Lone Star, the US private equity company, stands to make a return of nearly 700 per cent on its four-year investment in Tokyo Star Bank, the Japanese lender, in the latest sign that Japan continues to provide extremely rich pickings for private equity investors.
The US company, which acquired the former Tokyo Sowa bank in 2001 for $339m, confirmed on Thursday that it plans to offer 30 per cent of the bank for sale in an initial public offering next month that, depending on the issue price and an over allotment option, could raise $750m.
This tentative valuation will price the entire bank at $2.33bn, around 6.8 times the price the US fund paid for it. The sale of 30 per cent of the bank alone will allow the fund to double its money, excluding taxes and other expenses.
The subject of overseas investors making huge profits by investing in troubled Japanese banks has been controversial in Japan ever since Ripplewood, the US private equity firm, sold part of its stake in Shinsei, the bank, for $2.4bn, having acquired it for $1bn.
That deal attracted a great deal of criticism because the Japanese government allowed Shinsei to sell a large number of non-performing loans back to the government, prompting accusations that Ripplewood was making profits at Japanese taxpayers’ expense.
Overseas investors have rejected these criticisms, pointing out that there was nothing to prevent a Japanese company from acquiring the troubled banks if they had wanted to and that their returns are justified by the risks they took.
Three Japanese banks – Shinsei, Tokyo Star and Aozora, which is owned by Cerberus, a private equity company – were acquired by overseas investors about five years ago, a time of great uncertainty in the Japanese banking industry.
It was not known at the time if the Japanese economy would recover, or if there was sufficient political will to ensure the banking system would revive. Private equity investors have pointed out that risk capital is so named for a reason.
Tokyo Star Bank almost collapsed after it told the banking regulator in 1999 that its liabilities exceeded its assets by ¥100bn. Under Lone Star’s ownership, it reported a net profit for the year to March 2005 of ¥14.4bn and a capital adequacy ratio of 8.8 per cent, according to the listing prospectus.
Its loans have grown by 20 per cent on a compound annual basis, and deposits have risen 56 per cent over the past three years. The IPO is being lead managed by CSFB and NikkoCitigroup.