MBO no longer a 'dirty word' in Japan - AVCJ Forum

Speaking at the AVCJ Japan Forum in Tokyo, Jun Tsusaka, managing partner and co-founder of Nippon Sangyo Suishin Kiko (NSSK), said that the idea of turning to private equity as a succession solution is not only increasingly acceptable, but founders often feel an obligation to bring in professional management to protect their legacy.

"If you look back 10 years, MBO was a dirty word, owners hated the idea," said Tsusaka. "Now owners are happy to speak about it and there is no negative sentiment, they understand GPs can help grow their company."

His comments reinforced sentiments expressed by Hideo Nagatsuyu, a senior partner with mid-market GP Advantage Partners. Nagatsuyu also noted that the change in attitude towards outside investors was not driven by regulatory pressure; rather by companies' desire to be more competitive at home and overseas.

"It is more of psychological change that is driving these Japanese companies," he said. "Buyout funds are no longer seen as vultures seeking arbitrage, they are now considered as a good counterparty not only because of the capital they bring, but also because of the operational support they offer."

Tsusaka - who spun out his firm from TPG Capital last year to focus on investments in small- to medium-sized enterprises (SMEs) - added that a lot of the potential deal flow came from succession deals involving SMEs with ageing founders. He added that Japan remains an inefficient M&A market because global investment banks are less established, which means fewer auctions and more opportunity for proprietary deal flow.

"SMEs account for around 90% of the Japan's GDP," he added. "So what you have is a very large pool filled with a lot of small fish."

David Gross-Loh, managing director with Bain Capital, said his firm has made three Japan investments in the past year, all of which were succession deals. The most recent of these was the JPY50 billion ($421 million) acquisition of hotel and spa operator Ooedo-Onsen Holdings, which was announced in February.

He believes succession deals present the biggest opportunity as the decision-making process is more linear, with decisions often made by a single person. By contrast, a corporate carve-out involves a more consensus-based process.

"It can often take time, there isn't much transparency, and in many cases it doesn't always lead to a deal," Gross-Loh said. "But when dealing with founders we can build trust and there is a high likelihood of realizing a deal."

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