GPs anticipate rich flow of Japanese divestments - AVCJ Forum

"A few years ago, Japanese corporates were in distress. Toshiba had its accounting scandal and companies like Panasonic were in tough situations in terms of market capitalization and earnings," said Ryo Fujii, a partner and head of Japan at Permira. "Now these corporates are in better shape, they don't have to sell. But a lot of conversations are happening, and we see a lot of opportunities."

Private equity buyouts reached $8.9 billion in 2016, the most since before the global financial crisis, with a record 82 deals announced, according to AVCJ Research. There were two billion-dollar-plus transactions, including KKR's carve-out of Calsonic Kansei Corporation. This rose to $22.9 billion in 2017, largely thanks to the Bain Capital-led acquisition of Toshiba Memory Corporation. It was one of three large-cap carve-outs.

Last year, the total was a relatively disappointing $1.3 billion, with the number of buyouts dropping below 60 and none in the billion-dollar bracket. However, activity has picked up in 2019, with $3.6 billion committed across approximately 20 deals as of late June, including MBK Partners' $1 billion acquisition of chocolate maker Godiva's Asia operation, which is primarily based in Japan.

The rise in divestments by Japanese conglomerates is generally linked to more pressure to focus on return on equity, governance reforms, and a recognition that third-party capital and expertise are required to make their businesses globally competitive. Kazuhiro Yamada, who leads The Carlyle Group's buyout team in Japan, highlighted the importance of a rule that local companies appoint external directors.

"It makes a big difference," said Yamada. "Hitachi is a leader in corporate governance. It has 12 board members and eight of them are now external. Four of those eight are global CEO and COO types." This expert input means companies think more strategically about resource deployment. Divesting assets to focus on core operations is increasingly entertained in discussions.

He believes there is "no question" that there will be more carve-outs over the next decade. Carlyle is already engaging numerous second-tier conglomerates that are aggressively considering divestments, often while also pursuing outbound acquisitions.

Deal flow is lumpy because transactions can require years of nurturing. Akira Iinuma, CIO of Polaris Capital Group, said that his company makes many proposals to conglomerates and "sometimes this leads to a deal, sometimes it takes longer and sometimes they offer something else." Nevertheless, he attests that "very few large companies are not having discussions with private equity firms."

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• Topics
• North Asia
• Buyouts
• Japan
• AVCJ Events
• The Carlyle Group
• Polaris Capital
• Permira Advisers