April 2016

THE JAPAN SPECIAL 2016 A special supplement Unlocking value in Japan’s mid-market Private equity plans for a breakout year Tokio Marine Capital takes its medicine The six investors every GP should meet ...and more

Sponsors: Advantage Partners Ant Capital Partners CLSA Capital Partners Tokio Marine Capital

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While the giant sleeps ISSN 1474–8800 APRIL 2016

TOBY MITCHENALL EDITOR'S LETTER

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a pr i l 2016

The phrase ‘sleeping giant’ has often been ascribed to the Japanese economy. While the giant has been sleeping, however, a small cadre of local private equity firms have been busy creating value in the mid-market and improving the reputations of the asset class. Our Japan roundtable this year (p.16) gathers five veterans of the Japanese mid-market to reflect on an industry making inroads into a corporate landscape that has, at times, been suspicious of private equity involvement. As Megumi Kiyozuka of CLSA Capital Partners Japan candidly puts it: “Previously they hated seeing us private equity firms.” This is no longer the case, we hear. Corporates are coming around to the benefits of private equity ownership: in two areas in particular. The first is succession planning. As detailed in our market overview (p.4), the Japanese economy is built on a backbone of almost four million small to medium-sized enterprises. Many of these are led by chief executives facing retirement and looking to either exit entirely or recapitalise the business as they hand it on to the next generation. Private equity firms are helping steer these generational transitions. The second is internationalisation.The ability to take a proven concept and expand it from a domestic setting to an international one has been a key value creation lever for private equity investors around the world; it is a skill particularly valued in Japan and a theme that recurs throughout this publication. In Deal Mechanic (p.14) we dissect the t he japan s pecial 2 0 1 6

various improvements brought to bear on drug manufacturer Bushu Pharmaceuticals, while in our keynote interview with Ant Capital we hear how the firm took seaweed snackmaker Sokan (p.10) to new global markets. While general partners in the country display a reserved optimism for the improving state of the deal market, they are rather more enthusiastic about prospects for fundraising. Japan-focused funds have never really been flavour of the month among global investors (see p.26 for detailed fundraising intelligence from our Research & Analytics team). However, our roundtable reports that once disappointed foreign LPs may now be taking a more serious look at the country. While this may be promising, the real “game changer” in terms of fundraising is likely to come from the country’s giant domestic pension funds. The world’s largest pension, Japan’s Government Pension Investment Fund, has allocated up to 5 percent of its $1.2 trillion in assets to alternatives. Japan Post Bank, which holds $1.8 trillion on behalf of Japan’s depositors, is also allocating a similar percentage. Throughout this magazine we discuss how the mobilisation of this $3 trillion war chest could change everything for Japanese private equity firms. Surely it would enough to rouse any slumbering giant. Thank you, as ever, to our sponsoring firms for contributing their expertise.

Enjoy the supplement,

Toby Mitchenall

e: [email protected]

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CONTENTS

THE JAPAN SPECIAL 2016 4

Introduction: Now could be the time Every year the private equity community in Japan hopes for two things: increased dealflow and for its giant domestic institutional investors to enter the asset class. In 2016, the hope is stronger than ever

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News in brief Moves, mergers and fundraisings: some of the biggest stories from Japan’s private equity industry in recent months

10 Keynote interview: Ant Capital Partners Amid the subdued economic backdrop shadowing much of Japanese corporate activity, one firm is shining a light on an investment bright spot 14 Deal Mechanic: Growth-enhancing medicine Tokio Marine Capital capitalised on a series of opportunities to turn Bushu Pharmaceuticals into a global player

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16 Roundtable: Unlocking value The Japanese corporate landscape is an enticing prospect for private equity firms, particularly those in the midmarket. Private Equity International gathered five local industry veterans to talk about the challenges and rewards of investing in the country 24 LP watchlist: Wish you were here Japan’s most active LPs have made more than 50 commitments to funds focused on the country since 2010. Here are six who should be on any GP’s list of investors to visit 26 Japan by the numbers From funds raised to targets met (and missed), PEI Research & Analytics offers a statistical snapshot of the country’s private equity industry 28 Funds in market Some of the country’s key funds broken down

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april 2016

IN DEPTH IN ASIA Committed to growing the value of Japan’s domestic mid-cap market. Sunrise Capital is a Japan dedicated private equity fund specializing in buyout investments of established mid-cap companies. The fund provides strategic solutions to support the growth of domestic Japanese companies. In addition, the fund leverages CLSA’s extensive Asian network to support Japanese companies planning international expansion. Sunrise Capital is committed to creating long-lasting value and engages directly with portfolio companies, working alongside management to share knowledge and experience and to provide financial and strategic guidance. Since the launch of Sunrise Capital I in 2006, Sunrise Capital has raised more than USD550 million (as of January 31, 2016). CLSA Capital Partners has been investing in Asia’s growth for more than 20 years. It is the alternative asset management arm of CLSA, Asia’s leading brokerage and investment group, headquartered in Hong Kong.

Sunrise Capital Investments

Contact: [email protected]

www.clsacapital.com

+81-3-4578-6300 (main)

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CLSA Capital Partners

Investing in Asia’s growth for 20 years

INTRODUCTION

An end to the waiting? Every year the private equity community in Japan hopes for two things: increased dealflow and for its giant domestic institutional investors to enter the asset class. In 2016, the hope is stronger than ever. Adam Le reports

When news broke last month that Canon had won the bidding war for Toshiba’s medical unit, close watchers of Japan’s private equity industry pointed to the challenges foreign private equity firms face when looking to acquire companies in the country. The sale of Toshiba Medical Systems Corporation, the world’s second largest maker of medical imaging equipment, highlights some of the frustrations the likes of KKR and Permira, who lost out in the deal, have when bidding for large Japanese assets: namely, competing against local trade buyers awash in cash and potential protectionist issues. With a price tag of around $6.2 billion, the Toshiba deal is more than double the total value of all private equity transactions completed in Japan in 2015. Just $2.6 billion-worth of deals closed last year, according to Bain and Company, a significant drop from the $5.6 billion the year before. The biggest private equity deal in the country during 2015 was Bain Capital’s ¥50 billion ($440 million; €396 million) purchase of Ooedo Onsen Holdings, a hot springs and hotel chain. Such deals are a

HIGHS AND LOWS

Total capital raised by Japan-focused funds closed since 2008 $bn

3.36 2.84 2.57

1.11

0.97 0.47 0.27

0.13 2008

2009

2010

2011

2012

2013

2014

2015

Source: PEI Research & Analytics

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private equity international

drop in the ocean when compared with the multi-billion-dollar deals completed by private equity firms in western markets. SIGNS OF CHANGE

Every year, Japan watchers say the private equity landscape will improve. Whether 2016 will be that year remains to be seen, but signs are pointing to a market surge. Japan’s corporate governance code, which is part of Prime Minister Shinzo Abe’s 2013 Japan Revitalisation Strategy, has been in force since last July and experts believe this will finally help open up more deals for private equity buyers. The reforms put pressure on Japanese listed companies to target higher returns on equity (ROE) and sustainable growth, and this is expected to generate more carve-out deals of non-core assets. Another exciting space to watch is Japan’s almost four million small and medium-sized enterprises (SMEs), often praised as the backbone of the world’s third largest economy. About half of these often family-run businesses are led by chief executives aged 65 years or older and a lack of succession planning is providing private equity buyers huge potential dealflow. Japan’s SMEs are also hungry for investment firms with foreign know-how to help them expand internationally, something private equity firms are well-placed to provide, according to Tamotsu Adachi, managing director and co-head of the Carlyle Group’s Japan buyout advising group. He cites Carlyle’s recent investment in GGC Group, owner of the Meisui Bijin bean sprout brand, as an example. “We were happy to meet the owner who was thinking of growing the company by partnering with a global private equity firm,” says Adachi. “We discussed how we could help him and how the business should be in the coming years.They have ›› april 2016

