page 17 outbound directive - asian venture capital … directive japanese fi rms are ... men in the...

ASIAN VENTURE CAPITAL JOURNAL

PRIVATE EQUITY ASIA

M&A ASIA

Asia’s Private Equity News Source avcj.com September 04 2012 Volume 25 Number 33

FoCusFoCus

Outbound directiveJapanese fi rms are in search of new markets - can PE help fi nd them? Page 7

Exits and entrances From PE to PE, as secondary buyouts rise 0

Men in the middleMid-market GPs target take-private deals Page 15

PE fundraising: Excesses of 2005-2006 versus austerity of 2011-2012

Page 17

Globis’ Shinichi Takamiya on the prospects for start-ups in Japan

Page 19

Are we witnessing the start of a new dawn for Japanese private equity?

Page 3

Apollo, Bain Capital, BlackRock, Blackstone, Blume Ventures, CIC,CPPIB, Crescent, Hony, J-Star, KKR, Leopard, Mandarin, Permira, StepStone

Page 4

Editor’s ViEwpoint

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Editor’s [email protected]

Is the Japanese prIvate equIty industry finally turning the corner? The simple answer to that is yes.

First, let’s deal with the negatives. While the country’s economy has improved dramatically since the natural disasters of March 2011 and remains the third-largest in the world, GDP numbers still point to a long-term gradual decline. Private equity fundraising is, if anything, even more depressing. Nine funds have raised a total of $253 million so far this year, well short of the $2.3 billion committed last year, not to mention the $7.7 billion in 2006, during private equity’s heady days.

The numbers are certainly modest, but they don’t fully reflect the changes taking place in the market. Foreign LPs, traditionally ignored by smaller independent domestic managers, accounted for a much larger share of capital committed in 2011 than is normally the case (bear in mind that Japan’s large-cap GPs have until recently been absent from the fundraising scene).

For mid-market players, going overseas has become a matter of survival as domestic LPs stay on the sidelines, dissuaded from making further allocations to the asset class following the excesses – and subsequent losses – of the pre-global financial crisis period.

The days of the massive leveraged buyouts are long gone. In recent years, more attention has focused on the likes of Polaris Capital, Ant Capital and J-Star. These are veteran investors targeting small- to mid-size companies with a view to adding value through consolidating and globalizing businesses. There are some solid track records out there and it is to be hoped that international LPs will be sufficiently reassured to put money in places where they haven’t trod before. However, the jury is still out and whispers we hear from the fundraising trail offer a mixed picture.

Activity is also picking up in the higher end of the market thanks for a number of secondary buyouts, such as Skylark and Bellsystem24, both acquired from their former private owners by

Bain Capital, as well as Permira’s recent $1 billion purchase of Akindo Sushiro, Japan’s largest sushi chain, from Unison Capital.

Meanwhile, KKR’s reported interest in acquiring chip maker Renesas suggests that there is also scope for large-scale restructuring transactions. It is worth noting that private equity lost out to strategic investors on a similar deal – Elpida Memory – so even if there is sustainable deal flow in this area, it doesn’t necessarily mean more buyouts for financial players.

Finally, there is a potential silver lining to the dark clouds that hang over those trying to tempt capital from the clutches of Japanese LPs. The big game changer is whether or not the country’s $3.4 trillion pension fund industry will start making allocations to private equity and other alternatives.

With an ageing population, the pension funds need to create alpha. As many of their US counterparts have already concluded, one of the best ways of doing this is to place more emphasis on higher risk investments like private equity where have historically outperformed other asset classes.

It is a big ask in a country where a 5% return is considered acceptable, but we live in hope.

Allen LeePublisherAsian Venture Capital Journal

The sun is rising again for Japanese private equity

Managing Editor Tim Burroughs (852) 3411 4909

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avcj.com | September 04 2012 | Volume 25 | Number 334

ASIA PACIFIC

StepStone adds two MDs to Asia teamStepStone has appointed Mu-shin Kim and Andy Tsai as managing directors to its Asia team. Kim, who joins from Asian Development Bank, will cover investments and business development in Korea and Japan. Tsai, formerly head of alternative investments at Cathay Life Insurance, will focus on Taiwan and broader Asia. Both will be based in Beijing.

AUSTRALASIA

Crescent wins support for ClearView buyoutCrescent Capital Partners improved its buyout offer for Australian financial services provider ClearView Wealth, winning the support of leading shareholder Guinness Peat Group. The PE firm is now offering A$0.55 per share, up from the A$0.50 per share bid made in July. This pushes the deal value to A$245 million ($254 million).

GREATER CHINA

China Baoxin Auto to buy PE-backed NCGA for $305mHong Kong-listed China Baoxin Auto has agreed to pay $305 million for NCGA Holdings, a Beijing-based high-end car dealership owned by the Citigroup, Apollo Global Management and Pangaea One. The acquisition is expected to add eight BMW/Mini dealerships, two Jaguar and Land Rover dealerships, one Porsche and one Volvo dealership to Baoxin’s operations.

Goodman, CPPIB boost China JV with $500mAustralian property and logistics firm Goodman Group and Canada Pension Plan Investment Board (CPPIB) have injected a further $500 million into their joint venture, Goodman China Logistics Holding (GCLH), increasing its capacity to a total of $1 billion. CPPIB contributed $400 million of the equity, while Goodman provided the rest.

Mandarin, Hony to support Zoomlion spin-offMandarin Capital Partners will team up with Hony Capital to finance the spin-off of Chinese

construction equipment manufacturer Zoomlion’s sanitation machinery business. It is one of two deals - together worth around EUR100 million ($125 million) - that the Sino-European GP expects to close later this year. The other involves a Chinese fashion company.

CIC trims BlackRock holdingChina Investment Corporation (CIC) has exited most of its holding in asset manager BlackRock as part of a wider effort to reduce its exposure to international financial institutions. The sovereign fund paid about $1 billion for just under 3% of BlackRock in 2009 and has reportedly been offloading the bulk of its shares in recent months via the public market.

IFC invests $47m in China’s Fosun PharmaInternational Finance Corporation (IFC) has agreed to provide RMB300 million ($47 million) in funding to Fosun Pharma, one of China’s leading drug companies. The investment will help Fosun scale up the production of affordable drugs in China and other developing countries.

China Renaissance Jiuxian on Series C roundVC firm China Renaissance acted as a financial advisor to alcohol B2C e-commerce company Jiuxian.com on its RMB200 million ($31.5 million) Series C round led by hedge fund manager Richland Capital. Jiuxian, which previously raised two rounds of financing in 2011, is a leading player in the alcohol e-commerce vertical, offering customized services via its website and call center

NORTH ASIA

JIP buys Olympus’ mobile telecom unitJapan Industrial Partners (JIP), a Tokyo-based private equity firm specializing in business restructuring, has bought the mobile-phone retailing business run by Olympus Corp’s ITX unit for JPY53 billion ($676 million). Olympus has struggled in the wake of last year’s accounting fraud and is badly in need of fresh capital.

