Japan ‘fertile territory’ for private equity

Japan was set to become fertile territory for private equity as companies come under pressure from shareholders to improve performance, two of KKR’s founding partners said on Tuesday.

Henry Kravis and George Roberts presented their case for setting up operations in Japan, a country that has proved difficult for private equity, saying that Japanese companies would be more receptive as they faced growing investor demands for better returns.

“If you look at a lot of the large . . . companies at some point in time, even though the economy has improved . . . management needs to . . . [think] if they are [not] getting the returns on their assets, if they are not better off doing something different with their assets,” Mr Roberts said.

Japan is where the US was in the 1970s and 1980s when companies came under pressure from activist funds as well as institutional investors and “managements woke up and really started operating much more efficiently”, Mr Kravis said.

“I see a lot of the same thing here in Japan; that eventually this will happen. It will take time. It’s not going to happen overnight. But we believe that it will and we sure plan to be here for the long term as patient investors,” Mr Kravis said.

He indicated, however, that the biggest impetus for change was likely to come not from foreign investors but from a Japanese company that decides “to do things differently”.

“Change happens from inside,” Mr Kravis said.

The remarks by some of the most respected and successful practitioners of private equity come as Japan has seen a flood of private equity funds flowing into the country. At the same time, however, the large private equity firms that have established operations in Japan, including Carlyle, Permira, TPG and Cerberus, are finding investment opportunities few and far between.

Mr Kravis and Mr Roberts were careful to distinguish KKR from hedge funds and activist funds, which aim for short-term results. “[There is] a lot of confusion regarding hedge funds and private equity – we are not the same,” he said.

He stressed KKR’s long-term stance, saying it had an average holding period of 7½ years in contrast to hedge funds and even long-only equity funds, which have a time span of between six months and two years. “I don’t think anyone can say we are short term,” said Mr Kravis.

The KKR representatives are in Japan at a time when it is in the midst of a major deal – Alliance Boots in the UK – and as private equity has faced strong criticism in Europe for a lack of transparency. Mr Kravis conceded there were concerns about transparency but said: “We have added jobs and our companies have operated better than other companies that . . . have stayed in the public arena.”

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