Japan's J-Star sees 8x return with first secondary exit

This is J-Star's first-ever exit to secondary private equity investors.

The company's main business is Burn Repair, a final-touch repair service used by homebuilders and construction materials manufacturers to clean up properties post-construction and before sale. This function was previously fulfilled by small local contractors, but as developers began to work on larger projects an opening emerged for a large-scale provider.

There are 30 Burn Repair outlets nationwide. It also provides post-sale services such as property inspections and interior adjustments. Burn Holdings' other businesses, HouseBox and Spec, sell repair materials and offer interior finishing services.

J-Star acquired a majority stake in the company for around $5 million in 2011. That year Burn Holdings recorded sales of JPY4.7 billion ($43 million) and EBITDA of just under JPY200 million. Forecast sales for the year ending September 2014 are JPY7.4 billion, while EBITDA is expected to be JPY500 million. Earnings growth is said to have contributed about 70% of J-Star's overall return on the investment.

The private equity firm's operational contribution fell into three categories. First, it formed a holding company structure for the various subsidiaries in order to improve governance and operating efficiency. Second, headcount increased from 524 to 783 and efforts were made to reduce turnover through shorter training periods and an internal mentor system. Third, steps were taken to boost profitability.

"We introduced information systems and set key performance indicators," explained Greg Hara, president of J-Star. "This was important because prior to our investment the company focused on everything, whether or not it was profitable. This is a labor-intensive business and if people were busy management was happy. After our investment, the focus switched to the earnings contribution of different businesses."

A number of strategic buyers were interested in acquiring Burn Holdings but the company was keen to maintain its independence. The founder and representative director, Akio Hayashi, held a significant minority investment in the business after J-Star's acquisition and he will retain a financial interest and operational involvement under the new owners.

Burn Holdings is seen as a likely IPO candidate.

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