Hellman & Friedman sells Goodman to Japan’s DaikinUS-based private equity firm Hellman & Friedman has sold its air conditioner maker, Goodman Global, to its Japanese rival, Daikin, for $3.7 billion. Hellman & Friedman acquired Goodman in October 2007 for an enterprise value of $2.65 billion. The deal comprised $1.8 billion in cash and $1.1 billion in equity. Hellman & Friedman was said to be eying a $4 billion exit last year.

KT, NPS, Korea Post set up outbound M&A fundKT Corporation has teamed up with the National Pension Fund (NPS) and Korea Post to form a KRW1 trillion ($883 billion) fund that will make acquisitions overseas. NPS and Korea Post have agreed to contribute KRW400 billion and KRW60 billion, with KB Investment and Rutter putting in KRW13 billion and KRW2 billion. KT would likely match these collective contributions.

Shandong Heavy invests $922m in PE-backed KionWeichai Power, a Chinese automotive and equipment manufacturer owned by Shandong Heavy Industry, will invest EUR738 million ($922 million) in Kion, the German forklift truck maker backed by KKR and Goldman Sachs. It is the largest Chinese direct investment in Germany to date.

The investment will be separated into two parts: EUR467 million to acquire a 25% stake in Kion via a capital increase, and the remaining EUR271 million for a 70% interest in Kion’s hydraulics business. Weichai Power has the option to increase its stake in Kion to 30% in the event of an IPO.

According to market sources, Shandong Heavy’s purchase will help alleviate a large round of debt refinancing due next year. KKR and Goldman bought Kion in 2006 from German group Linde, reportedly placing an enterprise valuation on the company of around EUR4 billion - EUR2.6 billion in debt, EUR300 million in pension liabilities and another EUR1 billion in equity. The private equity investors put up a further EUR100 million in 2009.

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Japan’s J-Star exits Iki Iki to Noritsu Koki GroupJ-Star, the mid-market Japanese GP, has exited lifestyle marketing company Iki Iki to a subsidiary of Noritsu Koki Group. The deal value hasn’t been disclosed but Iki Iki’s EBITDA is $12.5 million and companies of this nature usually trade at a multiple of 8-9x. Iki Iki publishes lifestyle magazines and sells related products targeted at females aged 50 years and over.

KKR poised for Renesas investment KKR will reportedly invest JPY100 billion ($1.3 billion) in Japan’s Renesas Electronics Corp. The PE firm is mooted to be buying enough new shares in the unprofitable Tokyo-listed chipmaker to become a majority stakeholder through a private placement by the end of 2012.

SOUTH ASIA

Blackstone commits $44m to Indian fragrance makerThe Blackstone Group has paid INR2.43 billion ($43.69 million) for a 33% stake in SH Kelkar & Company (SHK), India’s largest fragrance and flavor company. The investment in Mumbai-based SHK, which makes the specialty fragrance and flavor ingredients used by consumer goods companies such as ITC, Emami and Marico, values the company at INR7.36 billion.

India regulator pulls plug on ACA’s Repco Home dealThe Securities and Exchange Board of India (SEBI) vetoed ACA Private Equity Trust’s proposed investment into Repco Home Finance. The regulator said the company didn’t represent a permissible VC investment because it is engaged in asset-backed financing for mortgaging homes and loans against properties but is a registered non-banking finance company. Furthermore, SEBI said that ACA, as a registered venture capital fund, is not allowed to do minority deals for private firms.

Blume Ventures invests in four Indian startupsIndian angel and seed fund Blume Ventures has invested in four startups during the first half of 2012. They are Framebench, a cloud-based service platform, Glamrs, an e-commerce portal designed for beauty products, Idfy, an interactive

business-to-consumer platform, and 23spaces, an application development company.

IVFA to invest in Manipal HospitalsIndia Value Advisors (IVFA) will commit about INR10 billion ($179 million) to Manipal Hospitals over a three-year period, enabling the healthcare provider to more than double its hospital bed capacity. Part of this increase will come through acquisitions. The first tranche, worth INR2 billion, is expected before the end of September.

Bain, KKR target Lanco power businessBain Capital and KKR are reportedly in discussions with Lanco Infratech to buy a 30% stake in its power projects. Lanco, one of the largest private

sector power players with an installed capacity of 4,480 megawatts, has been trying to raise around $750 million in equity since the start of the year.

Kalyani Group to sell wind energy stake to PEThe Kalyani Group, the Indian industrial conglomerate, is reportedly in talks with private equity firms to sell a stake in its wind energy business, Kenersys. In addition to diluting Kalyani’s controlling interest, the deal would allow the partial exit of First Reserve. The stake is likely to sell for $300 million.

SOUTHEAST ASIA

Thailand eases licensing rules for PE firmsThailand’s Securities and Exchange Commission (SEC) has abolished rules requiring private equity and venture capital firms to apply for securities licenses. It will also allow PE firms to establish trust structures and will look into offering capital gains tax exemptions to private equity firms that back government-supported businesses.

Gree Ventures makes first Southeast Asia investmentGree Ventures has made its first Southeast Asian investment by leading the Series B funding round in PriceArea.com, a price comparison website in Indonesia. Sony’s So-net Entertainment and East Ventures, a new and an existing investor, respectively, also participated. The capital will be used to expand PriceArea’s current operations and to develop new technologies.

Leopard Capital appoints Cambodia CIOLeopard Capital has hired Richard Intrator to be its new Cambodia managing partner and chief investment officer. He will be based in Phnom Penh. Intrator has previously held senior roles with IMAX, PaineWebber, Kidder, Peabody & Co, and Booz, Allen & Hamilton.

Hogan Lovells boosts Singapore banking practiceHogan Lovells hired Alexander McMyn as a banking partner in Singapore, as part of the law firm’s ongoing efforts to strengthen its finance capabilities in Southeast Asia. McMyn previously worked at Linklaters in Singapore, having relocated from the firm’s London office in 2008.

Permira exits half its Galaxy casino holdingPermira has exited over half of its remaining stake in Hong Kong-listed Galaxy Entertainment Group for HK$5.855 billion ($755 million). The PE firm sold 279 million shares through a block trade on Wednesday. The price of HK$21 per share represented a 4.1% discount to the previous day’s closing price.

Galaxy was Permira’s maiden direct investment in Asia outside Japan. It first backed the casino operator in October 2007, paying $838 million for a 20.51% stake. It purchased a further 0.6% for HK$159.5 million on year later. Divestment started last September, when Permira sold approximately 6.5% of the casino operator for HK$4.8 billion. Following last week’s transaction, the private equity firm now holds 5.95%.