INTRODUCTION

a vision and hope to expand the business outside of Japan, and that’s the sort of value we can supply to them.” Over the last year, Japan watchers have seen a few significant developments that point to an increase in capital flowing into private equity from Japanese institutional investors. The industry’s eyes are on the Government Pension Investment Fund (GPIF), the world’s largest pension fund with assets of $1.2 trillion. It has an as yet untouched allocation of up to 5 percent to alternatives: equivalent to around $60 billion. Japan Post Bank, which had $1.8 trillion in assets as of 30 September 2015, is also touted as a huge source of capital. So is 2016 the year that alternatives managers will finally see Japanese institutional money start to flow? “I think the signs are better this year than ever,” says Alexander Wellsteed, who advises the Japan Bank for International Co-operation on private equity fund investments. Wellsteed, speaking in a personal capacity, noted that the low returns that fixed income and public equities will return to large Japanese institutional investors will force them to look at alternatives this year. “The beauty of alternatives is that – at its best – it can be counter-cyclical; it can be relatively uncorrelated with equity markets; it is relatively uncorrelated with other investment classes,” Wellsteed says. “Alternatives and private equity is something that is desperately needed in Japan at this time.” ››

CULTURAL CHALLENGES

While the short to medium-term future for the private equity industry in Japan may seem positive, particular issues remain. Corporate divestitures should provide ample dealflow to private equity buyers, but making these deals work can be tough. “Divested companies from large corporations usually have very strong corporate

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How to change the culture of these companies, is a big issue for private equity firms Tamotsu Adachi

cultures from their parent company,” Adachi says. “How to deal with this culture, how to change the culture of these companies, is a big issue for private equity firms.” Another challenge is the lack of internationally experienced private equity professionals in Tokyo. Compared with centres like London and New York, the Japanese capital has only a handful of private equity experts with relevant experience, and this is restraining potential growth, according to sources. On top of that, private equity is still suffering from a poor public image. “Domestically, private equity still has an unfortunate association with asset stripping, laying people off in smaller family owned businesses in the countryside,” says Wellsteed. “The industry as a whole needs private equity international

to communicate better about the benefits of transformational and growth focused private equity, both in a domestic and in an international context.” Despite this, attractive deals can be found. Healthcare, retail and mobile technology are some sectors providing attractive opportunities, according to Megumi Kiyozuka, a managing director at CLSA Capital Partners in Tokyo. Businesses that cater to social trends, such as value-for-money apparel retailers which benefit from higher levels of low income earners in Japan, are particularly attractive, he says. Appetite for exposure to Japan remains lukewarm. Japan-focused funds raised just $2.6 billion last year, according to PEI Research & Analytics. Sources say LPs’ concerns include yen-dollar fluctuations, whether Abenomics will succeed in revitalising the economy, and Japan’s declining population. “A lot of international LPs are not very excited about Japanese private equity, but this bitter taste comes from a few concentrated experiences and isn’t representative of all the funds on the market,” says Charles Wan, a vice-president who focuses on fundraising at Atlantic Pacific in Hong Kong. “If you take a broad-based index approach to the returns, you’d find that Japanese private equity has delivered reasonable returns quite consistently, but it does take time.” Takuya Sato, secretary-general of the Japan Private Equity Association, agrees. “It might take more time and more good successful examples of private equity buyout divestitures before we have the same deal frequencies in Japan as in the US or European markets,” Sato says. And with just $2.6 billion in private equity deals last year, it seems the only direction deal volume in Japan can go this year is up. n april 2016

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NEWS IN BRIEF

ROUND-UP

Moves, mergers and fundraisings Some of the biggest stories in Japan’s private equity industry, as reported on privateequityinternational.com

J-STAR MAKES TENDER OFFER FOR AISEI PHARMACY

Japanese private equity firm J-STAR announced a ¥12.7 billion ($110 million; €98.4 million) tender offer to acquire Japanese chemist chain Aisei Pharmacy in February. J-STAR is aiming to buy the retail chain through a special purpose company, Aisei Holdings, wholly managed and operated by its second buyout vehicle, the 2012-vintage J-STAR No. 2 Investment Limited Partnership. If successful, Aisei would be the ninth portfolio company held by J-STAR No. 2. Established in 2000, it has over 300 pharmacies in Japan. The deal would be the first time J-STAR has executed a tender offer to take a company private. GPIF BAN ON DIRECT INVESTING

¥12.7bn

Offer by private equity firm J-STAR for chemist chain Aisei Pharmacy

¥119bn

Total raised by The Carlyle Group for its third dedicated Japanese buyout fund, surpassing its target of ¥100bn

leave the ban on direct stock investment in place. Welfare minister Yasuhisa Shiozaki said improved governance was important for the GPIF, which manages public pension funds in Japan, to win trust from savers. Prime Minister Shinzo Abe has said that pension benefits could shrink if the GPIF makes losses on its investments. ADVANTAGE PARTNERS ACQUIRES ISHII SPORTS

Japanese private equity firm Advantage Partners acquired Tokyo-based sports equipment retailer Ishii Sports for an undisclosed amount last month. Advantage is currently investing out of a $200 million bridge fund that closed in 2013. It is also reportedly raising a new flagship fund and a $400 million fund for investments outside Japan. Founded in 1992, the firm focuses on acquisitions, growth capital, privatisation and turnaround opportunities in Japan, China and South Korean markets. Its investment portfolio lists just under 50 companies.

IN PUBLIC EQUITIES UPHELD

Japan’s ruling party has voted to maintain a ban on direct stock investment by the Government Pension Investment Fund (GPIF) amid ongoing turmoil in the markets. The welfare ministry is to announce a bill of reforms to GPIF that would introduce an executive committee and reduce the power of the fund’s president. The bill would

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JAPAN POST BANK REPLACES PE HEAD

Japan Post Bank appointed Hideya Sadanaga, former head of product development at Nissay Asset Management, as its new head of private equity in February. Sadanaga, who was previously general manager of global product at Nissay and a manager at Nippon private equity international

Life Insurance Company, replaces Tokihiko Shimizu who moved to a newly created division focused on real estate investing, according to the bank. Shimizu was appointed to the private equity role in October to look for opportunities and higher returns in the asset class. Before joining Japan Post, Shimizu was at the ministry of health and welfare where he led the Government Pension Investment Fund’s drive to diversify its allocation of money into alternative assets including private equity and property. ADVANTAGE FOUNDER PREDICTS GROWTH YEAR

The co-founder of Japanese private equity firm Advantage Partners said 2016 would be another growth year for the industry in Japan, with both the variety and number of deals expected to increase. Taisuke Sasanuma told Private Equity International in January that businesses were stripping back to their core interests, which was expected to boost merger and acquisition activity. “Japan’s big enterprises are now becoming more proactive in restructuring their business portfolio in order to respond to requests from global investors that say, ‘You Japanese companies could pay a little bit more attention to shareholders’ value or return equity.’” According to Bain & Company’s 2015 private equity report for Japan, making new acquisitions will remain the number one priority for firms as april 2016

NEWS IN BRIEF

sellers warm to the private equity value proposition.

and Mutual Aid Corporation for the Private Schools of Japan.

PENSIONS TO INCREASE PE

CARLYLE BEATS ¥100BN TARGET

ALLOCATION

FOR THIRD BUYOUT FUND

Japanese corporate pension funds are expected to increase their allocation to private equity as funds invest in less liquid assets yielding higher returns, said Akira Kunikyo, a Tokyo-based global market strategist at JPMorgan Asset Management. “Alternatives are now the second largest growing asset class for Japanese corporate pension funds and this trend will continue,” Kunikyo said, citing the JPMorgan Asset Management Japan Corporate Pension Funds Survey Report 2015. During 2013, corporate pension allocations to alternatives grew from 11.8 per cent to 12.5 per cent, according to the report, which consulted about 100 domestic pension funds. As a percentage of overall asset allocations, private equity increased from 2.3 percent to 3.1 percent from the beginning of 2013 to the beginning of 2014.

The Carlyle Group raised ¥119.5 billion ($988 million; €872 million) for its third dedicated Japanese buyout fund, Carlyle Japan Partners III (CJP III), surpassing its target of ¥100 billion. CJP III will focus on mid-cap companies across a range of sectors and industries in Japan, taking majority or significant minority stakes over a three- to five-year investment cycle. The fund has already made four investments.

