Midwinter hasn’t been so bleak for private equity firms in Japan.
In January, three firms reported stellar exits in the country: Advantage Partners sold coffee shop franchise Komeda to MBK Partners for about $480 million, representing a 7x return on its 2008 investment, according to the firm; US-based Cerberus Capital reportedly sold its stake in Aozora Bank in a $1.7 billion deal; and small-cap firm J-STAR made 3x its money on the sale of clothing business Olive des Olive.
Japan’s economy has been in the doldrums for more than 20 years. GDP grew by a respectable 2.2 percent in 2012, but that was partly a rebound from the slump caused by the 2011 earthquake (which hammered exports). The IMF is forecasting growth of just 1.2 percent in 2012 – and with debts equivalent to 236 percent of GDP, the new government has limited wiggle room.
Nonetheless, newly-elected prime minister Shinzo Abe seems determined to do whatever it takes to spark some life into the country’s economy after two lost decades. And his radical $116 trillion stimulus package should actually aid private equity, according to Tamotsu Adachi, co-head and managing director of The Carlyle Group in Japan.
“The stimulus package has made a huge difference,” he says. “Stock prices have risen more than 15 percent since [it] was announced and so the comparable multiples of Japanese companies are much higher.”
Among the new measures is a monetary easing policy targeting a 2 percent interest rate, which has depreciated the yen, Adachi explained. “This is having a positive impact, especially on export-related companies – the values of our existing portfolio companies are rising and at the same time Japanese stock prices are rising quite a bit. That is [allowing] us to exit within a very favourable environment.”
Carlyle took full advantage by listing restaurant operator Chimney Co on the Tokyo Stock Exchange in December, an IPO that it had delayed twice before.
Firms in Japan are bullish about investment opportunities too. In April, a law implemented after the 2011 earthquake, which required banks to extend the loans of small- and medium-sized enterprises, will expire. “There should be some subset of these companies that … will need to look to alternative financing, which could lead to private equity opportunities,” says Richard Folsom, co-founder and representative partner of Advantage Partners (although most of these companies will be too small to interest Japan’s larger private equity groups).
Another opportunity lies in the ongoing restructuring of Japanese corporations that have struggled to compete with the growing dominance of international rivals such as Apple or South Korea’s Samsung – something the government is encouraging.
Advantage Partners will be one beneficiary: it is closing a deal to acquire the SANYO digital camera business from Panasonic for an undisclosed sum. “Panasonic, SANYO, Sharp, Fujistu and all the companies in that space have all been going through their own struggles. As a result, certain businesses are being divested and consolidated and some of that will come to private equity,” Folsom explains.
He expects the trend to continue, creating buyout opportunities worth around $500 million to $1 billion.
Although many of the new monetary and fiscal policies are yet to take effect, David Gross-Loh, managing director at Bain Capital Japan, says people are optimistic. “The [new government] had a clear enough win and made a strong enough statement about what they are going to do that people are assuming [the proposals] will translate into policy.”