Two days earlier, Galaxy announced that its first half revenue doubled year-on-year to HK$28.3 billion and its EBITDA increased 159% to HK$4.7 billion. Net profit increased to HK$3.4 billion from HK$378 million.

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a BrItIsh corporate Buyer was In talks with a Japanese seller. The company, which had been the majority shareholder’s hands for decades, was about to be sold for a handsome sum, and the only stickler was the exiting shareholder’s attitude. “Why is this seller requiring me to guarantee certain employment levels for a period after the acquisition?” asked the buyer, frustrated. “Once I buy it, I should be able to do what I want with it.”

The Japanese seller wouldn’t budge, however, until he had ensured the care of his employees and the business’ standing in the community would be maintained after the deal closed. He even insisted on having a clause promising that the relationships with the company’s existing partners would be maintained.

It is not an isolated case. Attitudes such as this – the belief that financial exits should not be viewed as successful if they fail to take equal care of other stakeholders in the business – are prevalent among Japan’s business owners. They are one of the reasons why local companies are traditionally difficult for outsiders such as foreign private equity firms to access.

One strategy which a number of Japan-focused PE firms are hoping may win them more favor, though, is the ability to help domestic businesses expand overseas. “Many Japanese companies historically aren’t terribly receptive to financial investors,” explains Paul Ford, a director in KPMG FAS’ transaction services practice in Tokyo. “But if the financial investor can persuade a company that it has the competency to support overseas expansion in area where the company may not have a lot of skill or experience, it is seen as being able to bring something to the table.”

Ford recalls how when he began working for KPMG FAS a decade ago, 80% of his work was for foreign funds doing deals in Japan as well as inbound work for foreign corporates. This has now been turned on its head, and a similar majority of his time is spent helping Japanese corporates buy overseas.

Crossing bordersIndeed, for many Japanese corporates, outbound investment is a strategy that is being pursued with or without private equity backing. The $50.9 billion of capital invested across 438 outbound

deals so far this year is on track to break all previous records. Supported by low borrowing costs and a strong yen, large corporations and trading houses such as Toshiba and Marubeni have their fingers on the pulse of various industries and can easily identify targets by dint of having tracked their competitors so closely.

Those strategic buyers that are less sophisticated and have little or no global expertise rely heavily on domestic banks when putting together their outbound strategies. Japanese PE firms with international networks can play a role here as deal originators. Advantage Partners is one example of a local GP that has been upping its contact with Japanese corporates – on occasion even presenting them with outbound deals in which it hasn’t participated.

“It’s a great opportunity and we’ve found that oftentimes, even bigger companies may not be able to find a deal via an investment bank, since they may not have the international depth of management they need,” says Emmett Thomas, the firm’s head of Asia. “We have networks and are living in the transaction space more than some Japanese corporates who don’t have business development teams on the ground.”

As well as referring deals – no doubt in a bid to forge future co-investment relationships with corporates – Advantage is also one of a number of Japan-focused GPs that is attempting to grow its domestic portfolio companies in overseas markets.

Of the firm’s 20 Japanese companies, up to 70% either have or plan to have operations elsewhere in Asia. Pokka is one firm that Advantage assisted to expand abroad, having acquired the company at a time when only 5% of its profits came from outside Japan. The GP initiated two bolt-on acquisitions in Southeast Asia – in Singapore and Malaysia – and designed an entry strategy into the Middle East. After six years, Pokka’s overseas profits had risen to 30%.

The China imperativeGiven that Advantage acquired Pokka in 2005, the firm’s outward-looking strategy pre-dates an increasingly prevalent trend among more recent deals realized in Japan. In 2010, CITIC Capital – no stranger to outbound investment either, having established a Japan presence eight years ago to help companies expand to China – acquired Japanese logistics business Tri-Wall.

“We’re helping Tri-Wall do business outside

Go local to go globalCash-rich corporates have led the surge in outbound investment from Japan, buoyed by easy access to debt and the strength of the yen. What role are Japanese GPs playing in this buying spree?

Major outbound deals by Japanese companies in 2012

Date target nameenterprise

value ($Mil)target nation acquiror name

target Macro Industry

May-12 Gavilon Group 5,600.000 United States Marubeni Corp Consumer Staples

Jul-12 Aegis Group 4,311.229 United Kingdom

Dentsu Media and Entertainment

Aug-12 Goodman Global 3,700.000 United States Daikin Industries Industrials

Feb-12 Boston Biomedical 2,630.000 United States Dainippon Sumitomo Pharma

Healthcare

Jul-12 CFAO 2,186.885 France Toyota Tsusho Corp Industrials

Mar-12 ZOLL Medical Corp 2,122.079 United States Asahi Kasei Corp Healthcare

May-12 Woodside Browse -Browse

1,982.160 Australia Japan Australia Energy and Power

Mar-12 Pacific Capital Bancorp 1,515.272 United States UnionBanCal Corp Financials

Feb-12 EnCana Corp-Cutbank Ridge

1,456.116 Canada Mitsubishi Corp Energy and Power

Feb-12 EnCana Corp-Cutbank Ridge

1,456.116 Canada Mitsubishi Corp Energy and Power

Source: Thomson Reuters


Japan, especially in China, in many ways,” says Hironobu Nakano, senior managing director and head of Japan private equity at CITIC Capital. “We helped them with their issues with the local labor force, and with the many legal, accounting and finance issues they encountered when their factories relocated across China. We also introduced them to some of the companies CITIC Group owns which are potential customers.”

CITIC Capital’s efforts have seen Tri-Wall’s China revenues increase to 60%, while 25% of sales now come from Southeast Asia.

Expansion into China, and other parts of Asia, particularly South Korea or Southeast Asia, also played a part in the deal rationale when CITIC Capital invested in coated film manufacturer Higashiyama Film last year, as well as Permira’s secondary buyout of sushi restaurant chain Akindo Sushiro from Unison Capital last week. Permira sees strong demand for the Sushiro dining experience in China and Korea, and plans to help the firm hire more people to expand its presence in these markets.

When selling half of Jupiter Shop Channel

to Bain Capital in a $1.3 billion deal in June, Sumitomo Corporation stressed that its choice of partner was in part based on the need to go overseas. The firm said Bain would use its “knowledge and worldwide network” to promote the expansion of the TV shopping company into Asia. Bain made a similar strategic offer to audiovisual equipment provider D&M, which it bought in 2008.

“Japan as a market is looking at fairly limited growth,” says T.J. Kono, a director at Unison Capital, which also worked with Sushiro to put the firm in touch with a Korean management team. “We need to generate our returns in some way and obviously our primary focus continues to be investment into Japan, but one of the ways to create delta for our investments is to look at the overseas market.”