J-STAR NAMED FIRM OF THE YEAR IN PEI AWARDS

J-STAR continued its hold on the number one spot in Private Equity International’s firm of the year category in Japan. The Tokyo-based firm had a busy 2015, making three acquisitions in under six months from its J-STAR No. 2 Investment Limited Partnership, a ¥20 billion ($162 million; €149 million) vehicle. a pr i l 2016

Entering one of the world’s most robust and stable insurance sectors, J-STAR acquired insurer Nihon Hoken Service in May 2015 and completed an add-on acquisition of industry peer Sokisha Corporation a few months later. The small-cap firm’s third investment was in December, acquiring energy saving solutions provider ESCO. PENSIONS GIANT OPENS ALTERNATIVES ACCOUNT

The Federation of National Public Service Personnel Mutual Aid Associations, one of Japan’s ‘big four’ pension funds, is preparing to invest in alternative asset classes for the first time. According to Yukihiko Ito, managing director at Asterisk, a placement agent based in Tokyo, the decision was anticipated and he expected the other two ‘big four’ pension managers to follow suit: Pension Fund Association for Local Government Officials and the Promotion t he japan s pecial 2 0 1 6

Stars in their eyes: J-STAR’s Gregory Hara, chief executive, and Kenichi Harada, founding partner

JAPANESE PENSIONS TO INVEST IN RE SECONDARIES

The market could be about to be hit by a boom from Japanese institutional investors buying secondaries real estate fund stakes, according to real estate firm CBRE. Japanese pensions, including the Government Pension Investment Fund, may allocate about $1.8 billion to global real estate investment in the coming years, CBRE said. Some of this could hit the secondaries market within about 12 to 18 months, according to an executive at the firm. “The bigger guys are probably going to do more primary, but the smaller ones are going to invest in secondaries because they simply can’t access the market in any other way,” Mark Evans, head of Europe, Middle East and Africa equity placement at CBRE in London, said. n

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INDIA ROUNDTABLE ANT CAPITAL PARTNERS KEYNOTE INTERVIEW: ACTIS

SME CHAMPION

Steering ‘transformational’ growth Amid the subdued economic backdrop shadowing much of Japanese corporate activity, Ant Capital Partners is shining the light on an investment bright spot

Sluggish earnings, capped profits and a GDP growth rate of just 1.3 percent forecast by the World Bank for 2016, would sound loud alarm bells for most investors looking at Japan. Abenomics, the programme of aggressive monetary policy, fiscal stimulus and a regulatory reform introduced by Prime Minister Shinzo Abe has yet to fire up the economy. A volatile stock market, currency lows and headwinds from slowing Chinese growth just darken the picture. But for private equity managers there is shining opportunity. Local firms such as Tokyo-based Ant Capital Partners are no strangers to economic peaks and troughs. The operational buyout firm, which also has a strong secondaries business, has ploughed a rich furrow investing in Japanese small and medium-sized enterprises (SMEs), which account for over 80 percent of the domestic corporate universe. Ant Capital has operated in the local market since 2000, successfully selecting buyout opportunities in the small to midcap space. Its assets under management now stand at $1.2 billion. The firm is currently investing from the fourth flagship fund in its “Catalyzer” series, a ¥13.15 billion ($119 million; €106 million) vehicle that closed in 2010. Among Fund IV’s investments are 140-year-old shoe manufacturer MoonStar Company and health snack company Sokan, as well as Shizuoka-based building material retailer Maruhon, B2B hotel reservation

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website Appleworld and Tokyo-based rental guarantor company Casa. Its buyout investment mandate is clear and tested. It targets undermanaged, overlooked and underinvested SMEs with an enterprise value of $20 million-$250 million with stable cashflows in sectors including consumer retail, light manufacturing and business services. While economists worry about an aging Japanese population, Ant Capital says it can help steer generational transition at investee companies. Where other investors express concern about conservative consumption habits, the firm sees huge opportunity to boost well-loved brands and proven business models through operational improvements. VALUE CREATION

There are only a handful of active managers in the same space in Japan, says Ryosuke Iinuma, Ant Capital Partners president and head of its private equity team. The firm’s response is to differentiate itself by not simply investing, forecasting and

We only invest in what we know and have industry experience in John Cheuck private equity international

monitoring its portfolio companies, but by rolling up its sleeves and instigating operational transformation. “Most Japanese SMEs have a business owner at the top,” notes Iinuma. “They are super salesmen and draw in customers, but these companies are undermanaged. They don’t have KPI [key performance indicator] based management and they don’t know how or have any experience of expanding their business in new and creative ways, either domestically or overseas.” Ant Capital’s credits its success to the operational strength of its team of 16 investment professionals, backed up by veteran private equity experience. Four of its existing partnership team have worked together since the firm launched its first vehicle in 2001. “Most of our team have an operational background – have run their own businesses, divisions in a corporation or have provided management consulting services. Only a few have a financial engineering or investment banking background,” says Hong Kong-based Ant Global Partners managing partner John Cheuck. “We only invest in what we know and have industry experience in.” The firm deploys at least one executive fulltime into a portfolio company, with additional support from others on a flexible basis.The team focuses on creating efficiencies to boost EBITDA, rather than slashing costs and employees, and is moderate with leverage. As a local player, it is also culturally sensitive to issues triggered by change at management level. “Cutting costs and firing people is easy,” Iinuma says, “but you have to get into the business to see the inefficiencies, such as inadequate use of IT, procurement, april 2016

ROUNDTABLE KEYNOTE INTERVIEW: ANT INDIA CAPITAL PARTNERS

accounting systems, decentralised sales or purchasing, top down management not bottom up, lack of brand focus, or more brands and products than a company needs.” Its active management approach takes time and caps the number of deals undertaken, but it yields results. One of the firm’s more recent exits was of its stake in Muginoho Holdings, a food manufacturer and retailer with franchises such as Beard Papa’s cream puff kiosks. The company’s EBITDA stood at ¥401 million in 2006 prior to Ant Capital’s investment. Following the firm’s restructuring of its business model, the development of new businesses lines and products, as well as investment in quality management, including hygiene control, and the construction of new factories, the EBITDA figure more than doubled to ¥945 million in 2013, the year the firm exited the business to Tokyolisted food manufacturer Nagatanien Holdings Company. Ant Capital maintains the pursuit of alpha has been robust across its four buyout funds to date. Fully realised buyout transactions from the firm’s Catalyzer series of funds have generated total EBITDA growth of ¥32.6 Billion with an average enterprise value/EBITDA multiple of 7.9x on exit, up from 5.6x on entry. OVERSEAS EXPANSION

Ant Capital was also able to bring strategic value to Muginoho by supporting its overseas expansion. Identifying companies with the potential to enter faster growing international markets is a key plank of the firm’s strategy. It marks it out from its peers. Its cross border realisations to Chinese buyers were eye-catching and a rarity ›› in the Japanese market. a pr i l 2016

SOKAN: A TASTY ACQUISITION

Ant Capital Partner’s investment in Tochigi-based seaweed snackmaker Sokan in November 2014 was a classic transaction for the firm. The company’s owner and founder was a brilliant salesman who controlled the business, relying only on his wife and best friend. The company had accrued about 90 percent market share, but had hit a growth ceiling. It was ripe for reorganisation and the introduction of new processes to grow it to the next stage. “They had never had a board meeting in its history, the owner decided everything,” says Ant Capital president and managing partner Sokan: new processes installed Ryosuke Iinuma. The deal was sourced through Nomura Securities, which Iinuma notes, recognised that Ant Capital was strong in investing in businesses on the brink of leadership succession and in need of hands on post-investment attention. “The owner wanted someone he could work with to help the company grow and keep a 30 percent shareholding,” says Ant Global Partners managing partner John Cheuck. The firm installed three of its own executives. It has introduced new processes and policies, including board and management meetings and key performance indicators, and supported hiring new staff. The company had not analysed its local market or its product position prior to Ant Capital’s investment, and over the past year the team has reviewed its approach to sales and procurement. The existing management “were very good at development but not at research”, notes Cheuck of the company’s ability to make a new product on time and on cost but with no supporting data. Crucially, Ant Capital’s involvement has helped the company secure financing for a new factory that is scheduled to open this year. And it is helping it expand overseas for the first time by establishing a partnership with a Thai seaweed snack maker that has a similar story. Sokan has already begun promotional distribution of its partner’s Thai flavours into the Japanese market and is working on Thai flavours of its own for expansion into Asian markets. n

t he japan s pecial 2 0 1 6

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KEYNOTE INTERVIEW: ANT CAPITAL PARTNERS

