's Amtek Auto. Was this an unusual buyer?

A: There is a lot of talk about Asian players entering the Japanese manufacturing space by acquiring assets, but there haven't been many significant deals of that nature. We orchestrated one transaction with a Taiwanese player in the semiconductor space [Covalent's silicon wafer business was sold to Sino-American Silicon Products in 2012] and now there we now have this auto parts deal. There continues to be very strong interest from Asia, but how do you turn that into deals? It might help the Japanese industry to tie up with those Asian players because the market is shifting. In that sense our role as transition capital is playing out in the way it should be playing out.

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• Topics
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