There is more than one way to target the overseas market, however. While the bulk of activity takes the form of bolt-on acquisitions and organic growth by local portfolio companies, several Japanese PE firms have ventured into the realm of outbound primary investments.

The unifying theme for these deals is a connection with Japan: A foreign company might have a business alliance with a Japanese company, be leveraging technology from Japan or wanting to acquire domestic businesses. In this way Japanese GPs can have an advantage over foreign – and even global – competitors that lack extensive links back to the country.

Unison Capital’s $104 million management buyout of South Korea’s Nexcon Technology evidences the GP’s superiority over a non-Japan investor. Prior to Unison’s entry, the company had struggled to access Japanese customers, despite the huge potential for business with the likes of Sanyo, Panasonic and Sony. “Now we’re introducing new management resources and advisers and a network in Japan who can put them in touch with these kinds of companies,” says Unison’s Kono. “It’s a natural fit because we have the resources they can use to penetrate Japanese clients.”

Another foreign acquisition for which Japan holds very strong business logic is Teleguam, the Guam-based telecoms services provider that Advantage Partners bought in 2010. Given that tourists from Japan represent 80% of the $1.35 billion tourism industry in Guam, Advantage has striven to increase the company’s share of revenues generated by this visitor base, as well as helping it market its services in Japan.

Advantage has made six non-Japanese domiciled investments over the past decade, all of which purport to have strong Japan links. Hisense Broadband Multimedia Technologies, the China-based company Advantage acquired last year, for example, manufacturers fiber optics


pe exits: the lure of corporate JapanThe boom in Japanese outbound investment has provided a convenient exit route for an

increasing number of international private equity firms. According to Thomson Reuters, Japan’s strategic buyers have purchased $13.8 billion worth of companies from PE firms so far this year. “This trend should continue,” says Hideo Norikoshi, a Tokyo-based M&A partner at law firm Baker & McKenzie. “One reason is the strong yen. The other reason why companies are trying to invest overseas is the shrinking and aging population of Japan and the high cost of living.”

Assets exited by PE firms to Japanese corporates, as with Japanese outbound M&A in general, cover a wide range of sectors. Businesses in the areas of manufacturing, engineering and electronics appear to have curried particular favor, though. One example is US-based air conditioner maker Goodman Global, which was sold by American PE firm Hellman & Friedman to Japan’s Daikin for $3.7 billion last week. The CEO of Osaka-based Daikin, the world’s second-largest air conditioner manufacturer, first claimed to be considering making a bid for the company more than 18 months ago.

“Because there’s an enhanced risk profile when you’re investing abroad – especially when every market in the region is unique – generally firms want to invest in area they’re comfortable with and already have some experience with,” Paul Ford, a director in KPMG FAS’ transaction services practice in Tokyo, tells AVCJ. “That’s why we see a lot of manufacturing and technology investment, because those are areas where many Japanese firms tend to have experience.”

Riverstone Holdings’ sale of British wind power engineering firm Seajacks International to Marubeni Corp and Innovation Network Corp of Japan (INCJ) for $850 million earlier this year is another prominent example of this tendency. Marubeni aims to use its expertise in manufacturing and renewable energy to help the company set up offshore wind farms in Japan and other parts of Asia.

Other recent private equity exits in this space include The Carlyle Group’s sale of Talaris Topco, a UK-based cash handling machine maker, to ATM manufacturer Glory; the SkylakeIncuvest private equity fund’s sale of its stake in SCD, a South Korea-based electronic components manufacturer, to Nidec Sankyo; and the exit by a consortium of venture firms including Mizuho Capital from Nistica, a US-based optical modules equipment maker, to Fujikura.

The inclination towards manufacturing and electronics deals is mirrored in the outbound private equity investment data too.

“If you’re going to be able to justify an outbound acquisition to your investment committee, you want to give a strong narrative about what your strategy is for the business,” explains KPMG’s Ford. “Having experience and knowledge of a particular industry is pretty critical when you’re going into a new market.”

It’s no coincidence then that technology firms feature strongly in the handful of primary deals realized by Japanese GPs over the past year. These include DI Asian Industrial Fund’s investment in Vietnamese medical equipment maker Japan Vietnam Medical Instrument and Unison Capital’s buyout of Nexcon Technology, a South Korea-listed battery safety units maker.


components. Chinese fi rms in this industry are heavily reliant on Japanese technology and so the GP provides assistance in terms of identifying potential partners and hiring talent in Japan.

Barrier to entryOne of the barriers to more widespread investment of this nature at present is the Japan-specifi c mandates under which most local GPs operate. Over time, KPMG’s Ford suspects that funds will begin to widen in scope, as overseas markets compare ever more favorably to home. It appears this change in focus isn’t a process

that can be rushed, however, as LPs need to be appeased and the key to doing that is to build up a local presence in the target markets.

Unison Capital, for example, cut the size of its third fund by one quarter to JPY107 billion ($1.4 billion) due to limited dealfl ow earlier this year. A logical alternative to this would have been to commit the capital already raised to transactions in more buoyant markets, but this wasn’t a move the GP considered due to its nascent state in most countries. “It’s easy to say that you’ve got some capital and so you’re going to allocate it to a diff erent market and I’m sure some funds would

defi nitely do that,” says Kono. “But is it a justifi able investment decision based on the capabilities of the team? I’m not so sure.”

Perhaps lessons are being learned from the last market peak, in 2000, when $32.2 billion was invested across 348 outbound transactions. Around that time, a large number of foreign GPs also entered Japan. Some were successful at sourcing deals; others weren’t and have since left the market. “The ones that were successful seemed to share the characteristics of having either very good Japanese senior management or local partners, and spending a long time building meaningful relationships across industry, banking and government,” says KPMG’s Ford.

For Japanese funds trying to source acquisitions overseas, similar rules may hold true. Being able to fi nance acquisitions because of the strength of the yen isn’t enough. Local presences need to be established and that means hiring local people, investing in them over the long-term and building connections with senior fi gures in industry and politics.

This is where global funds like Bain Capital, whichhave a footprint in Japan, and the likes of Advantage Partners and CITIC Capital, which have Hong Kong and China offi ces respectively, have a real advantage. As Ford says, there aren’t any shortcuts.

Asia has over US$318 billion in private equity funds under management

Just where and how are these funds distributed? Read all about it in AVCJ Private Equity and Venture Capital Report, the annual series of regional reports by the leading source of information on Asian private equity, venture capital and M&A.

Reviewing the year’s activity in the industry, the regional reports are filled with up-to-date data and intelligence on fundraising, investments, exits and M&A. They also feature information on key companies and transactions. Offering global perspective alongside local opportunities, the regional reports include Australasia, China, India, North Asia, and Southeast Asia.