MoonStar: Ant Capital refreshed the brand message

Ant Capital Partners president and managing partner, Ryosuke Iinuma, who heads its private equity investment team, knew MoonStar well.The 140-year-old shoe manufacturer based in his home town of Fukuoka in Kyushu was once run by his best friend’s father. “There’s a family connection,” Iinuma says, highlighting the reach of the firm’s business network. However, the path to investment was not without obstacles. When the firm approached the company 12 years ago, the board was resistant to its proposed changes. “Management needs to support a change in culture,” Iinuma notes, adding that when resistant members left, the firm was able to acquire a significant stake in MoonStar. The company manufactures popular branded footwear for children and adults with a traditional focus on comfort and quality. They also provide OEM and contract manufacturing services for several well-known global brands. Since the management buyout in October 2013, the “transformation” team, led fulltime by Ant Capital managing partner Naoki Ito, has focused on improving its marketing strategy, boosting its distribution channels, developing new business lines and devising a global business development plan. For the first time, the shoemaker has analysed which of its products were profitable. The company, which has 900 employees, has 18 factories outside Japan, and two inside. It discovered that its domestic production lines were more profitable with the consequence that it is now seeking to increase its local manufacturing base. With Ant Capital’s help and guidance, MoonStar has also addressed conflict between its stable of brands, for which it recruited an Italian brand strategist from the footwear industry, its first non-Japanese executive, to support their overseas branding efforts. “He took three months for [Ant Capital] to recruit and six months for the company to accept,” says Ant Global Partners managing partner John Cheuck. It has also refreshed its brand message, moving away from its outdated association with comfort shoes. As a result, over the past two years, revenues have grown from $350 million to $400 million and EBITDA from $8 million to an estimated $12 million. “We are not experts in shoes but we have a lot of experience running businesses and simplifying their processes,” says Cheuck. n

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In 2010, the firm sold a 75 percent stake in Honma Golf, a manufacturer and retailer of golf equipment, to a Shanghaibased conglomerate Marlion Holdings. In the same year, the firm sold packaging company Tri-Wall Japan to China’s CITIC Capital as part of its strategy to accelerate its Asian expansion. Honma Golf, which the firm acquired in 2006 and Tri-Wall, bought in 2005, were selected on the basis they occupied interesting niches, offered strong brands and technology, but crucially, displayed significant scope to grow outside Japan, Cheuck says. It is not easy. Japanese business owners can also be hesitant to sell their company to overseas buyers, particularly in China. “There is an emotional component,” Cheuck says, as well as fear the transaction will fail. Iinuma adds: “We understand that employees have such a feeling.With Honma, in order to integrate the business and culture, we installed our team member as its Japanese CEO and that offered them some comfort.” Typically, the companies are exited to strategic partners, which have included Japanese blue-chips Toyota Motor, watchmaker Citizen Holdings, and the trading arm of All Nippon Airways. “Employees are happy to be owned by a big name and this reputation brings new deals [to us] in the same segment,” Iinuma says. Honma followed its investment in second-hand retailer GOLF Partners, while the firm’s investment in baked goods company Aunt Stella heralded its investment in Muginoho. With an immediate improvement in Japan’s economic environment unlikely, the stage appears set for Ant Capital to continue its value creation strategy of identifying and transforming companies in need of an operational upgrade and a guide to international markets. n ››

MOONSTAR: IF THE SHOE FITS

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DEAL MECHANIC

BUSHU PHARMACEUTICALS

Growth-enhancing medicine DEAL MECHANIC UNDER THE BONNET OF A RECENT DEAL

Tokio Marine Capital capitalised on a series of opportunities to build Bushu Pharmaceuticals into Japan’s number one drug contract manufacturing company and a top 10 global player. Nathan Williams reports

¥1.6bn

EBITDA at time of investment

¥6.5bn EBITDA at time of exit

c.30%

Increase in number of corporate customers during investment period

¥20bn Acquisition price

¥60bn

Sale price (bought by Baring Private Equity Asia)

14

The business of developing and manufacturing drugs is one that had captured the interest of Tokio Marine Capital (TMC) for some time. “We had been looking at the exponential growth of the CMO [contract manufacturing organisation] market in the United States and how private equity investment in that market functioned in the country,” says Koji Sasaki, managing partner and president of the private equity arm of Japan’s Tokio Marine and Nichido Fire Insurance. Previously, Japanese law had required local drug licence holders to conduct part or all of the drug manufacturing process in-house, but an amendment to the law in 2005 to allow full outsourcing brought Japan into line with Europe and the US, and in turn paved the way for growth in the CMO industry. When Sionogi Group, one of Japan’s largest new drug manufacturing companies, decided to sell non-core subsidiary Bushu Pharmaceuticals,TMC’s track record as the owner of generic drugs manufacturer Showa Yakuhin Kako and healthcare insurance claim analysis business Japan Medical Data Centre meant it was perfectly positioned to triumph in a competitive process. The firm acquired the business in a ¥20 billion ($179 million; €159 million) deal, with an equal debt and equity split, in 2010, in a country where “private equity investment in the pharmaceuticals industry is not so common”.

1

CHANGING A MINDSET

While Bushu was the second biggest contract manufacturing business in Japan, on acquisition it was a long way from being a global player. According to Sasaki, it was operating primarily as a “CMO factory” and suffering from being a wholly-owned subsidiary of Shionogi. private equity international

“All of the senior managers at Bushu had been seconded from the parent company. [Because of this] they were weak in the mindset of entrepreneurs, so we introduced a new mindset. We told them, ‘You are no longer one part of a bigger company – you are an independent company.’” Being a subsidiary of a parent drug manufacturer had also reduced the incentive for the company to generate its own client leads and stifled Bushu when it came to signing up new drug developer customers, Sasaki adds. “As a wholly-owned subsidiary Bushu didn’t need to make a pitch to new clients – it could rely on existing customers, including Shionogi customers, coming to them. And potential new drug developer customers were reluctant to contract Bushu for manufacturing because they were owned by a [rival] drug developer. And Bushu itself was reluctant to make a pitch to Japanese competitors.There were concerns regarding conflicts of interest.”

2

SCALING UP SALES AND MARKETING

With efforts to grow its client base being stifled, TMC identified sales and marketing as critical areas to spur growth. “When we bought Bushu there were only four people in the sales team and this is obviously too small to make worldwide pitches – it’s even too small to make pitches effectively domestically” says Sasaki. TMC headhunted an experienced manager from Janssen Pharma and asked him to take charge of a new strategic planning division, put together a sales team and develop relationships with pharmaceuticals companies globally. “Bushu already had a relationship with the big US pharma companies like Pfizer, but we needed to strengthen this april 2016

DEAL MECHANIC

of the Misato plant, Sasaki says a process of education was required to integrate the business smoothly. The deal allowed Bushu to increase tablet production from 3.5 billion to 10 billion and doubled the number of Bushu employees.

5

FROM COST TO PROFIT CENTRE

Drug contract manufacturing: moving from cost centre to profit generator

relationship and develop relationships with more big European and UK pharmaceutical companies.” By the time of TMC’s sale of Bushu, the sales team was 10 strong.

3

PRODUCTIVITY BOOST

TMC also identified productivity as a stumbling block to increased growth and hired a specialist consultancy, with whom TMC had worked during its ownership of drug developer Showa Yakuhin Kako, to bolster productivity. Sasaki says that the specialist team focused on shortening production lead time, resulting in increased productivity of around 30 percent. New clients and improved productivity put Bushu on a path to stronger growth, but the firm’s success created a new, if welcome, problem – a shortage of capacity. “We needed a new plant and the most efficient way to do this was to acquire an existing plant,” says Sasaki.

