Japan buyout investors must consider post-deal positioning - AVCJ Forum

“What’s unique about Japan is that it’s not the end of the story after the business is sold off. That is not the mindset of management. They are interested in the future of the business, how it will grow after the sale, and how corporate value will be enhanced. This is how PE firms can differentiate themselves in this market,” said Kazuhiro Yamada, head of Japan buyouts at The Carlyle Group.

He was referring specifically to corporate carve-outs, but these are one of two forces that helped propel private equity investment in Japan to a $11.1 billion last year, the highest total since before the global financial crisis. More than $5.5 billion has been committed so far in 2017, comfortably more than the figure for 2015 in full.

The carve-out opportunity is underpinned by corporate governance reforms, which are forcing companies to communicate more frequently and effectively with investors. This emphasis on corporate accountability has prompted boards to consider their strategic priorities, resulting in more divestments. The need to be globally competitive – and therefore more focused on core competencies – is another contributing factor.

The other deal type that features prominently in Japan is business succession, as aging founders opt to sell to private equity in the absence of next generation talent to whom they can hand over management of their businesses. Stock market performance is one of the reasons they are increasingly willing to sell.

“Over the last three years, because of Abenomics, stock prices have gone up in Japan. In the past when we talked to business succession customers they said they didn't want to sell because prices were too low – they weren’t willing to sell at 2x EBITDA. Today it’s up to 5x EBITDA,” said Reijiro Yamamoto, founding partner of Integral Group. “Culturally, institutionally and in terms of valuations, business succession is becoming easier and these opportunities are likely to grow going forward.”

The cultural and institutional considerations have been influenced by time – many founders are aged 70 or above, so they are running out of time to plan for an orderly succession – and the fact that private equity firms have established enough of a track record that they are no longer perceived as corporate raiders. Nevertheless, these sensitivities should factor into negotiations.

“Rather than just pricing they are concerned about the future of their business, they want it to be in good hands,” said Kimihiro Fukuyama, deputy director general in the growth and cross-border investment department at the Development Bank of Japan.

Atsushi Akaike, a partner at CVC Capital Partners, noted that issues such as loss ratio assume an unusually high level of importance when dealing with management teams that care about their company’s reputation under new ownership. This has made CVC more conservative in its deal selection, but he still sees the potential for significant gains through operational improvement.

“It’s not that management teams in Japan aren't doing a good job, but there are different objectives at play,” Akaike said. “Japanese companies stress profitability but they still prioritize business size. For investors like ourselves, profitability is most important. That is why we believe there is a lot of room to make improvements and in that sense we can be very aggressive these days chasing deals.”

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• Topics
• North Asia
• Buyouts
• Japan
• The Carlyle Group
• Integral Corp.
• CVC Capital Partners
• The Development Bank of Japan (DBJ)
• AVCJ Events