Japan on the up?
3i’s recent decision to close its Tokyo office suggested that private equity opportunities in Japan remain few and far between. But is the market finally starting to pick up for the right sort of firm? Ricky Morton reports.

It would be easy to surmise from 3i’s decision to close its Tokyo office that Japan – long predicted as a buyout opportunity waiting to happen – had again failed to deliver on its promise. However, given the growth in Japan’s M&A market last year and much more concerted efforts at industrial reorganisation, it actually could be about to provide investors, both overseas and domestic, with a long-anticipated increase in dealflow.

3i was one of the earlier entrants into the Japanese buyout market. It set up its Japanese office in Tokyo in July 1999, with the intention of completing several buyouts per year. However, in the intervening period, the firm put only one deal away (the $120m buyout of distribution business Vantec Corp in January 2001), and the firm has now decided to focus on opportunities in the country

from its Hong Kong offices. “Despite a promising start, the fact is that at this time we do not see sufficient opportunities in the market.” said Mark Thornton, head of 3i’s Japan operations who is now based in Hong Kong.

Part of the problem has been the relative infancy of the Japanese buyout market. JAFCO, one of Japan’s oldest venture capital investors set up in the 1970s, started looking at buyout during the late 1990s. “When we got involved in buyouts five years ago, we had to try to cultivate the market because there wasn’t one already,” explains Tomoya Shiraishi, structured investment group officer at JAFCO. “We had to provide managers with case studies of successful buyouts overseas.”

John Lewis, chief representative in Japan for JP Morgan Partners Asia, which advises on funds of $1.1bn, is sympathetic to 3i’s situation, but maintains that there is a significant level of opportunity in the market. “It is a slow moving market, which can be frustrating, but we see a lot of potential. Dealflow is definitely improving.” According to the Asian Venture Capital Journal, Japanese private equity activity rose last year, from $2.1bn in 2001 to almost $2.4bn by transaction value, an increase of just under 12 per cent. In addition to 3i and JP Morgan, a number of large firms have targeted the Japanese market, including Ripplewood, Carlyle, Warburg Pincus, UBS Capital and MKS Capital, formerly Schroder Ventures. And deals have been closed by these firms: Ripplewood was responsible for the first takeover of a Japanese bank, when it acquired Long-Term Credit Bank, since renamed Shensei, in February 2001.

One important factor when investing in Japan is that the deal process can take longer than many other markets. But Lewis believes this can produce an upside for the right investor who has both the patience and the focus. “Vendors are often more interested in identifying a buyer that is right for the management and employees of a business more than they are on getting the highest price. This can lead to some attractive valuations.”

A case in point is JP Morgan’s acquisition of Rhythm Corporation, an automobile components manufacturer, from Nissan Motors in July 2002. The price for the business, which reported turnover last year of $191m, was not disclosed, although the total valuation including debt was “over 10 billion yen” ($80m). Nissan left the selection of the winning bidder to the management team of Rhythm – something that’s hard to imagine in most other markets. “It was a competitive auction, but not based on price. We had to convince Rhythm’s management that we were the best partner to help them grow the business,” explains Lewis.

Potential for improved dealflow can be put down to two factors, key of which is the increase in industrial reorganisation in Japan. “Internal restructuring among Japan’s big corporations is starting to happen and this should lead to an increase in management buyout opportunities,” said Shiraishi, adding that changes to non-performing loans access, which for years has seen poorly performing businesses kept afloat by low-interest bank loans, will also present opportunities for private equity firms.

The Japanese market is also becoming more accessible to overseas firms. In the past there was an assumption that all non-domestic private equity investors were the same – and that this meant that they all bought distressed assets at distressed prices.

“There used to be a degree of confusion over the difference between buyout and vulture firms, particularly in the late 1990s,” explains JAFCO’s Shiraishi. “But there is no hurdle for international investors in today’s market, especially given the fact that many professionals at these firms are Japanese nationals.”

JP Morgan private equity Australia spins out
Sydney-based JP Morgan Capital Asia Pacific, the private equity arm of JP Morgan Chase in the Asia Pacific region, has spun out of its parent in a management buyout to form an independent firm, Georgica Associates.