4

EXPANDING PRODUCTION

In November 2013 TMC acquired a production plant from pharmaceutical company Eisai for a

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price understood to be more than $100 million, paid for through the refinancing of the original leveraged loans TMC had used to buy Bushu. “Bushu had strong cashflow by this point, debt was decreasing and we had enough capacity to refinance the existing debt and use it to finance the acquisition,” says Sasaki. While an acquisition was part of the original strategy, Sasaki says they could not foresee “which company would be out there” when they were ready to buy. TMC hired investment banks to scout for potential purchases and the sale of the plant proved beneficial for both parties given the broader trends playing out in Japan’s pharmaceutical industry. “At Bushu we were running short of capacity and needed a new production plant. And from Eisai’s point of view the production of new drugs is declining and this creates over-capacity (and a willingness to sell production facilities).The whole industry is having a headache with how to utilise existing capacity.” Because manufacturing was a new concept for management and employees t he japan s pecial 2 0 1 6

Under TMC, Bushu became Japan’s number one CMO company. Sales grew from ¥10 billion to ¥26 billion, moving the company into the top 10 drug contract manufacturers globally by sales, with the number of corporate customers growing by about 30 percent in the five years after the acquisition. EBITDA increased from ¥1.6 billion at acquisition to ¥6.5 billion at exit. Sasaki says that by the time TMC was ready to sell, Bushu’s growth story meant it had a field of suitors, both in Japan and globally. TMC and Bushu company management “hoped to find a buyer that would help strengthen its future business and, in particular, global expansion”. TMC hired Nomura to run a competitive auction process, with Baring Private Equity Asia paying ¥60 billion for the company, securing TMC a healthy multiple on its ¥20 billion investment. Sasaki adds that Bushu Pharmaceuticals’ senior management are eyeing a flotation of the business in the future and this influenced the choice of Baring as the preferred bidders, given the firm’s history of successful portfolio company IPOs. Sasaki believes that TMC’s ownership of Bushu has helped to shift the narrative around drug manufacturing in Japan, which was previously seen “as purely a cost to some pharmaceutical companies. With Bushu we showed it was possible to change a cost into a profit centre – I think that’s the key story”. n

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JAPAN ROUNDTABLE

Unlocking value

From left: Ryosuke Iinuma, Ant Capital Partners; Taisuke Sasanuma, Advantage Partners; Megumi Kiyozuka, CLSA Capital Partners (Japan); Koji Sasaki, Tokio Marine Capital; Yasufumi Hirao, Alternative Investment Capital

The Japanese corporate landscape is an enticing prospect for private equity firms, particularly those in the mid-market. Carmela Mendoza speaks to five local industry veterans about the challenges and rewards of investing in the country

Doubts may linger over the success of Prime Minister Shinzo Abe’s economic growth programme, but the Japanese private equity industry is finding reasons to be optimistic. The latest data from Japan’s Cabinet Office show that the country’s economy is shrinking less quickly than previously thought. Figures for the last quarter of 2015 show it contracted at an annualised pace of 1.1 percent from October to December 2015, down from 1.4 percent in the previous quarter. The numbers also presented a slight upward revision for domestic demand. Among the five private equity practitioners that gathered for Private Equity International’s Japan roundtable discussion,

expectations for 2016 ran high. There are signs that corporate divestitures are starting to drive increased dealflow, entry valuations are looking increasingly attractive and the corporate culture is slowly warming to private equity ownership. Furthermore, the world’s largest pension fund, the Government Pension Investment Fund, is sitting on a vast undeployed alternatives allocation that could find its way into private equity. PEI: What is the Japanese private equity story to date? Yasufumi Hirao: Private equity investments

account for only 2-3 percent of total M&A transactions in Japan. In terms of size, more

SPONSORED BY ADVANTAGE PARTNERS, ANT CAPITAL PARTNERS, CLSA CAPITAL PARTNERS AND TOKIO MARINE CAPITAL

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private equity international

april 2016

JAPAN ROUNDTABLE

than half are below ¥10 billion ($87 million; €79 million), which would be considered small-cap transactions. In addition, more than half of transactions nowadays are business succession and corporate carveout deals, compared to the early 2000s when turnaround transactions were a large portion of total deals. Megumi Kiyozuka: I agree with Hirao-san

that the private equity market in Japan is heavily skewed to small to mid-cap companies. According to data from the Japan Buyout Research Institute, about 60 percent of deals in Japanese private equity history were $50 million or less in terms of enterprise value; the next 30 percent were between $50 million-$300 million; and 10 percent or less were over $300 million.

ageing founders do not have any successor and contact us directly for a sale; another is partnership investment alongside family members, where sons and daughters who inherit the business ask us to recapitalise the company to further its growth. In Japan, this kind of deal happens more often because founders are generally more reluctant to sell the company due to a strong sense of attachment. MK: Japan’s maturing consumer market has

I wouldn’t be surprised to see deal sizes in Japan increasing 10 or 20 times in the near future, but this will only happen if corporate carve-outs become the norm Yasufumi Hirao

generated some trends which we are very interested in. A good example is e-commerce. Sales numbers alone are not ››

Through our almost 20-year history we have recognised that the sweet spot of Japanese private equity is in the small to mid-cap market. It’s not a coincidence that all of us here focus on that space. Ryosuke Iinuma:

I don’t feel Japanese private equity is getting to be more competitive; I think the situation has remained the same for the last 10 years. But I would say that the quality of the deals has been getting better. Many of them are really bankable; management group capabilities are quite strong; and most of the deals are in the attractive sectors of the market. It’s a qualitative change.

Taisuke Sasanuma:

Which sectors are providing the most interesting opportunities for private equity and why? Koji Sasaki: The most interesting opportunities today come from family business successions. There are two types: one is traditional business succession where

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t he japan s pecial 2 0 1 6

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JAPAN ROUNDTABLE

growing, but there has been a real shift from store sales to e-commerce. If there is a good company riding on this trend, we would be very interested. Another example is manufacturing, such as for speciality store retailers of private brand apparel for [the likes of] Gap, Uniqlo, H&M and Zara. ››

TS: I have observed that the expected func-

tion of private equity and venture capital seems to be getting closer. We have seen several deals which size-wise and growthwise seem to be in the infancy stages, but the founder is interested to sell and give up ownership in order to get operational or strategic help from us. What happens is that we take a majority stake, work together to grow the company and let them absorb the know-how from a private equity firm.

I think the leveraged buyout market in Japan is probably the best in the world now. It’s a very positive environment for investing and I haven’t observed any negative impact so far Megumi Kiyozuka

is semi-distressed situations. Toshiba Corporation – while it is not in a distressed situation – had been under a lot of pressure to divest its crown jewel Toshiba Medical; that’s an example that gives a more realistic view of corporate carve-outs in Japan. YH: As

Kiyozuka-san mentioned, we have high hopes and high expectations for the increasing number of corporate carve-outs. But while the number of transactions is increasing, it is still very limited. Another important thing to note is these corporate carve-outs still seem largely driven by events – and not by a strategic focus on core assets – as in recent cases with electronics companies. Looking back at

Has volatility leading to deflation had an impact on the operating environment? KS: Stock prices falling sharply may affect

exit opportunities.We haven’t exited a business since last year, but looking ahead our strategy of exiting through initial public offering may be somewhat affected if market volatility continues. I think the leveraged buyout market in Japan is probably the best in the world now. Some figures we are seeing include five years tenor, 5x EBITDA and less than 150 basis points. It’s a very positive environment for investing and I haven’t observed any negative impact so far. MK:

Are there opportunities for GPs from corporate carve-outs? MK: I have been talking to some foreign LPs

recently and I noticed high hopes among them that recent reforms in Japan’s corporate governance code would increase the opportunity for carve-out transactions. That may be true, but we have yet to see it. I think the more realistic and immediate driver for corporate disposals

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JAPAN ROUNDTABLE

the number of private equity deals, there are at most about ¥400 billon-¥500 billion worth of transactions per year, which is less than 10 basis points of Japan’s total gross domestic product. If you look at the US and Europe, private equity transactions equate to around 1-2 percent of the total economy. I wouldn’t be surprised to see deal sizes in Japan increasing 10 or 20 times in the near future, but this will only happen if corporate carve-outs become the norm. Is there a better understanding and acceptance of private equity by company owners than previously? MK: The situation is improving, and I give

credit to those people who act as intermediaries like investment banks. I think the level of information given to the seller has improved a lot. Sellers are better informed of the advantages and disadvantages of each potential buyer, and can therefore make rational decisions. Previously they hated seeing us private equity firms, but that negative perception is decreasing. Nowadays, private equity firms have a better chance of at least meeting the sellers and presenting our proposals. KS: Yes, absolutely.We find it very interest-

ing that business successions or partnership investments with family members are increasing. One of the reasons behind this is that company owners have a better understanding of private equity and see our role as integral to the growth of their companies.Word-of-mouth is also very important; our most recent acquisition, gift catalogue business Yamato, was sourced directly from the president of our other portfolio company, furniture and kitchenware retailer Asplund. RI: We actually do not hear about any hesi-

tation or allergic reaction to buyout funds from the business owners we deal with. They acknowledge private equity firms as a pr i l 2016

