J-Star buys ‘fourth hand’ Primagest

Set-up in Tokyo in 1968, Primagest - then known as Recognition Equipment Incorporated - was one of first companies to sell large-sized OCR systems for converting printed information into machine-encoded text. Nearly half a century later, there has been significant change in both the technology and the company's ownership.

Last week Primagest was acquired by J-Star, which now owns around 66% of the business. Financial details were not disclosed, but according to AVCJ Research, the first tranche of the investment, which took place in June, saw J-Star buy an initial 34.7% stake for JPY498 million ($5 million).

Until recently, Primagest's core business has involved developing software and hardware used for OCR and intelligent character recognition (ICR). However, a greater portion of revenue now comes from business process outsourcing (BPO) services, work essential to paperwork-laden organizations including financial institutions and local governments.

"Often clients will have many paper items - such as insurance applications - that need to be scanned, so they outsource the work to Primagest, which stores the information and backs it up on the client's database," says a source familiar with the transaction. "Japan is very original-heavy country and, while there is a move to digitization, many organizations still rely on paper originals."

The company's ties with J-Star goes back a decade as many of the GP's current team were at venture firm JAFCO in 2002 when it backed a $82.5 million management buyout of Primagest. At the time, it was a subsidiary of BancTec - a Texas-based BPO provider that had been acquired by New York buyout shop Welsh, Carson, Anderson & Stowe in 1999 - and was trading under the name BancTec Japan.

Following the JAFCO carve-out, the company listed on JASDAQ in 2006 before going private once again three years later with a second MBO, led by CEO Kiyohiro Miisho.

The deal is both an opportunity to recapitalize the business, paying down debt held from the previous MBO, and a succession solution with many of the company's top management seeking to exit the business and retire.

J-Star is said to be looking at a typical three-year holding period, during which time the company - which recorded JPY11.6 billion in revenue in 2012 - will look to maintain a steady cash flow. Of the various exit options, a strategic sale to a big data vendor that wants to gain access to Primagest's extensive client roster is regarded as the most likely.

This latest investment was made through J-Star No. 2, a JPY20.4 billion vehicle that reached a final close in July.

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