Georgica Associates, to be headed by Brian Watson, will manage Morgan Capital’s existing A$200m ($117.6m) private equity portfolio in Australia and Asia and offer advice to third parties on private equity deals.

Until 1999, Watson was the global head of JP Morgan Capital, JP Morgan’s private equity investment arm. Under Watson, Morgan Capital Asia Pacific then built up a diverse range of investments from 1999. For example, in October 2000, the firm acquired a stake in Internet protocol telecommunications group Comindico, and also invested in Indonesian conglomerate PT Rodamas.

Li returns to Carlyle as managing director
Gabriel Li has rejoined The Carlyle Group as a managing director for its Carlyle Asia Venture Partners arm. Li will work alongside Hong Kong-based Carlyle Asia Venture Partners’ current managing director Tony Jansz. Li will focus on technology related opportunities in the semiconductor design and manufacturing, display, and wireless device sectors, located primarily in China, Taiwan, Korea, and India.

Li was a director with Carlyle Asia Venture Partners before leaving to become a managing director at Robertson Stephens in San Francisco, where he co-managed a fund that invested in public and private technology companies. Prior to joining Carlyle, Li worked at Hong Kong-based Orchid Asia Holdings as a partner, and at McKinsey & Co. in Los Angeles.

Carlyle has two venture funds in Asia: Carlyle Asia Venture Partners I, a $159m fund that is fully invested, and Carlyle Asia Venture Partners II, a $170m fund that was launched in mid-2002.

K1 Ventures appoints new president
Singapore-listed venture capital firm K1 Ventures has hired former Bain & Co Singapore chief Mark Daniell as its new president. K1 Ventures was started just over two years ago with around S$450m of capital, with Keppel Corp as its main backer.

K1 is reported to have suffered significant losses and write-downs on its early investments in telecoms, Internet and other technology. The firm is currently pursuing investments in Asia and the US. Daniell said the firm would be looking to invest in medium-sized businesses, targeting returns of ‘at least 15 per cent’.

TMT Ventures passes $100m
Corporate venture capitalist TMT Ventures, backed by both New Zealand-based and international investors, has held a final close, making it New Zealand’s first $100m (US$55m) fund. “Some people may be surprised it is the first such fund to achieve $100m, but the real value of venture capital has taken a while to take root in New Zealand,” said TMT Ventures executive chairman Ross George.

TMT Ventures is New Zealand’s largest early stage venture fund, targeting the converging telecommunications, media and technology sectors. TMT says that the fund is only 21 per cent drawn so has the majority of its capital available for investment.

A joint venture between Direct Capital and US-based Advent International, TMT was set up by seed investor Telecom New Zealand. Telecom committed capital itself and was joined by other major international venture capital and technology sector investors, including technology companies Alcatel, Lucent and Marconi, fund managers AXA and ACC alongside domestic utilities owner Rotorua Energy Trust. The fund also attracted investment from the private equity arm of Credit Suisse First Boston. NZVIF, a fund of funds initiative set up by the New Zealand Government, is also investing $15m as part of the TMT Ventures programme.

Carlyle backs Worldzen Holdings
Carlyle Group has invested $4m in Worldzen Holdings, a Bangalore-based firm that specialises in business process outsourcing in the financial services, insurance and healthcare industries. The funds will be used to expand Worldzen’s outsourcing capabilities in Bangalore. “BPO in India is experiencing an explosive growth period as companies seek to reduce costs while improving customer service,” said Tony Jansz, managing director of Carlyle Asia Venture Partners.

TVP backs four IT start-ups
Australian venture capital firm Technology Venture Partners has backed four local IT and technology businesses, investing a total of A$11m. The firm co-led early stage funding rounds totalling $A15.85m in three start-up Australian technology companies – photonics innovator Engana, bioinformatics technology company Genetrax and the developer of high performance embedded network security products, Sensory Networks. The firm also contributed to the third and final tranche of Peregrine Semiconductor Corporation’s A$42.4m funding round.