Deal focus: Longreach secures swift return from Japan's NOC

Private equity firms are looking for ways to capitalize on Japan’s demographic challenges, with healthcare, elderly care, childcare and even pet care tipped to see increased demand from an aging population. There is also the matter of a dwindling workforce – it will number 52.4 million by 2040, down from 65.3 million in 2017, a recent government study found – and the expectation that companies will outsource functions they haven’t the resources to perform in-house.

Those that have proffered from investments in business process outsourcing (BPO) range from Bain Capital and Advantage Partner with call center operators Bellsystem24 and Custom Relation Telemarketing to J-Star with document digitization specialist Primagest. The Longreach Group has now added Nippon Outsourcing Corporation (NOC) to the list of exits.

Industry sources say the GP generated a multiple of 2.7x, while the IRR is in the region of 40% thanks to a shorter-than-expected holding period. “There were some aggressive inbound inquiries from multiple parties, most of which want to build out their existing businesses and get into third-party BPO,” says one source. “Demographic pressures are a factor. There’s a positive correlation between the labor shortage ratcheting up and demand for outsourcing and labor-saving services.”

Fuyo said in a filing that BPO would complement its existing general leasing businesses. The company generated JPY618.2 billion ($5.8 billion) in revenue and JPY25.7 billion in profit for the 2019 financial year, driven by machinery, equipment and commercial property leasing as well as real estate financing. The amount paid for NOC was not announced, but Fuyo did disclose that the BPO player recorded revenue and net profit of JPY9.7 billion and JPY449 million last year.

Longreach acquired NOC through a carve-out from Olympus Corporation in October 2016. It represents the first full exit from the firm’s second fund, which closed at $400 million in 2012. Fund III closed earlier this year on $650 million. Longreach typically targets deals in the $50 million to $250 million range.

NOC provides administrative support services, covering human resources, accounting, finance and payroll functions, as well as back office support such as customer relationship management and fulfillment.

At the time of acquisition, around 60% of revenue came from Olympus, so business diversification was an early objective. In this respect, parallels can be drawn with Sanyo Electric Logistics, which Longreach bought in 2010 and sold 18 months later to local rival Mitsui Soko, generating a multiple of 2.5x and an IRR of 60%. As with NOC, the early exit was driven by inquiries from trade buyers.

In addition to bringing in more third-party business while still growing overall revenue – Olympus signed a multi-year contract to ensure early stability and underwritten cash flow – Longreach had to help NOC address the same problem facing many of its clients: worker retention. To this end, the company opened a new facility on the outskirts of Tokyo, which widened the target base of employees and increased capacity.

“Once you can expand, it’s really about marketing and good business development,” the source adds. “With NOC, there were strong inherent capabilities, but it was necessary to wean the company off the parent culture mentality by bringing in new management and shifting to higher-margin growth areas.”

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• Topics
• North Asia
• Support services
• Trade sale
• Japan
• The Longreach Group Limited
• professional services