For more information or to order, call Sally Yip at +(852) 3411 4921 or email [email protected].

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PRIVATE EQUITY ASIA

M&A ASIA


China 2012

* as of September 30, 2011. Source: AVCJ avcj.com

Japan Outbound M&A

Source: Thomson Reuters * 2012 - data through September 3, 2012

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what Is the Best way to DIvest portfolio companies in face of sluggish global markets? A growing number of private equity investors in Japan are looking back at the way they came in – passing their portfolio companies to their peers. After only 3-4 secondary buyouts per year between 2007 and 2010, there were nine in 2011. The trend has continued this year, with seven deals in eight months.

Unison Capital has recently been the most active private equity player in this space. In May, it partnered with GC Corp. to acquire Showa Yakuhin Kako, a Japan-based pharmaceutical company, from Tokio Marine Capital, Polaris Capital and PineBridge Investments for a reported JPY50 billion ($650 million). The investors had held the asset since 2008.

Last December, Unison bought auto industry supplier Asahi Tec for JPY23.9 billion from RHJ International, which first invested in the company in 2003. One month earlier, it acquired shoe

repair company Minit for $128 million, bringing to an end CVC Capital Partners’ six-year tenure.

More recently Unison has been on the other side of the table, selling its entire stake in Akindo Sushiro, a leading Japanese sushi restaurant chain, to UK-based Permira for $1 billion, marking the largest secondary buyout of the year so far. Unison invested in the company in 2007 via Unison Capital Partners II.

“Our second buyout vehicle was raised in 2004 and is now reaching the end of its fund life in two years unless we extend it, with some portfolio companies still staying with the fund,”

Tatsuo Kawasaki, a partner at Unison, tells AVCJ. “In Japan, a good number of transactions are likely to be sold to other private equity players or strategic investors, given the slow IPO market.”

A time to exitThe transactions mentioned above represent a handful of the slew of Japanese buyout deals that took place in the years leading up to the global financial crisis. According to AVCJ Research, the country saw just $2 billion transacted across 27 buyouts in 2005. A year later deal volume had doubled but cumulative value grew fourfold to $8 billion, followed by $11 billion in 2007, despite only a small increase in transactions.

Since then, deal value has passed $4 billion on only one occasion, in 2011, but Bain Capital’s $2 billion acquisition of restaurant chain Skylark – also a secondary buyout – accounted for nearly half the total. This transaction, said to be around $3.4 billion including debt, brought to a close

one of the most infamous of the 2006-2007 megadeals. Nomura and CVC paid around JPY380 billion (then $3.19 billion) for Skylark, supported by JPY220 billion in loans from Mizuho.

One of the megadeals that has yet to see an exit is financial software developer Yayoi, which was purchased by MBK Partners for JPY71 billion in 2007. According to reports in January, Orix dropped out of the bidding, leaving Advantage Partners and Bain Capital, but nothing has been heard since.

“Many funds were very active in 2006-2007 and it’s time to exit from these investments,”

says Kazushige Kobayashi, managing director of Capital Dynamics. “Also many of them are in the market trying to raise new funds and so they have to show some returns to investors.”

According to a research published by Tokyo-based advisory firm Brightrust in April, private equity players have significantly lengthened their investment holding periods over the last few years. While there were 94 exits with an average holding period of 3.2 years in 2007, the duration had extended to 4.8 years and 4.6 years in 2010 and 2011, respectively.

For example, Bain and Skylark’s owners – Nomura and Mitsui, which replaced CVC in 2009 – started negotiations as early as March 2011 but progress stalled as banks temporarily withdrew funding following the earthquake and ensuing tsunami and nuclear crisis. The deal eventually went through in October.

Brightrust added that exit pressure would likely rise in 2012 as several investments of seven-years or more pushed the average holding period to 5.6 years. As of April, approximately one-third of portfolio companies held by Japanese buyouts funds were ready for exit, with another third heading there: 75 deals were older than five years, and 85 were in the 3-5 years range.

The expiry of financing packages is also pushing private equity players to seek exits for heavily leveraged investments. With local banks still willing to lend at attractive rates, Japan remains one of the world’s most liquid debt markets. According to the World Bank, Japan’s benchmark lending rate has been below 2% since 2001, compared to 7-9% in Australia, Asia’s only other sizeable leveraged buyout market.

“Everything we have done in Japan involves leverage,” Jonathan Zhu, managing director of Bain Capital Asia, told AVCJ last November. “The average leverage multiples were never very high, probably 3-4x supporting a deal valuation of 6-7x EBITDA.”

With a typical maturity of 6-7 years for Japanese loans, leveraged deals completed in 2006-2007 must be exited or refinanced in the next couple of years. Private equity firms generally prefer the former – fund life extensions often require permission from LPs while the longer an investment is held the more likely IRR will suffer.

Tsuyoshi Imai, a Japan-based partner at Ropes

Secondaries: A new wave?Japan’s megadeals of 2006-2007 need to be exited or refinanced. With IPOs off the agenda due to weak public markets and strategic investors’ appetites uncertain, secondary buyouts are a popular option

Japan's secondary buyout market

Source: AVCJ Research

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& Gray, adds that currency gains are another major reason for foreign funds to exit. “In 2007, the yen was about 120 to the US dollar; now it’s below 80,” he says. “If a financial sponsor [that does not call capital in yen] made an investment in 2007, it could realize a 40% return based on currency appreciation alone.”

Limited optionsThe rise in secondary buyouts should be seen in the context of other exit routes. Ernst & Young surveyed 100 industry participants between July and August last year on their expectations for secondary exits, trade sales and IPOs in Asia Pacific over 2012 and beyond. Only 13% of respondents saw promise in the public markets, the lowest score in the region, with China and India managing a relatively bullish 67% and 55%.

Japan saw 17 private equity-backed IPOs last year – compared to only three and four in 2009 and 2010, respectively, but public investors remain very cautious due to market volatility prompted by global economic uncertainty. The Nikkei 225 Index, for example, closed at 8,783 points on Monday, lower still than in the weeks following the tsunami in March 2011.

“Because of the relatively weak performance of the domestic capital markets and the long lead time required to take a company public, a

sale to secondary or strategic buyers presents a more attractive option in Japan compared to many other markets,” says Imai.

When the IPO market is likely to remain sluggish over the foreseeable future, cash-rich Japanese corporations could be another way out for private equity investments. According to the Ernst & Young survey, 47% of the respondents see trades sales as the most viable exit strategy in Japan this year. However, Satoshi Sekine, head of private equity at Ernst & Young Japan, notes that PE is often considered preferable to a strategic investor in situations where entrepreneurs want to retain a degree of autonomy.

