Deal focus: Counterintuition pays off for NSSK

Vati is Japan’s eighth-largest nursing care provider. Industry leader Sompo Holdings, which targets premium services versus Vati’s more mass-market positioning, has three times as many facilities and five times as many rooms, but according to Jun Tsusaka, founder and managing partner of NSSK, Vati’s EBTIDA margin is 100-300 basis points higher.

“You’d think the largest player, with scale, would be the most profitable. Conventional wisdom also states that because we have a lower monthly charge per patient, we would earn less. But we have shown it is possible to profit by catering to people living off a pension income,” he says. “This is driven by a unique business model that prioritizes non-metropolitan areas and clustered growth.”

NSSK acquired Vati in 2016 for about JPY6 billion ($54 million). Based on the company’s growth over the past three years, an investor group led by Neuberger Berman has acquired it for an undisclosed sum. It represents a first full exit from NSSK’s second fund – which closed at JPY60 billion in 2017 – with an IRR of 40% and a multiple of 3x, according to a source familiar with the situation. However, the GP is reinvesting in Vati, through the same fund, in the expectation of further upside.

The first phase of NSSK’s ownership was dominated by internal improvements. Vati was already benefiting from macro tailwinds driven by Japan’s aging population, but the founder-led business needed to be professionalized. This involved augmenting management, putting in place back office systems and processes, and incentivizing employees to pursue certain key performance indicators. For example, Vati’s facilities break even once the occupancy rate reaches 70%. Since NSSK invested, the average has risen by five percentage points to 92%.

Given the emphasis on operations, expansion in the first phase was moderate. Vati went from 122 facilities to 144. It is now well-positioned to accelerate, with Tsusaka looking to open 10-12 new premises per year – aided by an algorithm developed in-house that identifies optimal locations. With add-on acquisitions, he believes the company could reach 200 facilities by time of exit.

However, in its haste, Vati is not going to abandon the model that has got it where it is today. Notably, expansion will continue to focus on the outer-lying parts of the Greater Tokyo area and some second-tier cities. Land and labor are cheaper and easier to come by, which means costs stay under control. Vati also opts for clusters of buildings – for example, five 35-room facilities within a 30-kilometer radius – rather than large-scale developments. This means it can still realize economies of scale, but it creates more intimate environments that are popular with residents.

While some of the larger operators may seek to mimic Vati’s approach, Tsusaka observes this would be difficult to do: “It is so different from a metropolitan strategy in terms of the types of facilities you need and the hiring and managing of employees. We had a lot of interest from strategics because they can’t copy what we do.”

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• Topics
• North Asia
• Trade sale
• Real estate
• Support services
• Japan
• NSSK
• Neuberger Berman