Buyout firms optimistic about Japan again

In the opening keynote panel chaired by HarbourVest Partners' Sebastiaan Van Den Berg, the Japan heads of some of the largest private equity firms in the world were saying that the scope for private equity buyouts in Japan is widening due to falling public market valuations and clear opportunities for value-add within portfolio companies.

The panel, which comprised of speakers from Bain, KKR, PAG and TPG, argued that pricing for Japanese companies is much more attractive than it has been historically.

It is worth noting that while US and Chinese companies are trading at similar levels in terms of EBITDA and price-to-book, the Nikkei 225 Index is trading 20% lower at 6x EBITDA. On a relative basis therefore, Japan is cheap right now. There are more than 800 companies valued between $150 million and $700 million, and 60% of them are trading at less than 0.8x book value.

More importantly, Japan is one of few markets where control-oriented buyout deals are possible. By contrast, in China, Asia's most active market, almost 90% of deals completed last year was for minority stakes. That number increases to 94% in India, while the current hotbed of Southeast Asia managed 75%. This obviously means that private equity investors can deliver more value-add through operational improvement.

Speakers also observed that corporate Japan is more open to the idea of working with private equity partners, although ensuring alignment of interests remains a challenge. The changes, which have occurred over the last 10 years, have been driven in part by a greater sense of urgency among the big corporations.

As for smaller Japanese companies, especially those with an enterprise value of $500 million to $2 billion, a major selling point would be helping them with their China strategy, as their ability to expand in China is going to be critical part of their future. The recent political tension between the two countries over the Diaoyu/Senkaku Islands may dampen the short-term interest.

Credit needs to be given to the private equity firms that are targeting growth segments in an economy that is flat-lining. Bain Capital, the most active firm in Japan (in terms of volume), has recently invested in two such opportunities:Skylark, the restaurant chain it bought last year from Nomura Principal Finance and Mitsui for $2.1 billion plus debt, and Jupiter Shop Channel, Japan's number one TV shopping channel.

According to Shintaro Hori, chairman at Bain Capital Japan, the former was attractive because of its good price-line strategies that ensure the restaurant chain caters to most consumer segments. As for the latter, their core customers, women aged 40 years and over are spending JPY10,000 ($127) a week. With an expanding population of savings-rich females, the potential for growth is almost certainly assured.

Finally, as for returns, TPG's Jun Tsusaka dispelled common perceptions of Japan as a low-return market for private equity. According to him, TPG's Japan return of 2.4x is ahead of India and Southeast Asia, which both returned 1.8x.

So there you go. Buyout firms again are maximum bullish on Japan.

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