“good friends” because we improve management and apply KPI-based management. A positive reputation is a form of deal sourcing for us. For example, we invested in cookie company Aunt Stella in 2005 and this led us to Muginoho Holdings in 2006, which also sells sweets and owns the cream puff chain Beard Papa. TS: It used to be that large enterprises and

top management feared that their employees would be unhappy if they sell to private equity firms. In my experience, the opposite is true: they are much happier when they are not held captive by weak enterprises. Once a private equity firm comes in, we really maximise the potential of those ›› t he japan s pecial 2 0 1 6

Every time I visited foreign LPs during our fundraising period in 2011-12, they only had three words for the Japanese private equity market. ‘No.’ ‘Why?’ ‘Disappointed.’ I don’t hear that anymore Ryosuke Iinuma

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JAPAN ROUNDTABLE

‘MADE IN JAPAN’ GOES ABROAD

As domestic growth becomes harder to achieve against the backdrop of Japan’s declining consumption and ageing population, private equity firms have increasingly looked to overseas markets to create value for their portfolio companies. Data from Japan’s Small and Medium Enterprise Agency show that overseas expansion by Japanese small to mediumsized enterprises (SMEs) has been on the rise in the last 10 years. Specifically, enterprises in the service industry and information and communications industry have shifted their sales and profits abroad. Japanese companies have gone as far as Mexico and many are now rapidly tapping into the growth engine of fast-growing Asian economies such as Vietnam, Indonesia and the Philippines. In addition, Japan’s cultural appeal – minimalist designs, unconventional and innovative ideas and quality workmanship – has been attracting considerable interest globally. Ant Capital representative director and president Ryosuke Iinuma says: “The so-called ‘made in Japan’ brand has grown in popularity in global markets; consumer businesses including food, cosmetics, clothing and electrical appliances have largely benefited from this.” Another serious driver for SMEs’ push for global expansion in recent years has been the support from local and regional banks. One example is Mizuho Bank, which supports the overseas expansion of Japanese SMEs through business matching in addition to financing. Banks are also playing an important role in increasing private equity awareness and acceptance among local businesses, says Koji Sasaki, president and managing partner of Tokio Marine Capital. “In the past few years, numerous family business succession issues happened and

20

Game changer: Japanese technology and design has global appeal

The so-called ‘made in Japan’ brand has grown in popularity in global markets; consumer businesses including food, cosmetics, clothing and electrical appliances have largely benefited from this Ryosuke Iinuma

private equity international

the founders turned to banks and financial institutions for help.While they can advise on financing, private equity firms were seen as a more attractive option as companies can capitalise on the know-how of firms in terms of operational management, tax and legal issues, labour management, as well as business succession planning. This is unique to Japan.” Ramping up focus on international expansion isn’t without challenges, especially for local SMEs who may often face obstacles. Firms like Ant Capital and Tokio Marine are, however, not deterred and see this as a valuable opportunity for them to go in as a majority shareholder and support the growth of the business. The depreciation of the yen has also had an impact on SMEs expanding overseas. “Most of the SMEs we invest in import materials, parts or outsource their business processes to other parts of Asia, and they are seriously affected by the depreciation of our currency,” Iinuma says. “Unfortunately, they do not have an overseas market to sell their products and that means they need some hedge to find potential markets to sell their products abroad – this is where we step in to expand their network and to support them.”

april 2016

JAPAN ROUNDTABLE

Foreign LPs – who had very high hopes in the 2000s and subsequently left Japan disappointed – have started to come back. One reason is that, relative to China and India, and in the context of current global volatility, Japan is more stable and attractive. A second reason is political leadership under Prime Minister Abe’s administration. Lastly, GPs have shown strong track records through the years and have generated good returns. RI: Every time I visited foreign LPs during

our fundraising period in 2011 to 2012, they only had three words for the Japanese private equity market. “No.” “Why?” “Disappointed.” I don’t hear those three words anymore. TS: Foreign investors might be concerned about foreign exchange. They’re becoming a little bit more sceptical about the real effect of the third arrow [structural reforms] of Abenomics; this is the impression I’m getting from them. It has changed quite a bit in the past years. The first and second arrows – fiscal stimulus and monetary easing – worked well, so at that time global investors had high expectations for Japan’s economy.

subsidiaries, work together to pursue maximum growth opportunities and improve profitability. How is the fundraising environment in Japan today? MK: The fundraising environment is much

improved compared to the previous cycle. As far as the domestic situation is concerned, commercial banks (which were negatively affected by the Volcker rule in the previous cycle), are coming back. Regional banks are becoming more interested in private equity and on top of that, corporate pensions have started allocating to alternatives, meaning domestic LPs are now much more aggressive. a pr i l 2016

It used to be that large enterprises and top management feared that their employees would be unhappy if they sell to private equity firms. In my experience, the opposite is true Taisuke Sasanuma

t he japan s pecial 2 0 1 6

How is the GP-LP relationship in Japan?

Banks and financial institutions are the second largest group of LPs in Japan after corporate investors. I have observed that Japanese banks are committing more capital to private equity firms, not only for treasury purposes but also for business development. In Japan, ageing business owners who face succession issues often consult local banks for solutions. When banks do not have sufficient solutions internally, they approach GPs to provide buyout solutions. From our viewpoint, this is a unique route for deal sourcing. I think this GP-LP co-operation is mutually ›› beneficial. KS:

21

JAPAN ROUNDTABLE

Business successions or partnership investments with family members are increasing [because] company owners have a better understanding of private equity and see our role as integral to the growth of their companies Koji Sasaki

NO ROOM FOR CO-INVESTMENT

Japanese private equity seems to be unaffected by limited partners’ growing appetite for co-investments. Local general partners say the abundance of deals in the small to mid-cap bracket and comparative lack of larger buyout deals insulates them from LPs’ thirst for co-investments. “Outside of Japan, LPs now are trying to really enjoy each ride after paying the entrance fee [commitment to funds] and entering Disneyland. I’m sorry to say that this isn’t happening in Japan.The deal sizes are not big enough to provide frequent co-investment opportunities for LPs,” says Taisuke Sasanuma, representative partner at Japanese mid-market firm Advantage Partners. Yasufumi Hirao, president and chief executive officer of fund of funds Alternative Investment Capital, agrees: “One reason why co-investments are not prevalent in Japan is that the deals are mostly below $50 million, so funds don’t need a co-investor.”

22

Apart from the relatively small deal size, deal sourcing is also a challenge. Japanese companies are slow to sell their businesses, limiting the size of the marketplace for private equity investment. While the country teems with small to medium-sized enterprises with world-class technology and the need to grow, cultural factors and massive conglomerates still thwart transactions. CLSA Capital’s managing partner Megumi Kiyozuka says global LPs do seek to impose co-investment rights alongside fund commitments. “When I receive a commitment from a foreign investor, especially funds of funds, I think co-investment rights are almost a must, a standard requirement,” he says. “When it comes to Japanese co-investments, it is not that easy for them because of the language barrier, the quick turnaround of documents and so forth. It’s getting common and it’s becoming the preferred practice globally, but in Japan it’s not that easy to do.”

private equity international

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JAPAN ROUNDTABLE

MEET THE ROUNDTABLE

YASUFUMI HIRAO serves as the president and chief executive officer of fund of funds manager Alternative Investment Capital. He has nearly 20 years of global private equity experience in direct investments and fund investments. Hirao previously managed the private equity portfolio of Mitsubishi Corporation, which owns around half of AIC. He was a former director of investments at MC Capital Europe. RYOSUKE IINUMA is the representative director and president of Ant Capital Partners. He joined the firm in 2001 and has played a key role in the organisation’s development. Iinuma leads a team of about 10 investment professionals and focuses on corporate management and business strategy. He has served on the board of several companies, including Checker Motors, Golf Partner, Willplus Holdings, VarioSecure and Apple World. MEGUMI KIYOZUKA is the managing director (head of Japan) of CLSA Capital Partners Japan. Before joining the firm in 2006, he was a director at the Carlyle Group Tokyo, where he led buyouts in the consumer, healthcare and industrial