Darren Massara, managing partner at NewQuest Capital Partners, adds that strategic players like to keep relatively large cash reserves in times of uncertainty, which can be a disincentive to deploying large sums. “While strategic investors are sitting on a lot of cash today, they remain quite cautious,” he says. “Given the global economic climate, financial investors with committed capital to spend may have a higher appetite for acquiring these secondary stakes.”

Pass the parcel?Furthermore, given that the Japanese market is relatively small, it cannot be relied upon to deliver

consistent deal flow for large buyout firms. The secondary space therefore offers rich pickings for global or pan-Asian funds.

According to some industry participants, large PE firms are merely passing portfolios amongst themselves. A less cynical way of looking at recent secondary deals is that the target companies have the capacity for overseas expansion and global private equity firms are well equipped to support these endeavors.

Osaka-based Sushiro, for example, is regarded as a prime asset: revenues reached JPY99.8 billion for the year ended September 2011, up 69% from JPY59 billion in 2007 when Unison first invested, and outlets have been opened abroad. Sources familiar with the situation say that Permira was one of several private equity players involved in the bidding process.

While Permira remains an occasional investor in Japan, Alex Emery, partner and co-head of Asia at the firm, tells AVCJ that the aim is to develop a balanced portfolio with different dynamics, and so Japan will not go ignored.

“Japan is a mature market and with that comes a certain level of investor confidence, unlike China and India,” he says. “Deals are large and offer control stakes, leverage pricing is attractive, and business is equipped with good governance and low risk.”

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What are the major issues facing private equity firms in Japan?

I believe one of the major issues facing private equity firms in Japan is deal sourcing. Many Japanese executives have read the “Barbarians at the Gate”-related stories about the birth of private equity in the US during the 1980s. To them, private equity firms are just looking to purchase and dismantle companies rather than provide capital and management expertise that will help grow the businesses. To overcome these issues, when US private equity firms decided to enter Japan, they made “ostensive” announcements about complying with local culture. They also hired former top-ranking officials from the Ministry of Economy, Trade and Industry (METI) to provide introductions and guid ance and former senior Japanese bankers to manage the funds. This has been a double-edged sword as potential sellers and buyers have not been able to agree on terms, leaving the private equity firms under invested with limited deal flow and increas-ingly impatient LPs.

Another major issue in Japan is that while the relative lack of equity financing in Japan might be mitigated by the presence of US private equity companies, troubled Japanese companies are unwilling to sell off unsuccessful business divisions. Local investment banks and the government are happy to provide further debt financing to companies, but they rather rely upon government-related equity funding and don’t supplement their equity investment with management expertise, access to third-party equity providers or outside information on improving the underlying fundamentals of the businesses. This often leads to distressed situations where the company is forced into asset sales, and sometimes on worse terms than if they had allowed private equity investment.

How can GLG’s services assist private equity clients?

I feel that GLG is well positioned to assist private equity companies in all stages of their pipeline from the early stages of deal sourcing to due diligence to post-investment support. At the beginning of the process,

Overcoming the Information Gap to Make Better Informed Decisions

GLG’s private equity clients can speak to experienced individuals in their industry of focus to gain insights into key trends and better understand where deal opportunities might exist. Clients can use this service to augment their internal knowledge and expertise so that when they approach company management the initial meetings are much more productive.

GLG’s service can also be used to build background knowledge of certain industries and, in some cases, even specific companies in order to gauge the viability of potential investment targets. If the private equity decides to assign more resources, GLG can again be of use during the due diligence process, providing access to independent opinion and expertise that can only come from individuals with years of experience.

How have you helped private equity clients on early-stage due diligence in Japan?

I have assisted several clients making important business decisions. There have been cases in which, after speaking to me on the phone about a particular opportunity, clients have requested a custom research report highlighting my views on industry trends and the future viability of an invest ment in the Japanese market.

Where would you say your biggest impact has been when providing insight on industry?

I have been in the investment banking industry for over 30 years, working at some very large institutions, and I understand Japan’s finance industry intimately. Using this knowledge, I believe I have made a specific impact on how private equity investment teams decided to approach certain deals, specifically empowering the teams to develop transactions in a manner not previously considered. I have also provided a head-start on due diligence that didn’t involve huge resource commitments. There was one case in which I provided firsthand knowledge of an industry player and this insight supported the client’s investment thesis, greatly enhancing the investment team’s decision-making ability.

Takuma Amano is President at Tandem Advisors, a Tokyo-based independent financial services firm providing advisory in the areas of corporate finance in addition to strategic advice for non-Japanese companies on their opera tions in Japan. He was previously the Managing Director, Swiss Banking Corporation, where he was responsible for restructuring the firm’s investment banking business in Tokyo to respond to the after-bubble market. Mr. Amano also played a key role in restructuring

the US business of CSK Corporation, the largest software and IT services company in Japan. During 1980s, as the first Derivative Head of Yamaichi Securities, Mr. Amano developed new derivative-related products. As Managing Director for CSFB, he developed a private placement market for non-Japanese borrowers in Japan and Japan-type cross-currency interest rate swaps. Then as Senior Advisor to Saudi Arabian Monetary Agency in Riyadh, Mr. Amano managed Saudi Arabia’s huge foreign currency reserves prior to and during the Gulf War period. He writes the monthly market column for the prestigious Nikkei Financial Journal. Mr. Amano is a member of the GLG Councils – a global network of third party experts available to GLG clients for consulting engagements.

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when the founDer of Baroque Japan decided to sell up in September 2007 to CLSA Capital Partners, he had been at the helm of the women’s fashion chain for just eight years and was in his mid-30s. Similarly, the man behind Everlife, who had spent nearly two decades building the business from nothing to a leading player in the food supplements market, was well short of retirement age when he agreed to a private equity buyout.

These examples go against the grain of perceived private equity succession planning opportunities in Japan – founders in their late 70s finally ceding control of companies they set up in the years after World War Two – but industry participants attest to their realism.

“Everyone thinks the sellers are 75-80 years old, but in my experience, it’s difficult to get these people to sell. Many are opposed to private equity and they would rather take their shares to the grave,” says Megumi Kiyozuka, managing director at CLSA Capital Partners. “Instead we look at the younger generation, people in their 40s with consumer and lifestyle-related businesses. They are more willing to pass on ownership.”

Given recent market conditions, these sentiments are echoed by Gregory Hara, director and president of J-Star, another mid-market GP. In ordinary circumstances, younger entrepreneurs with consumer-oriented businesses would seek to liquidate their holdings via IPOs – the multiples tend to higher than for domestic M&A – but appetite for new listings has been so weak that this is no longer an option. Private equity is therefore an alternative.

“Younger entrepreneurs are more able to make decisions,” Hara adds. “They get the capital and can go and do something else. If the owner is 70, they might get $20 million, but that is the end of them as a business person, so many try to hold on.” In the case of Baroque Japan and Everlife, the middle-aged founders severed ties

with the companies completely, desiring a clean break and no further role in management.

