Fund focus: Integral scales up again

Integral Corporation’s courtship of foreign LPs has been a gradual process. For Fund II, which closed in 2014, the overseas contribution was 10%. This rose to 25% for the Japanese GP’s third fund in 2017 and now stands at 50% for Fund IV, the most recent vintage.

“When we were raising Fund II, overseas LPs were not so interested. They took us through initial screening but weren’t confident enough to commit,” says Keisuke Aiba, a vice president at the firm who worked on Fund IV, which has closed at JPY123.8 billion ($1.18 billion). “But we kept the communication channels open and eventually they began to take Japan more seriously, to really understand the market and appreciate that our DII and i-engine are appropriate.”

DII is short for “deal-inducing investment” – Integral’s terminology for putting balance sheet capital into deals alongside fund commitments – and i-engine is its dedicated corporate value enhancement team. The firm sees both as distinguishing characteristics in Japan’s middle market. Aiba suggests that the most recent fundraise was facilitated by LPs seeing these characteristics make a difference.

The private equity firm completed three IPOs in 2018, with distributions sufficient to cover the entire Fund II corpus. Five-and-a-half portfolio companies remain (there has been one other partial exit), including Skymark, an airline turnaround and the largest investment from Fund II. It is being prepped for an IPO as well. Meanwhile, telemarketing operator Direct Marketing Mix – a Fund III investment – went public in October, with Integral receiving JPY19.6 billion in proceeds. It retains a 48.9% stake.

The GP declines to give details on the magnitude of the exit, but it normally writes equity checks of JPY3-10 billion for companies with JPY10-30 billion in enterprise value. Aiba does observe that i-engine played a role in business development.

“A lot of mid-size companies have limited relationships with blue-chip companies. We connected them with potential customers,” he says. “We also reorganized the management team and introduced a new set of KPIs [key performance indicators] that helped accelerate growth.”

Integral has registered significant step-ups in fund size over the past three vintages: Fund III was 65% larger than Fund II and Fund IV is 69% larger than Fund III. It is a general trend in the market, with Integral becoming the second local GP to raise more than $1 billion since the global financial crisis. Japan Industrial Partners was the first and Polaris Capital Group is likely to be the third.

However, Integral does not plan to ascend the ranks of the middle market. Check sizes will be about the same as Fund III, there will just be more of them – around 15 versus nine in Fund III. To this end, the firm continues to add headcount. There are approximately 60 professionals today, double the number from 2015, and every expectation of hitting 70.

Founder succession, turnarounds, privatizations, and corporate carve-outs will continue to be the focal points. “A lot of investment opportunities are coming through,” Aiba adds. “Ten years ago, no one wanted to sell non-core entities, but then they saw Toshiba and Hitachi do it, and it’s extending to mid-size companies as well. We carved out a business from Sanden Holdings last year, and that’s a mid-size company.”

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• Topics
• North Asia
• Fundraising
• Buyout
• Integral Corp.
• Japan