Japanese GPs still see opportunities

The earthquake and tsunami that hit northern Japan in February carved about 4% off the country’s GDP but, together with the ensuing nuclear crisis, it did far more damage to business sentiment among foreign and local LPs. Investors were considering commitments to local funds when the disasters struck; these plans have now been put on hold as risk factors are reassessed.

Global investors are particularly disillusioned, one LP tells AVCJ. Those that aren’t mandated to have at least some exposure to Japan are struggling to come up with strong reasons for investing in the country, where the economy has been stagnant for months.

It is an unfortunate state of affairs, particularly as local GPs see plenty of opportunities. “The private equity market has gone down to the levels not seen since the Lehman crisis, but we are now planning one or two exits,” Masao Nakagwa, senior director at Nippon Mirai Capital, tells AVCJ. He notes that the disasters have led to increased demand in certain industries, such as LED lighting and power saving, disaster prevention and, of course, construction.

Capital is certainly being made available for rebuilding efforts. Local governments are preparing capital injections for select industries while the Bank of Japan pledged to lend JPY300 billion ($3.7 billion) to over 120 banks – with interest rates of just 0.1% – in order to facilitate corporate lending.

“Overall, Japanese GPs have not been significantly affected from the disasters,” says Joji Takeuchi, CEO and Co-founder of Brightrust. “Local companies are at the stage of business recovery where they need loans from banks or the government and funding from private equity.”

All is not lost

The message to LPs is that, although Japan has never been able to deliver miracle returns, satisfactory returns can be gained from investing in funds with solid track records and sensible areas of focus.

Indeed, since the middle of 2010, mid-market private equity in Japan has seen considerable deal flow. Local players have made a number of investments and exits despite poor liquidity conditions that date back to the global financial crisis. They specifically target investment opportunities created by succession issues within family-owned companies, industry consolidation and non-core divestments by large corporations responding to competitive pressure.

Further openings come through management buyouts (MBO) and takeovers of listed companies that require support from private equity. The trend is driven by companies that are seeking to reduce costs tied to maintaining a public listing or restructure operations to improve performance while the equity market is sluggish. There were 69 MBO deals in 2010, worth a total of JPY55.4 billion ($690 million). Private equity participated in 13 of these. In the first quarter of 2011, PE-backed MBOs reached JPY36.2 billion ($451.4 million).

“We see steady deal flows in delisting where owners or management no longer see the merit of being public companies due to lower share prices, and in succession issues where company founders who have no suitable candidates within family who can assume control of the business,” says Ayumi Sakurai, Co-Representative Partner of Valiant Partners.

Looking for bigger deals

Japan’s private equity market has long been criticized by foreign and domestic investors alike for its lack of large-size deals that appeal to big buyout firms. Apart from the golden period of 2005-2006, mega deals have been few and far between, especially since the onset of tighter liquidity conditions. Nevertheless, industry participants remain optimistic.
“Private equity co-investment opportunities have been quite abundant in Japan, especially in the last half year. Since the entry valuations tend to be low, we regard this current environment as quite attractive,” Motoya Kitamura, senior vice president of fund-of-PE-funds at Macquarie Funds Group.

Other investors point to the array of mid-cap companies, particularly in the machinery and electronics manufacturing segments, that have been laid low by the downturn but retain the potential to expand into international markets given the support of private equity. 
“Among medium size companies, there are numbers of corporate which has growth capacity or accounting high market share in global market that we could invest in limited competition. Securing financing to make LBO deals is still possible,” says Megumi Kiyozuka, managing director of CLSA Capital Partners. 

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• Topics
• LPs
• Exits
• Buyouts
• Valiant Partners Co.
• Nippon Mirai Capital Co.
• Macquarie Funds Group
• CLSA Capital Partners