GPs see traction in Japan's middle market - AVCJ Forum

Gregory Hara, CEO and managing partner at J-Star, told the AVCJ Japan Forum that his firm typically looks at 50-60 buyout opportunities each year, but in 2015 the total rose to 92. He sees the low unemployment rate in Japan - currently 3.2%, and just 2.8% in the 35-55 age group - as one of the key contributing factors.

"For SMEs [small and medium-sized enterprises], business sentiment compared to a few years ago has improved dramatically," Hara said. "But it is getting difficult for owners to secure headcount, and that is one of the reasons why we see an increasing number of sale transactions."

There are four million registered companies in Japan and SMEs account for about 3.8 million of these. Most founders are in their 60s and a survey conducted by NSSK - a small to mid-cap buyout firm set up by Jun Tsusaka, formerly of TPG Capital - found that two thirds have no successor in place. Moreover, all of the bank loans issued to SMEs are personally guaranteed by the founders, which heightens the risk presented by succession situations.

Tsusaka noted that a record 2,000 M&A transactions were completed in this space last year and the challenge for private equity is to increase the share of deals that are leveraged buyouts and management buyouts. He sees private equity as a logical buyer of these assets, in part because many SMEs are not transparent and the founders prefer one-on-one sale processes to auctions. This is also the preferred route for NSSK and other GPs.

"Working on a one-to-one basis we can spend 1-2 months fully reviewing the company and manage the risk in totality. Two months before closing we come up with a business development plan and by the time we have signed the documentation this plan is with the managers," Tsusaka said.

Yuji Kimura, founder, president and CEO of Polaris Capital Group, added that, despite Japan's macroeconomic concerns, the stock market has gained since the Abe administration introduced stimulus policies, while businesses have benefited from the postponement of a consumption tax increase and reductions in corporate income tax rates.

For private equity specifically, Kimura highlighted the ready availability of leveraged financing for transactions and competitive entry multiples: 8.2x forward earnings in Japan compared to 11x in North America and 9.8x in Europe.

The AVCJ Japan Forum is taking place in Tokyo on June 22-23. For more information, go to www.avcjjapan.com.

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• Topics
• North Asia
• Buyouts
• Japan
• AVCJ Events
• J-Star
• Polaris Capital
• NSSK