Fund focus: Japan's T Capital closes Fund VI at hard cap

T Capital Partners – then known as Tokio Marine Capital – took just six months to achieve a final close of JPY51.7 billion ($466 million) on its fifth Japan mid-market buyout fund in early 2017. By the time of the second close, about halfway through the process, the GP had yet to decide on whether to reach out to overseas investors. In the end, domestic LPs were willing to move fast enough, and with sufficiently large commitments, that there was no time for diversification.

There was one other nagging concern: international LPs weren’t keen on backing the captive unit of an insurance company. This set the scene for a separation from the corporate parent in 2019, ownership transferring to the management team, and a clearer alignment of interest between GP and LPs. Renaming the firm underlined the transition.

“In the previous fundraise, international investors were unable to join. But even if they had been able to do so, maybe they couldn’t because we were a captive,” says Koji Sasaki, president and managing partner of T Capital. “After we did the management buyout, we had certain communication with overseas investors, and they all welcomed the move. When we started pre-marketing, they said, ‘You are no longer captive, so we can consider you.’”

Pre-marketing for Fund VI began in February 2020 and a formal launch, with a target of JPY70 billion, came in July. It closed in late January at the institutional hard cap of JPY80 billion, with an additional GP commitment of JPY1.1 billion. International LPs account for approximately 40% of the corpus. Commitments came from pension funds, insurance companies, endowments, family offices, and fund-of-funds based in North America, Europe, and Asia.

Even with the introduction of overseas investors for the first time, the increase in fund size meant the domestic contribution was roughly the same as in the previous vintage. However, there has been some change in the LP base. Fund V had 34 LPs, including 17 regional banks. Financial institutions – regional and national – were dominant in terms capital committed, as was the case in earlier funds.

Fund VI has more than 40 domestic LPs, of which around half were re-ups. Regional bank representation has fallen, with only the larger players returning, while Japanese pension funds – a new arrival in Fund V – are larger by number and by capital contribution. Domestic endowments came in for the first time, with Sasaki noting these institutions are showing more interest in private equity. Insurance companies have also become more prominent; they couldn’t back the firm when it was a captive of Tokio Marine.

Robust response

While the domestic and international portions of the fund were both oversubscribed, Sasaki says “the response from overseas was more overwhelming than it was domestically.” This can be linked to the general increase in LP appetite for Japan. A record $5.5 billion was raised for Japan-focused buyout funds in 2020, despite the uncertainty and limitations on due diligence arising from COVID-19.

There were sizeable final closes for the likes of The Carlyle Group, Integral Corporation, and Advantage Partners. Integral became the second independent Japanese GP since the global financial crisis to surpass $1 billion in fund size, closing its fourth vehicle at JPY123.8 billion in December. Polaris Capital Group will become the third, with a final close of JPY150 billion on Fund V said to be imminent.

The driving factors are well known. Monetary easing and fiscal stimulus policies introduced in 2012 have turbocharged the economy, offering helpful tailwinds to a Japan middle-market investment thesis typically underpinned by relatively low entry valuations, modest leveraged financing, and the scope for operational improvement.

At the same time, there are expectations of more robust deal flow as Japan’s aging founders increasingly recognize private equity as a succession planning solution and domestic corporates come under pressure to divest non-core assets. The carve-out phenomenon is likely to extend from the large-cap space into the middle-market as smaller corporates follow in the footsteps of their larger brethren.

“We are already seeing more potential carve-out transactions, particularly due to the coronavirus pandemic,” explains Sasaki. “You could say it has been triggered by COVID-19, but the Japanese government has also been issuing strong messages to the market for some time. Companies are thinking seriously about doing something in terms of divestments.”

Scaling up

T Capital has scaled up in fund size in the last few vintages. The firm started raising third-party capital in 1998, seven years after its establishment. A debut fund of JPY4 billion was followed by a JPY22 billion vehicle in 2000 and third and fourth funds – raised either side of the global financial crisis – of JPY33 billion and JPY23 billion, respectively. Fund V was twice the size of Fund IV and now Fund VI represents a 55% increase on Fund V.

A strong track record has helped stir demand. T Capital has made 26 investments to date and secured 20 exits, without incurring a single loss.

The question being asked of most Japanese GPs is whether repetitive jumps in fund size are taking them outside of their middle-market comfort zone. Sasaki’s response is that T Capital plans to capitalize on the growing number of opportunities by making more investments per fund. For reference, there were seven in Fund IV and six in Fund V. A small increase in deal size is expected, but the typical approach of negotiating transactions on a bilateral basis will remain.

“So far, we have invested in small-caps, companies with $10 million in EBITDA,” he says. “Having seen successful exits by smaller families, larger family groups are coming to appreciate that private equity might be a good partner for the future growth. We observe an increasing number of larger deals, companies with EBITDA of $30-40 million.”

UBS served as placement agent for T Capital VI.

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• Topics
• North Asia
• Fundraising
• GPs
• Buyout
• Japan
• T Capital Partners
• Tokio Marine Capital