Mixed marketAccording to anecdotal evidence, succession planning plays a direct or indirect role in 30-40% of PE deals in Japan. Yet the deceptive nature of the opportunities available says much about the country’s mid-market. To some it is an area rich

in opportunity as weak public market valuations create openings for take-privates, corporations divest non-core assets and, yes, aging founders seek an exit. To others, it is a slightly more active part of an otherwise tepid industry.

AVCJ Research has records of 88 private equity transactions in Japan valued between $15 million and $150 million since the start of 2009. Of these, nine in 10 were worth less than $100 million and nearly two thirds were below $50 million. During the same period, there were 31 deals of $150 million or more, of which 11 exceeded $500 million.

The cumulative total for the large cap deals is obviously several times that of the smaller transactions, but clearly something is going on in the mid-market.

“I believe there is still a lot of opportunity in the mid-market, particularly in areas where there has been consolidation over the last few years, such as autos, pharmaceuticals and electronics,”

says Brian Strawn, a partner with White & Case’s M&A group in Tokyo. “A lot of these companies are majority-owned by founding families and they are looking to get out because there is no successor.”

While there is a clear preference for sectors that exhibit potential for overseas expansion, some industry participants highlight sub-segments of the domestic economy that are

regarded as resilient against the wider downturn. Healthcare and insurance are frequently cited and, by extension, products and services that target the elderly.

On the consumer side are lifestyle-related industries – CLSA’s Kiyozuka notes the growth seen by budget apparel retailers such as Uniqlo – and niche areas like single women and pets. J-Star’s most recent investment, for example, was Tokyo-based pet clothing manufacturer Three Arrows. Japan is now the world’s second-largest market for this particular kind of apparel, driven in part by the growing popularity of smaller animals as pets among

older and smaller households.

Falling pricesOpportunities are also being created by plummeting valuations. One mid-market GP, which concluded several deals in 2011, claims to have paid a minimum of 2x EBITDA for its assets and no more than 4.5x EBITDA.

Public market valuations have been hit particularly badly, with the Nikkei 225 Index down 22% on its post-global financial crisis peak of 11,300 points in April 2010. More than half the listed companies in Japan are trading at less than 5x EBITDA, which means there is a strong appetite for take-private transactions among management teams, often backed by private equity. When Nippon Mirae Capital announced the $53 million buyout of education services provider ALC Press in May, the company was trading on JASDAQ at below 4.7x EBITDA.

For many listed companies, hopes for

Mixed feelings in the middle groundJapan’s mid-market is opening up as weak public market valuations facilitate take-private deals, corporations divest non-core assets and aging founders seek an exit. GPs have plenty to aim at, provided they can raise funds

$15-49 million$50-99 million$100-149 million$150-299 million$300-499 million$500-999 million$1 billion-plus

Japan PE deal volume breakdown, 2009-present



[email protected]

future equity financing are diminishing just as compliance costs are going up. This is yet another reason for companies expressing willingness to de-list and restructure in the interests of economic efficiency.

“There is a high hurdle for listing due to new regulations similar to the Sarbanes-Oxley Act that were introduced in 2007. Companies have to do more in terms of corporate governance, which can be expensive,” says J-Star’s Hara. “We are providing liquidity to entrepreneurs as a substitute for the capital markets.”

Kazushige Kobayashi, managing director at Capital Dynamics, adds that small- and medium-sized enterprises (SMEs) in Japan are likely to come under even more pressure when a the SME Moratorium Law, which obliged banks to support smaller companies despite concerns about default risks, expires in March 2013. No longer protected by legislation, SMEs will need to show stronger equity levels to qualify for loans, creating another potential inroad for PE investors.

Next Capital Partners’ recent JPY500 million acquisition of cooking school operator Sunrich supposedly came about because the company ran into distress after failing to secure financing through traditional channels.

Opportunities don’t necessarily translate into acquisitions, however. Describing the nature of the dealflow that crosses his desk each year, CLSA’s Kiyozuka says that 90 of the 100 companies he looks at are dismissed because they are unprofitable, in unattractive industries or being sold via auction. Of the remaining 10, four might raise red flags during due diligence and in another four cases the owners are unwilling to sell.

According to the Japan Buyout Research Institute, about half the investments announced in 2011 were take-private deals and up to 60% were worth US$50 million or less. There is a lot of crossover between these transactions and succession planning issues: typically the family

owners hold 10-20% of the public company and the prospective buyer wants to delist it, reorganize operations and possibly go public again in the future.

Given the hesitancy older owners have about selling to private equity investors, the challenge is finding viable targets among the myriad companies that make up Japan’s mid-market space. Jun Usami, another partner in White & Case’s M&A group, stresses the importance of getting on side with commercial banks that have been lending to family owners for years. “These banks have detailed information on these businesses and, in the event of a restructuring, they usually take the lead,” he says. “Private equity

firms that have relationships with banks will get dealflow. It is very hard for outsiders to find these opportunities.”

Building relations with founders can take years – one industry participant suggests it takes 2-3 times longer than on other deals in Japan, and questions whether PE firms are patient enough – and it is not unknown for transactions to fall apart at the last minute. “Owners can get emotional and sometimes price is not the most important consideration,” says Capital Dynamics’ Kobayashi. “They are also thinking about their reputation in the market, their families and their employees.”

For private equity firms, the rewards and trials of the mid-market are just one consideration. The

other is fundraising. Many domestic institutional investors have stepped back from the asset class: banks that are obliged to comply with the Volcker Rule introduced after the global financial crisis; insurers still dealing with the fallout from last year’s earthquake, tsunami and nuclear crisis; and others that have become disillusioned by the poor track records of some of the larger GPs.

Fundraising in Japan tumbled to $253 million in the first six months of the year, compared to $2.2 billion in 2011 and $1.5 billion in 2010. Yet according to Japanese investment advisor Brightrust, as of February, 15 buyout funds were in the market, another 11-12 GPs expected to start fundraising in 2012 and three more are operating on a deal-by-deal basis. J-Star, which is seeking around JPY15 billion for its second fund, is one of several mid-market players trying to raise capital from overseas LPs for the first time.

Where are the exits?Some GPs have already abandoned their efforts. Others are on the exit path, keen to show prospective LPs that they can return money to investors. PE firms completed 60 trade sale exits in the first eight months of 2012, generating $3.2 billion. This compares to 54 exits ($1.7 billion) and 88 exits ($7 billion) in 2010 and 2011, respectively. It’s worth noting that the 2011 proceeds were inflated by Bain Capital and The Carlyle Group’s secondary buyouts of Skylark and Tsubaki Nakashima, which accounted for nearly $2.9 billion.

