Global buyout firms see rich pickings in Japan – AVCJ Forum

"Pricing is much more attractive than it has been historically," said Jun Tsusaka, partner and managing director at TPG Capital Japan. "The US and China are trading at similar levels in terms of EBITDA and price-to-book, whereas the Nikkei 225 Index is trading 20% lower at 6x EBITDA. On a relative basis Japan is cheap right now."

He noted that there are more than 800 companies valued between $150 million and $700 million and 60% of them are trading at less than 0.8x book value.

Japan's status as one of the leading buyout markets in the region - 90% of China deals completed last year were for minority stakes, compared to 94% in India and 75% in Southeast Asia - means private equity investors can deliver more value-add through operational improvement.

Anthony Miller, partner and CEO at PAG Japan, said there are considerable opportunities for restructuring large-scale businesses, particularly in terms of overseas expansion. "For companies with an enterprise value of $500 million to $2 billion, the biggest problem is how they deal with China," he said. "This isn't true for every company but it's true for very many in Japan today. The ability to expand in China is going to be critical in the future."

On the domestic front, the key to effective deal-making is targeting growth segments in an economy that is flat-lining.

Shintaro Hori, chairman at Bain Capital Japan, said the private equity firm was drawn to Skylark - the restaurant chain it bought last year from Nomura Principal Finance and Mitsui for $2.1 billion plus debt - partly because of good price-line strategies that ensure the company caters to most consumer segments.

Meanwhile, Bain's most recent investment, Jupiter Shop Channel, appealed because its target market is expanding. "The core customers of Jupiter Shop Channel are women aged 40 years or over and they are spending JPY10,000 ($127) a week," Hori said. "Although the aging population could be viewed as a negative, these people have lots of savings and you need products and services that meet their requirements."

Tsusaka added that TPG sees similar growth in Avon Japan, which it acquired in 2010: The principal customers are women aged 50 years and over.

He also challenged common perceptions of Japan as a low-return market for private equity. While TPG has generated a 5x money-on-money return for realized deals in China, the Japan return of 2.4x is ahead of India and Southeast Asia, which are both 1.8x.

"We have proved we can make money so we are very bullish on Japan and the deal flow we are seeing today is the best we have ever seen," Tsusaka said.

The AVCJ Japan Forum continues on Friday. For more information, go to www.avcjjapan.com.

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