February 25, 2013 4:43 pm
This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
Japan’s private equity landscape is expected to see increased deal activity this year, fueled by such factors as political change and Japanese companies’ thirst for outbound growth, industry executives told mergermarket.
Tamotsu Adachi, Carlyle Group’s managing director and co-head of Carlyle Japan Buyout said he expected an uptick in deals, with private equity firms supporting mid-cap companies in their overseas growth ambition, while domestically large-cap corporate restructurings may mean spin-offs and divestitures.
“Abenomics”, the set of economic policies advocated by Prime Minister Shinzo Abe that include stimulus spending and relaxing monetary policy, is also expected to fuel activity.
Indeed, Adachi said Abenomics has already had a positive effect on Carlyle’s portfolio companies in terms of valuations and potential exit opportunities, adding that “the current trend is very favorable.”
In the wider market, the benchmark Nikkei 225 stock average has climbed 34% since mid-November 2012, when former PM Yoshihiko Noda dissolved the lower house.
“Abenomics is a wildcard for this year,” CLSA Capital Partners’ Managing Director Megumi Kiyozuka agreed.
Riding the outbound growth wave
Industry executives said one key theme will be how private equity can help Japan Inc in its international expansion, pointing to Bain Capital’s 50% stake acquisition of Sumitomo’s television shopping network Jupiter Shop Channel for a reported USD 1.3bn in June 2012. Sumitomo said that deal was designed to further expand its TV shopping business in China and other parts of Asia utilizing Bain’s expertise.
Private equity firms are also increasingly looking to partner with small to mid-cap companies that do not have the capacity to acquire overseas on their own, with a particular focus on Southeast Asia, China, and India, Carlyle’s Adachi said.
One such firm is Japan’s Unison, which has been exploring joint overseas acquisitions with strategics, a person familiar with the matter said.
There should be a gradual increase in outbound deals of this type as Japanese corporates become more accepting of private equity firms and seek to benefit from their expertise, though companies typically turn to house lenders for financing, one industry banker said.
Large cap conundrum
Domestically, meanwhile, strategic reviews by Japanese blue-chips seeking to optimize enterprise value amid fiercer global competition are resulting in carve-outs of non-core assets, Advantage Partners’ Chief Administrative Officer Hideyuki Inokuma said.
Blue-chip companies have historically preferred selling their non-core businesses to strategic investors but that mentality is slowly shifting, industry executives said. Overall, people are softening their resistance towards private equity and gradually understanding what they have to offer, Inokuma added.
For example, Olympus sold its ITX subsidiary to domestic fund Japan Industrial Partners, while Sony offloaded its chemical subsidiary to the Development Bank of Japan, which in turn sold a minority stake to Unison.
One stumbling block for larger private equity firms seeking to buy non-core assets from large corporates, however, is competition from the Innovation Network Corporation of Japan (INCJ), a government-backed entity armed with a warchest of about JPY 1.9trn (USD 24.7bn).
INCJ’s increasingly prevalent role as a domestic consolidator has eroded opportunities for private equity firms, industry executives said, pointing to KKR’s failed attempt last year to invest in chip manufacturer Renesas Electronics.
Still, Carlyle’s Adachi noted that there are ways for private equity firms to co-exist with INCJ, arguing that while the government entity invests across a wide range of sectors it could probably focus more on deals involving “national interest”. INCJ could also look to establish clear governance over what sort of investment opportunities it partakes in going forward, he added.
Japan is awash with companies in need of funding for growth or survival.
There is a solid pipeline of management buyouts (MBOs) and family-owned companies up for sale this year, while the high cost of maintaining a listing and the revival of leverage may spur further buyouts and take-privates, the industry banker said.
With many domestic businesses needing to sell to survive, investment opportunities should be more abundant this year, CLSA Capital Partners’ Kiyozuka said.
Industry-wise he argued the lifestyle consumer sector would prove a particularly abundant source of investment opportunities, pointing to a shift in consumer behavior as Japanese people spend more time with their families since the March 2011 earthquake and nuclear disaster.
Consolidation in many sectors will also provide funds with opportunities, J-Star President Gregory Hara agreed, though he said the process would be slow.
Despite an increase in companies facing succession issues, many of these businesses still want to be acquired by Japanese corporates, Hara said.
Although private equity executives voice optimism about deal flow, several funds have recently exited or are winding down operations in Japan, including Silver Lake, Cerberus Capital Management, and RHJ, as previously reported by mergermarket.
“Japan’s private equity space is becoming increasingly polarized,” one source at a global firm said. “Some ‘winners’ have built a presence, while some mid-cap firms are facing difficulties in raising capital for new funds as Japanese institutional investors – their major risk money providers – become more risk-averse and reduce commitments to domestic firms.”
J-Star’s Hara pointed out, however, that although the fundraising environment is “severe,” it also means less competition in the marketplace.
Moreover, the smaller end of the buyout market has remained relatively unscathed by market conditions, he noted, adding that lending conditions are easing and some smaller banks willing to commit.
While Japanese institutional investors have been known to be skeptical about private equity opportunities given the country’s past track record, some are returning to Japan to seek opportunities amid challenging conditions in other markets such as China and India, Carlyle’s Adachi said.
Statistics show Japanese private equity faring well compared to other markets.
Globally, private equity exits have declined about 19% from 2007, according to mergermarket data. Though few, Japanese exits have increased about 31.8% over the same period.
While firms elsewhere may be struggling to exit, data suggests that in Japan, funds are finding buyers for their portfolio companies.
On the other hand, in 2012 Japan buyouts totaled 23 deals worth a combined USD 5.02bn, down from 40 transactions for a total of USD 10.85bn a year earlier, according to mergermarket data. Foreign funds saw their share rise, accounting for 64% of the 2012 deals by value and 30% of deal volume, compared with 50% and 20%, respectively, in 2011.
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