J-Star’s Hara describes the exit environment as “not great, but decent,” adding that Japanese corporations are largely debt-free and have plenty of cash on their balance sheets for acquisitions. Excluding financial services, he puts the total cash reserves at $833 billion. The GP recently completed its first trade sale since 2008. Other independent mid-market players to record exits in recent months include J-Will Partners, Ant Capital Partners, Polaris Capital, Valiant Partners and Cas Capital.

It remains to be seen whether this will be enough. The consensus is that those who survive should find a reasonable number of opportunities in the next few years as valuations remain relatively low and competition for deals weakens.

“It’s like a chicken-and-egg situation – there are a lot of potential deals out there, but the problem is raising capital,” says Tatsuya Kubo, managing director at HarbourVest Partners. “If you have capital, it’s a great play because SMEs have outperformed the large corporations, and there are so many of these companies. But it can be difficult to find GPs that are respected, reliable and trustworthy, and are able to make good investments.”

Japan trade sale exits


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“PE firms that have relationships with banks will get deal flow. It’s hard for outsiders to find these opportunities” – Jun Usami


[email protected]

Japan pe fundraisingThen And now

69%Fall in no. of funds

raised in 2011-12

compared to

2006-07

2005-2006

41%

2007-2008

61%

2009-2010

30%

2011-2012

13%

Difficult timesFundraising took a hit after the global financial crisis and it hasn’t really recovered. GPs are increasingly looking to overseas LPs as domestic investors scale back allocations

The 2006 vintage featured a clutch of large funds as GPs rode on a wave of large leveraged buyouts. More recent funds appear to have more specialized agendas

Top funds, 05-06 vs 09-11

Buyout share of total fundraising

2006: Carlyle Japan Partners II, $1.88 billion 2003: Carlyle Japan Partners I, $441 million

2006: Advantage Partners IV, $1.8 billion 2002: Advantage Partners III, $423 million

2011: CITIC Capital Partners Japan II, $228 million 2004: CITIC Capital Partners Japan I, $213 million

2009: Ant Bridge No.3 PE Secondary, $138 million 2005: Ant Bridge No.2 VC Investment, $248 million

160 funds raised, with 24 buyout vehicles receiving $7.7 billion

$14.3 billion50 funds raised, 4 of them buyout

vehicles receiving $317 million

$2.5 billion

2006-20072011-2012


Q: what key trends do you see in Japanese venture capital right now?

A: There has been a new boom in VC opportunities because a lot of start-ups are being established on the back of the mobile and internet sector trend. Around the time of the internet bubble in 2000 we had this phenomenon called the “76 generation” – young entrepreneurs who were starting companies. They are now in their mid-30s, their companies are well established, and they have become the new role models. New entrepreneurs are now spinning off from those companies and doing their own start-ups. Furthermore, a lot of talented individuals are choosing a career in start-ups. Daisuke Iwase, the founder of online insurer Lifenet – one of our portfolio companies, which recently went public – graduated from Tokyo University, worked at Boston Consulting Group and at a buyout fund, went to Harvard Business School, and then came back to start-ups. Traditionally, someone of his caliber would have gone to an established corporation.

Q: what kind of interaction is there between Japanese start-ups and corporates?

A: Gree – the Japanese equivalent of Facebook – is a good example. Yoshikazu Tanaka, the founder, started out at So-net, a subsidiary of Sony, and went on to Rakuten, which was an early leader in e-commerce. He learnt the business practices at those corporations and started Gree on the side. Globis invested when Gree was just three people and then, before going public, they raised capital from KDDI,

Japan’s second-biggest mobile carrier. The reason they took the money was more business synergy than financial need: KDDI directs traffic to Gree and Gree helps KDDI monetize it. So the way that start-ups typically interact with big corporations is by creating alliances in order make the growth curve steeper.

Q: how many overseas LPs do you have? To what extent are you competing for capital against VCs in the likes of China and India?

A: Our LPs are 80% overseas. We might be competing with China and India for allocations to a certain extent, but our market is uncorrelated with those two, so it’s a diversification opportunity for our LPs. From a macro perspective, Japan’s GDP growth is flat, but when you look at the composition of the economy, there are old industries like manufacturing and low value-added services that are shrinking and there are new industries like the internet, mobile and IT that are growing rapidly. As a whole, Japan has been overlooked in recent years. We are like the hidden gem.

Q: does VC suffer due to wider perception issues of private equity in Japan, driven by the large buyout funds?

A: Maybe we are bundled with the buyout funds in that LPs look at Japan as a whole and want regional diversification, but when we communicate with them they understand there are different dynamics in the VC market. There is a huge gap between demand and supply

of venture capital: many great startups are being established yet there is a limited number of VCs investing millions of US dollars. To raise a decent-size fund, you have to approach global LPS, but many Japanese GPs can’t do this. We are one of few that does all the IR in English. We had an alliance with Apax Partners in our second fund and through this we became familiar with global standard IR and fund management practices. We continue to adhere to them.

Q: A number of Japanese VCs are looking to invest start-ups overseas. where does Globis stand on this?

A: A lot of corporate VCs are active overseas because the parent companies want to enter new markets. We aren’t too interested. One reason is our LP base is mostly foreign, they already have global diversification, and they want us to focus on Japan. Another reason is we believe our core strength as a VC investor is penetrating the local entrepreneur ecosystem, finding the best deals and adding value on the ground. You need a local presence to do this. However, we

do place a strategic emphasis on helping our Japanese portfolio companies grow abroad.

Q: Are you primarily backing entrepreneurs with business plans or proven businesses?

A: We start from somewhere in the middle of that scale. We would back entrepreneurs with service or product that comes with a proof of concept. The point is whether they have identified a key driver to scale their service or product; they do not necessarily need to have a monetizing model. For example, we invested in an internet media company called Nanapi when it had just six staff and 1.8 million monthly users because there was a clear plan for reaching 15 million users. We also invest in later stage deals, typically growth equity and pre-IPO transactions.

Q: what kind of support does the Japanese government provide start-ups?

A: Local and central governments provide a decent amount of support through subsidies and other measures. The basic infrastructure for investment is also well set in Japan. Our stable legal system is a huge advantage over other Asian countries. Additionally, the public markets are good for start-ups because you can do an IPO quite early with a relatively small market capitalization. On NASDAQ the median market cap of a newly listed company is around $300 million whereas in Tokyo it’s around $50 million. Globis had two companies go public since March and we are expecting 3-5 more in the next 12 months. Most other IPO markets globally aren’t nearly as active at present.

SHiNiCHi TAKAMiYA | industry Q&a [email protected]

Innovation generationShinichi Takamiya, a partner at Japanese VC firm Globis Capital Partners, discusses the prospects for domestic start-ups and how venture investment in Japan stacks up against global counterparts

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