Ant Capital: Ramping up while the world slows down

This article is sponsored by Ant Capital.

Ant Capital had a frenetic year. What was the cause?

Ryosuke Iinuma: 2020 was a very special year for Ant. First of all, it was our 20th anniversary, and we invested in five deals – the highest ever in terms of number of transactions and the total investment size.

John Cheuck: We had completed five investments from the fund before the first state of emergency was announced in March and then we made another five investments by December. The mindset of business owners in Japan has changed because of the pandemic. Three of these were deals we’d been working on for more than a year and it just happened that business owners decided to cross the line for closing during the pandemic. Doing five deals in a year was a challenge for our team; but we now work together better than ever, and are very comfortable doing two to three deals a year.

RI: We expect more deals after covid-19 in terms of business succession. During the pandemic, company performance was getting worse and worse, meaning we couldn’t reach the valuation level at which owners wanted to sell. However, after covid-19 they’re already exhausted and the performance is getting better, so they’ll begin to sell.

How has the pandemic shifted your focus?

JC: Since Fund I we have focused on five sectors. Of the five businesses that we bought before the pandemic, three were in food and beverage and one was involved with consumer/retail. After the pandemic started, we shifted focus to our other strong sectors, and made five investments in manufacturing, healthcare, and IT/business services.

RI: We focused on good quality companies with a very low impact from covid-19. We were quite cautious about industries that depend on shops and locations, like retail. We started to re-think how technology could help our companies transform their business models and even support disruptive growth.

JC: We did not want to position ourselves as a low-price opportunistic buyer of companies, because these were winning businesses that were already successful. We had to overlook the short-term effect of the downturn on these companies and be forward looking to see what would happen in a normal situation to work out the valuation with the owners. Owners were willing to sell if we could show them that we wanted to pay as much as we could for their businesses.

How do you navigate Japan’s lofty valuations?

RI: In 2017 and 2018, entry multiples were about 12x or 13x EBITDA – it was incredible. If we joined auctions, we’d be paying more than 10x. However, if we focus on smaller details, entry multiples are more reasonable at around 5x or 6x. For example, one of our recent exits was a dispensing pharmacy business that involved a roll-up strategy. For acquiring pharmacy chains with over EBITDA $10 million, the entry multiple would be around 15x; if a small chain store with EBITDA between $1 million to $3 million, the entry multiple is 3x to 5x. So we bought 10 small to midsize chains, built up a platform of 58 pharmacy stores, integrated and sold them to a large strategic at 13x EBITDA for a 3.6x return.

You’re unusual in having an in-house AI development team. How did this help in the pandemic?

RI: The first business we invested in during the pandemic was Amicus, which is a franchise business specialising in repairs for cars exteriors and interiors. They train franchisees to repair things. We used our AI/DX team to develop a matching application like Uber to help match franchisee companies with car dealers requiring services. In this case, the company can transform their business from a physical, paper-based model to an Uber-like online smartphone app model and look forward to a totally different market valuation at exit. We also plan to open that platform to other repair service operators.

JC: We also invested in a company called Sprout, which was a very challenging portfolio company during the pandemic. They run a chain of seafood izakayas – Japanese-style pubs that serve food – which were put on the governement blacklist during the state of emergency, because they’re designed for large groups to dine. Most of their branches are located in the middle of Tokyo and so a lot of customers are business people who had to stop hosting business dinners.

Initially we started doing takeout and online sales but that didn’t move the needle much because we had to close some locations down for two or three months. So we looked at how we could use software and technology to help support and transform the business. We developed two systems; one to help schedule their workers, and also another to analyse customer ranking sites to improve Sprout’s customer service and understanding of their customers. Now, we’re looking at expanding these systems to other restaurants and maybe even start a new software services business.

Is it time to think about fundraising?

JC: We started raising a new fund in February. We’re one of very few in Japan that are on their sixth fund and we’re looking to raise $500 million. We have maybe one or two follow on investments in Fund V and then we’ll be focusing on new investments and managing our existing portfolio.

Where will you look to raise capital from?

JC: Our historical AUM is about $2.3 billion, which is basically all from domestic Japanese investors. If you look at our active AUM right now – which is around $800 million – roughly 10 percent is international capital. We’ll be expanding the LP base and hope to see more interest from overseas investors with our track record to date.

ESG is a growing LP focus. How are you reacting?

RI: We became a signatory to the Principles for Responsible Investment (PRI) in 2016 and have already introduced ESG standards to our portfolio companies. For example, Maruhon, which provides natural wood flooring, has applied to the FSC Stewardship Code, and does not use forbidden or illegal wood in its products.

Going forward, ESG is an important pillar of our investment strategy and we will continue to refine how it is integrated in the culture of our firm. We’re setting up an ESG support team internally and will hire a dedicated ESG professional to oversee our portfolio companies.