Bespoke solutions offer path into Japan's local private debt space - AVCJ Forum

Speaking at the AVCJ Forum, Chris Heine, managing director and head of Asia Pacific with Intermediate Capital Group (ICG), said one of the main reasons behind the lack of private debt activity is that Japan's senior banks have been generous in the multiples they are willing to advance to companies.

He added that while the country has a fairly developed mezzanine market, foreigners are rarely able to participate, and that debt deals largely confined to local operators.

"The returns are about 10% gross and 1.3x the money," said Heine. "If you are investing yen and you are in a fixed income market you are doing well, but those returns don't satisfy our investors in a US dollar Asia fund who are looking for high teens returns and about 1.9x their money."

He said this was the reasoning behind ICG's decision to partner with Nomura, and target Japanese LPs, with the launch of a JPY20 billion mezzanine fund.

Rob Petty, managing partner and co-founder of Clearwater Capital Partners, agreed that the market is challenging for foreign investors but stressed that the main issue is the low interest rates available from local banks. "I think the cultural dimension is not that big a factor," he said. "I think Japan has a very developed market and you can hire high quality and talented lenders, but the low absolute rates makes it tough."

Heine added that the major opportunity in Japan for his firm's Asia Pacific fund is offering bespoke solutions to companies that face succession issues and want to achieve shareholder consolidation. Private debt is an option for privately-held family companies that have no intention of being sold and also do not want to go public.

"When you have low absolute interest rates, why would someone pay the sort the sort of premium we would require for our money?" asked Heine. "It is because we are offering a solution to a need which the banks are unwilling or unable to provide."

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