Q&A: The Longreach Group's Masamichi Yoshizawa

Q: Japan's new corporate governance code is intended to improve accountability and performance. Can it generate more private equity deal flow through divestments, as some suggest?

A: It is not a paradigm shift but it's a good trend. The code is creating motivation for better corporate governance. Companies must engage more with outside shareholders and they can look to improve return on equity through actions such as carve-outs to private equity.

Q: The code recommends that listed companies have at least two independent directors. Is that enough to bring outside influence to bear?

A: The good news is that board meetings will have more real discussions and decision-making processes - because the inside board members and management representative will have to explain their strategy to the independent directors, and the directors represent shareholder concerns. However, the board could still contain the independent directors, by saying that they understand the concerns but a decision has to be made and there is limited time, and so on. Again, I believe it is a good first step for corporate Japan to become more globalized but there is still a long way to go.

Q: Longreach has completed a number of corporate carve-outs, including Hitachi Via Mechanics (HVM) in 2013 and Sanyo Electric Logistics in 2010. How did those two deals come about?

A: Hitachi understands that global competition is getting tougher, so it cannot allocate resources to areas in which it cannot continue to invest in order to maintain its competitive position. The company wants to focus on social infrastructure and IT. The electronics-related machinery space, which includes a precision drilling business like HVM, does fall under its core competence. Sanyo Electric Logistics was a bit different. Panasonic had bought Sanyo and ended up with three logistics companies under a single umbrella. It didn't want three different companies doing similar things, so it decided to sell one.

Q: The code is part of the "third arrow" of Prime Minister Shinzo Abe's reform package and targets corporate restructuring. What progress do you see in this area in general?

A: In addition to corporate governance, Abe's cabinet is really pushing Japanese companies to become more global. The government is working with certain infrastructure companies to get railroad contracts outside of Japan, they are trying to introduce "cool Japan" culture into Asia, and groups like the Japan Bank for International Cooperation (JBIC) has a mandate to support companies that want to expand overseas through acquisitions.

Q: How important is the cross-border angle in Longreach's carve-outs?

A: It is very important - and not only for carve-outs, but also for acquisitions from family owners. Global expansion is one of the main reasons why companies accept third-party shareholders like Longreach. There are companies that already get most of their revenue from outside of Japan but the customers are Japanese. They want someone that can connect them to Asian, European and American companies that can become real clients. They often have good products and technologies but they lack management capabilities to drive marketing to non-Japanese clients or financial capabilities to do cross-border M&A. When looking to expand a non-core subsidiary into Asia, the CEO of a large conglomerate might ask himself two questions. One, can I find any good management within the company to lead this expansion? Two, can I really use capital to develop this non-core asset? If the answers are no and no, then he might turn to a private equity investor that has the resource, management and financial capabilities to help that subsidiary go into Asia.

Q: Are carve-outs driven more by the parent or the subsidiary?

A: Subsidiaries in Japan still have a lot of autonomy and can drive strategy, but the situation is changing somewhat. Five years ago, the parent would say to the subsidiary, you have three choices: stay in our company and improve profitability, be acquired by private equity and enhance global competitiveness, or be acquired by a competitor. And the strong preference was for option for number one. Now the parent isn't able to allocate the resources required for option one, which means there is a choice between working with private equity and retaining a degree of independence or being acquired by a competitor, which may mean greater stability but less independence. That discussion is now happening.

Q: Do subsidiaries actively reach out to potential PE buyers?

A: It is still relatively rare, but I have spoken to a couple of CEOs that are frustrated under their current corporate structure. They believe they can expand into international markets but the parent would rather take a dividend payment than use profit for expansion. The CEOs know they need to expand overseas or they will lose their competitive advantage.

Q: What impact are strong public market valuations having on deal flow?

A: The deal flow is there but sometimes valuations are too high for us. We also see some GPs rely quite heavily on leverage. Valuations become more reasonable in areas that are not so popular, such as manufacturing. While we are not going to do a lot of deals at very high valuations, once we find an interesting company with room for improvement on the management side and the potential to expand into Asia, we are able to go after it.

Q: Does bridal jewelry specialist Primo Japan fall into this category?

A: There are 650,000 couples getting married every year in Japan - the market is stable but gradually shrinking. At the same time it is a very fragmented market and there are no big names; Primo is the number one player by units sold with strong market share growth momentum. It can develop further in the domestic market by continuing to increase this share. We also have 10 stores in Taiwan and two in Hong Kong and we are going to open more in China, so there is a strong Greater China growth path. Generally in China and Asia, demand for quality Japanese brands is strong. We consider specialty consumer investments only if there is very strong market share or market momentum domestically and the ability to expand into Asia. We also attach great importance to the quality of management.

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• Topics
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• The Longreach Group Limited
• buyout
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