›› RI: My impression is that the number of

foreign LPs who have started to study the Japanese private equity market is gradually increasing. Last week we had foreign LPs visiting us and they said they would allocate some budget to invest into Japanese GPs; this would be a first time for them and they required some assistance understanding the Japanese private equity market. The Institutional Limited Partners Association and even the United Nations are providing [reporting] requirements that are widely shared among LPs. In one sense this is a cost for us, but it is also a benefit.We know these guidelines can really improve the quality of our operations, our own brand, as well as that of our portfolio TS:

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sectors. Before Carlyle, he worked with the Bank of TokyoMitsubishi UFJ where he gained over 10 years of experience in M&A and syndicate lending across various countries in the region. KOJI SASAKI is the president and managing partner of Tokio Marine Capital and leads its buyout team. He has been with the firm for almost two decades and was promoted to president in July 2015. Sasaki previously worked with the Long-Term Credit Bank of Japan where he was involved with M&A advisory. He also serves as a director in several Japanese corporations such as Miki Shoko Co., Ltd., Bushu Pharmaceuticals and Showa Yakuhin. TAISUKE SASANUMA is one of the founders of private equity firm Advantage Partners, one of the earliest buyout funds in Japan that has raised more than four funds and made more than 40 acquisitions. Sasanuma has significant management consulting experience, having previously worked with Bain & Company, Sekisui Chemical Corporation and several major US and Japanese corporations. He is the chairman of the Japan Private Equity Association.

companies.We are in a dynamic era; previously both GPs and LPs have been pulling against each other, but this next phase will be about real partnership.

MK: First is the origination capability and

constant deployment of capital; second is stable performance; third is overall attractive returns; and lastly, a stable team; these are what LPs most frequently ask for.

What advice would you give to new managers or entrants to the Japanese

YH: LPs are looking for both uncorrelated

private equity market?

and absolute returns from their private equity investment. Aside from executing alpha-generating strategies, it is important that GPs can identify underlying issues in portfolio companies, propose ideas to fix them, and deliver solutions. Do the funds have the track record and resources to do that? A successful investment cycle starts with this very basic value-adding activity. That, to me, is key. n

I would recommend new entrants to be patient. Sourcing high quality investments in Japan requires a long-term commitment to the country, including building deep relationships and leveraging networks developed through past transactions. After building these networks and generating a track record, dealflow can become more consistent, leading to strong returns even in a slower deal environment. TS:

t he japan s pecial 2 0 1 6

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LP WATCHLIST

Wish you were here Japan’s most active LPs have made more than 50 commitments to funds focused on the country since 2010. Here are six who should be on any GP’s list of investors to visit

3

1

SMRJ Founded in 2004 following the merger of three similar bodies, the Organisation for Small & Medium Enterprises and Regional Innovation began investing in private equity funds in 2000 and focuses on domestic venture capital funds. To date it has invested in more than 100 funds. Recent fund investments FUND NAME

YEAR

Gumi Ventures II

2015

FUND SIZE

¥2bn

Mizuho Capital Partners Mezzanine 3

2014

¥20.6bn

Dac Venture United Fund 1

2014

¥1.26bn

IMPERIAL PALACE

FUND STRATEGIES

Buyout/Corporate Private Equity, Secondaries, Distressed/Turnaround, Venture Capital/Growth Equity

4

REGIONS

North America, Western Europe, Asia-Pacific SECTORS INVESTED IN

Energy/Oil & Gas, Biotech/Life Science, Clean Tech/Renewable, Retail, Manufacturing, Transport, TMT, Healthcare, Customer Goods

2

Development Bank of Japan Wholly owned by the Japanese government, the DBJ is actively making direct investments in infrastructure and energy assets, as well as strategic LP investments in infrastructure funds. It invests mainly in Japanese companies, but also targets South-East Asian companies and cross-border M&As. Recent fund investments FUND NAME

YEAR

NCB Kyushu Activation Fund

2015

FUND SIZE

Equistone Partners Europe Fund V

2014

€2bn

Incubate Fund 3

2014

¥11bn

¥5bn

FUND STRATEGIES

Buyout/Corporate Private Equity, Funds of Funds/Co-Investment, Mezzanine Debt, Distressed/Turnaround, Venture Capital/Growth Equity, Other REGIONS

North America, Western Europe, Asia-Pacific

1

SECTORS INVESTED IN

Energy/Oil & Gas, Biotech/Life Science, Clean Tech/Renewable, Retail, Manufacturing, TMT, Healthcare, Customer Goods, Diversified, Other

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LP WATCHLIST

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2

5 6

Japan Bank for International Co-operation JBIC was established in 1999 following the merger of the Export-Import Bank of Japan and the Overseas Economic Cooperation Fund. Wholly owned by the government its primary purposes are to promote economic co-operation between Japan and other countries, as well as boost international commerce.

4

Recent fund investments

Recent fund investments

FUND NAME

YEAR

FUND SIZE

China Merchants Mizuho Growth Fund

2015

$20m

Mizuho ASEAN PE Fund

2013

$180m

Core Infrastructure Indian Fund

2014

$90m

Mitsubishi Corporation Japan’s biggest general trading company has long been engaged in business with customers around the world in fields including infrastructure, logistics, energy and finance. It first invested in private equity in 1985 and focuses on venture, buyout, turnaround and infrastructure funds.

FUND NAME

YEAR

FUND SIZE

Energy Opportunity Fund

2013

$241m

ASEAN Industrial Growth Fund

2013

$130m

MC-Seamax Shipping Opportunities Fund

2013

$300m

FUND STRATEGIES

FUND STRATEGIES

Buyout/Corporate Private Equity, Funds of Funds/ Co-Investment, Mezzanine Debt, Distressed/Turnaround, Venture Capital/Growth Equity, Other

Buyout/Corporate Private Equity, Funds of Funds/ Co-Investment, Mezzanine Debt, Distressed/Turnaround, Venture Capital/Growth Equity, Other

REGIONS

REGIONS

North America, Middle East/Africa, Central/Eastern Europe, Western Europe, Latin America, Asia-Pacific

North America, Middle East/Africa, Central/Eastern Europe, Western Europe, Latin America, Asia-Pacific

SECTORS INVESTED IN

SECTORS INVESTED IN

Energy/Oil & Gas, Clean Tech/Renewable, Retail, Natural Resources, Financial Services, Transport, Industrials, Customer Goods, Diversified, Other

Energy/Oil & Gas, Biotech/Life Science, Clean Tech/ Renewable, Retail, Natural Resources, Financial Services, TMT, Industrials, Diversified

5

Sumitomo Mitsui Banking Corporation A wholly-owned subsidiary of Sumitomo Mitsui Financial Group, SMBC offers a range of financial services centred around banking. It has extensive experience of lead arranging, underwriting and lending to infrastructure projects on a global basis. Its commitments to private equity funds, include secondaries, buyout, venture, mezzanine and turnaround vehicles.

6

Recent fund investments

Recent fund investments

Sumitomo Mitsui Trust Bank The largest trust bank in Japan shares a similar name to Sumitomo Mitsui Banking Corporation due to their historical links to the Sumitomo and Mitsui conglomerates. SMTB predominantly invests in buyout funds, but also has interests in venture capital, turnaround and secondary funds concentrated in US, Europe and Asia Pacific.

FUND NAME

YEAR

FUND SIZE

FUND NAME

YEAR

Incubate Fund 3

2014

¥11bn

Equistone Partners Europe Fund V

2014

FUND SIZE

€2bn

Core Infrastructure Indian Fund

2013

$90m

Equistone Partners Europe Fund IV

2013

€1.5m

JPE Private Equity 4

2013

¥3bn

CVC Asia Pacific Fund IV

2013

$3.5bn

FUND STRATEGIES

FUND STRATEGIES

Buyout/Corporate Private Equity, Funds of Funds/ Co-Investment, Mezzanine Debt, Distressed/Turnaround, Venture Capital/Growth Equity, Other

Buyout/Corporate Private Equity, Secondaries, Distressed/Turnaround, Venture Capital/Growth Equity, Other REGIONS

REGIONS

North America, Western Europe, Asia-Pacific

North America, Middle East/Africa, Central/Eastern Europe, Western Europe, Asia-Pacific

SECTORS INVESTED IN

Diversified

SECTORS INVESTED IN

Energy/Oil & Gas, Biotech/Life Science, Clean Tech/ Renewable, Financial Services, Transport, TMT, Industrials, Customer Goods, Diversified, Other

a pr i l 2016

Source: PEI Research & Analytics. For more information visit www.privateequityinternational.com/data

t he japan s pecial 2 0 1 6

25

DATA ROOM

By the numbers A snapshot of Japan's private equity industry, according to PEI Research & Analytics. For more information go to www.privateequityinternational.com/data TARGET PRACTICE

BRIGHTER FUTURE

Proportion of Japan-focused funds which met their target sizes

Amount raised by Japan-focused funds compared with targets

% 100

$m 8

537.10

25

80

33 60 55.10 60

40

67 75

-200.51

80

20

0

-6.27 -190.17

-190.00

-350.22

25

100

75

40

20

92

33

67

2008

2009

2010

2011

2012

2013

2014

2015

-453.35 2008

2009

2010

2011

2012

2013

2014

2015

Below target On target

Total capital raised — Total capital targeted

Above target Source: PEI Research & Analytics

Source: PEI Research & Analytics

TOP 10

SLOW RECOVERY

Total capital raised by leading Japanese fund managers since 2008

Average fund size for Japan-focused vehicles closed since 2008

Japan Asia Investment Co.

