Advantage raises $790m for sixth Japan buyout fund

It has been three months since Advantage Partners last closed a deal, but the Japanese mid-market buyout firm expects to see an influx of stressed sellers as a result of the coronavirus outbreak.

“I would suggest that over the next 6-18 months there will be an increasing number of opportunities,” says Richard Folsom, co-founder and representative partner at Advantage. “The types of deals will not change: founder-owner opportunities in the small to mid-cap space, where we see the most deal flow, and carve-outs that drive the large end of the market and are present in the small end as well. Both will be amplified by challenges posed by the current environment.”

Folsom is happy to wait and see how these situations play out: until there is more visibility into the nature of the recovery, Advantage cannot model potential investments and price them appropriately. However, the firm ended 2019 with a full pipeline and some of these deals might have closed in the first quarter if COVID-19 had not intervened. The plan is to be ready to move once the fog clears – on new deals as well as bolt-on acquisitions by existing portfolio companies.

Moreover, Advantage now has substantial dry powder that can be put to work on such opportunities, having recently completed a first and final close on its sixth fund at the hard cap of JPY85 billion ($790 million). The firm launched the vehicle in November with a target of JPY75 billion and the bulk of the due diligence work – including site visits by LPs – took place before the end of the year. As such, the fundraising process was not especially disrupted by the coronavirus outbreak.

“Even there we were fortunate. Most people were making decisions in February and March. Had we scheduled the close for a month later, we might have seen more decision processes stalled,” says Folsom. “One or two investors put a freeze on new investment decisions or were unable to take decision making forward for some reason, but for the most part coronavirus impact was limited.”

Existing investors account for the bulk of the Fund VI corpus and there is an equal split between domestic and overseas LPs, compared to 65-35 in the previous vintage. Among the local contingent, insurers and pension funds are the largest investors, while Japan Post Bank – a new relationship in Fund V – is said to have re-upped. Smaller checks came from a handful of regional banks. Tokyo Century Corporation, a local leasing business that bought a stake in Advantage’s management company last year, remains an LP. Folsom declined to comment on individual investors.

Several of the new LPs were participants in Fund IV, which closed at JPY215 billion in 2007 but ran into difficulties when its largest investment, Tokyo Star Bank, was surrendered to creditors. These investors sat out the next two vehicles – a JPY20 billion bridge fund in 2013 and a JPY60 billion fifth fund in 2017 – as Advantage rebuilt its franchise and they have now reactivated the relationship.

The Fund V portfolio includes some companies in the food and beverage and education sectors – such as Oishii Promotion, operator of the Kaneko Hannosuke restaurant chain, and Tokyo Central Japanese Language School – that have been severely impacted by COVID-19. Conversely, a second domestic education asset, vocational training provider Abitus, is said to have benefited from social distancing arrangements as more people occupy themselves with part-time study.

Advantage established a task force that operates across the different offices and portfolios. It received information from the deal teams and worked with them on identifying actions that could be taken to support individual companies. The firm has bases in Tokyo, Shanghai, Hong Kong, and Singapore and runs an Asia ex-Japan fund in addition to its flagship Japanese vehicles.

In some cases, specific steps were taken, such as ensuring restaurants were set up to do more home deliveries and converting educational content from in-classroom to online delivery. More generally, Advantage studied the Japanese government’s coronavirus stimulus package and advised certain companies to apply for loan guarantees to cover employee salaries or financial support programs for displaced employees.

"This is where the experience of our team comes into play," Folsom adds. "All our partners and deal leaders in Japan have been with the firm since before the global financial crisis. They have seen how new investment opportunities emerge following a crisis as well as how investments made just prior to a downturn can be challenged, and what needs to be done to support them.”

Cash conservation has been a large part of the coronavirus response at portfolio company level. In addition to managing day-to-day cash flow and costs, Advantage completed four refinancings in February and March. This has been a consistent practice in recent times. Once an investment enters its second year, the private equity firm replaces the leveraged financing package with a corporate debt arrangement. Typically, covenants are reduced in number – or entirely removed – and interest costs are cut by half, giving the business a lot more financial flexibility.

The impetus for rapid action contrasts the often drawn-out process of cultivating and executing investments in Japanese private equity. The industry is certainly making headway, with AVCJ Research’s records showing the number of buyouts rising from 30 in 2011 to a peak of more than 80 in 2016. The total stayed above 70 for the next two years before dropping below 60 last year. Despite these fluctuations, the emergence of more founder-succession deals is a consistent theme. They dominate the lower and middle-market segments.

The amount committed to buyout deals reached $7.3 billion last year, up from $2.3 billion in 2018, although short of the $8.9 billion and $23 billion deployed in 2016 and 2017, respectively. These statistics in part reflect the intermittent nature of large-scale corporate carve-out transactions, which have brought an increasing number of global and pan-regional private equity firms to Japan. Plenty of domestic GPs are also anticipating more carve-out opportunities in the middle-market and Folsom believes the patience – of both groups – will ultimately be rewarded.

“There is an expectation, rightly so, that there will be more carve-outs,” he says. “That expectation was based on things that were visible before the coronavirus situation: corporate parents being more positively disposed to carve-out activity and more positively disposed to working with private equity firms as recipients or stewards for those businesses. The downturn could amplify the volume of opportunities that come out of the next few periods.”

However, this should not be interpreted as a prediction of an immediate spike in activity. “When corporates say they want to move quickly on something, it’s usually a three to six-month process,” Folsom adds.

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• Topics
• North Asia
• Fundraising
• Buyout
• GPs
• Japan
• Advantage Partners