Deal focus: Advantage kneads 12x return

When Advantage Partners launched a sale process for Riraku, a Japanese massage chain operator that offers affordable services to the mass market, it did not expect one of the company's founders to enter the bidding. Buybacks happen from time to time in private equity, but rarely on terms that give the seller a 12x return. Nevertheless, Yukihiro Takenouchi is now the majority owner of a business he is familiar with and that is familiar with him.

The context of Advantage's investment in October 2013 was succession planning: one of Riraku's founders wanted to retire and the other two, Takenouchi and Satoshi Koizumi, wanted to stay involved. The GP acquired a 75% stake at a valuation of $50 million, including debt, and the two co-founders reinvested alongside it. At the time, Riraku had been in business for just three years, but after tracking the business for 12 months, the private equity firm was convinced by its growth prospects.

The company has certainly delivered. In selling at a valuation of $300 million, Advantage has returned more than the entire corpus of the fund that made the investment. This is based on Riraku's network of directly-owned outlets more than doubling in size to 569 as of the end of August – making it the market leader – while EBITDA has tripled to over JPY3 billion. The new owners hope to reach 1,000 outlets.

"When we opened new stores we saw a lot of demand, but the question is can you find potential therapists, train them and match the therapists with customer needs," says Daisuke Murakami, a principal at Advantage. "Riraku is one of the only players with the potential to keep on growing in this industry. The others are owner-operated and they don't have the infrastructure to handle complexity and scale."

The company has shown its capabilities in successfully targeting patrons on a budget – it has used the tagline: "Riraku, popular and affordable relaxation for salarymen, office ladies (OLs), and housewives." While most salon operators charge JPY6,000-10,000 ($53-89) per hour, Riraku's price point is around JPY3,000. The business model is underpinned by efficient management of customers and therapists. More than 1,000 massages are completed by each outlet every month, twice as many as its competitors.

Having initially focused on scale, putting in place professional systems and management, Advantage turned its attention to service quality this year. Initiatives on the customer side include a new style of treatment whereby clients lie on their side rather than their back, fully exposing the back and allowing a deeper massage of the back and shoulders.

Therapists now participate in a ranking system, which means they can enjoy higher compensation based on customer feedback and length of working hours. Riraku has also taken steps to improve staff training, with novice therapists put through a three-month apprenticeship alongside more experienced practitioners. Once established, therapists can attend regular seminars to review and upgrade their techniques.

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• Topics
• North Asia
• Buyback
• Consumer
• Advantage Partners
• Japan
• Exit