3.23

The Innovation Network Corporation of Japan (INCJ) Development Bank of Japan (DBJ)

1.53 1.12

SBI Holdings

Global Brain Corporation

1.02 0.65 320.71

0.46

Nippon Venture Capital

0.44

The Longreach Group

0.40

Nomura Holdings

945.65

1.67

Japan Industrial Solutions ORIX Capital Corporation

$m

224.18

162.40 94.77

79.47

89.96 26.13

0.38 $bn

2008

2009

2010

2011

2012

2013

2014

2015

Total capital raised Source: PEI Research & Analytics

26

Source: PEI Research & Analytics

private equity international

april 2016

DATA ROOM

CAPITAL BASE

TECH HUB

Funds headquartered in Japan by year of fund close

Sector focus of Japan-focused and headquartered funds

$bn

No

%

24

8

19

4 2 4 6

4 4 8

20 18

10 6

8

6

2.82

2.92

1.99

1.73

0.70

4.10

0.52

1.51

2008

2009

2010

2011

2012

2013

2014

2015

Total capital raised Number of funds

77

83

Japan-focused

Japan-headquartered

TMT Energy / Oil & Gas

Financial Services

Biotech / Life Science

Others

Source: PEI Research & Analytics

Source: PEI Research & Analytics

GROWTH BEGINS AT HOME

LOOKING INWARD

Strategy of Japan-focused vs Japan-based closed funds

Regional focus of Japan-based funds closed since 2008 (%)

% 80 70

6

60 50 40 29

30

21

Total number of funds closed = 84 62

20 10 0

59

77

Venture Capital / Growth Equity

25

14

Buyout / Corporate Private Equity

8

4

Mezzanine / Debt

5

3

1

Fund of Funds / Co-Investment

2

Distressed / Turnaround

0

Japan-focused Japan-headquartered Source: PEI Research & Analytics

a pr i l 2016

2

Secondaries

Japan Asia-Pacific (Excl. Japan) North America

Middle East/ Africa Central/ Eastern Europe

Source: PEI Research & Analytics

t he japan s pecial 2 0 1 6

27

CAPITAL WATCH

Funds in market PEI Research & Analytics puts the spotlight on some of Japan's key vehicles GLOBAL FUNDS FUND NAME

HEAD OFFICE

FUND MANAGER

TARGET SIZE ($M)

FUND STRATEGY

Cool Japan Fund

Japan

Ministry of Economy, Trade and Industry

1321

Venture Capital / Growth Equity

Japanese Venture Fund

India

Gujarat Venture Finance Limited (GVFL)

1000

Venture Capital / Growth Equity

TMCAP2015

Japan

Tokio Marine Capital Co., Ltd.

528

Buyout / Corporate Private Equity

Mizuho Capital Partners Mezzanine 3

Japan

Mizuho Capital Partners

264

Mezzanine / Debt

Tokio Marine Mezzanine Fund

Japan

Tokio Marine Mezzanine Corporation

264

Mezzanine / Debt

Japan Fund IV

Japan

Ant Capital Partners

176

Secondaries

Capital Dynamics Japan Fund

Switzerland

Capital Dynamics

132

Fund of Funds / Co-Investment

Global Brain No.5 Investment Limited Partnership

Japan

Global Brain Corporation

132

Venture Capital / Growth Equity

Japanese Limited Partnership DRC III

Japan

DRC Capital Ltd.

132

Buyout / Corporate Private Equity

Topaz Private Debt I

Japan

Topaz Capital

132

Mezzanine / Debt

Nippon Sangyo Suishin Kiko Fund I

Japan

Nippon Sangyo Suishin Kiko

88

Buyout/Corporate Private Equity

Rakuten Ventures Japan Fund

Japan

Rakuten Ventures

88

Venture Capital / Growth Equity

WM Partners Fund I (JSPF No. 3)

Japan

WM Partners

88

Secondaries

IMJ Investment Partners Japan Fund I

Singapore

IMJ Investment Partners

53

Venture Capital / Growth Equity

Hanzomon Opportunities Fund

Japan

Next Capital Partners

49

Distressed / Turnaround

JPE Private Equity No.4

Japan

Japan Private Equity (JPE)

44

Buyout / Corporate Private Equity

KSP Capital Investment Fund 4

Japan

KSP

44

Venture Capital / Growth Equity

500 Startups Japan

United States

500 Startups

30

Venture Capital / Growth Equity

TBS Venture Capital Fund

Japan

Tokyo Broadcasting System VC Unit

16

Venture Capital / Growth Equity

Inflexion Point Japan Fund

Singapore

Inflexion Point Capital (IPC)

15

Venture Capital / Growth Equity

SunBridge Partners JJV Fund

United States

SunBridge Partners

10

Venture Capital / Growth Equity

COOL JAPAN FUND

INFLEXION POINT JAPAN FUND

NIPPON SANGYO SUISHIN KIKO FUND I

• Founded in November 2013 as a publicprivate fund to support Japanese products and services overseas; • Looking to provide risk capital to create platforms to facilitate business development, and to create ‘success models’ by supporting business development in new markets; • Investments include ¥100m in SAS ENIS in Paris, which sells authentic craft products from regional Japan to retail shops and restaurants in Europe, and ¥260m in a US-based Japanese tea café that originated in Nagasaki Prefecture.

• Established in 2013, this Singaporebased venture capital firm targets investments in independent video game designers and studios strategically linked to Japan; • Vehicle launched in July 2014 to focus on investments in Japan’s mobile gaming start-ups; • Looking to make initial seed investment of between $100,000 and $500,000; • Board of advisors comprises industry experts, including Keiji Inafune, chief executive of video game developer Comcept.

• NSSK was formed in 2014 following a spin-out from TPG’s Japanese division; • Led by former TPG execs Jun Tsusaka, Akio Ishida and Kazuaki Tokuyama and former Skadden Arps M&A partner Kenju Watanabe; • Looking to invest in businesses with an EV of $20 million-$500 million; • Targeting equity cheques of between $10 million and $45 million; • Targeting companies with succession issues, untapped revenue opportunities, opportunities around ageing population and sustainable growth. n

28

private equity international

april 2016

GLOBAL EVENTS CALENDAR 2016 Private Equity International specialises in hosting premier events for the alternative asset class all over the world. As the leading voice in private equity investment, our events offer an excellent combination of education and interaction which will enable you to gain practical and strategic knowledge whilst developing your private equity network.

2016 DATES Direct Investor Summit

14-15 April

Hong Kong

Operating Partners Forum: Europe

19-20 April

London

Global Investor Forum: Asia

19-20 April

Tokyo

Private Fund Compliance Forum

10-11 May

New York

Family Office & Private Investor Forum

10 May

Hong Kong

Responsible Investment Forum

25-26 June

London

Investor Relations and Communications Forum

14-15 June

New York

PE/VC Finance and Compliance Forum: San Francisco

October

San Francisco

Operating Partners Forum: New York

19-20 October

New York

Family Office & Private Investor Forum: Singapore

November

Singapore

GIIN Investor Forum

7-8 December

Amsterdam

Women in Private Equity

December

London

www.privateequityinternational.com/events NOTE: This is a provisional calendar and dates, locations and events may be subject to change at the discretion of the organisers.