Carlyle could soon be even bigger in Japan

Private equity giant The Carlyle Group could carry out two deals of up to $2 billion each from its Japan-focused fund, which presently invests in the mid-cap space.

“There could be about two large deals in Japan from our current fund focusing on Japan,” Carlyle managing director and co-head of the firm’s Japan advisory team, Takaomi Tomioka, said at a media briefing on Tuesday, as reported by Reuters. “With equity and debt combined, we could invest as much as ¥200 billion ($2 billion; €1.8 billion) in each deal.”

Tomioka did not identify any acquisition targets or preferred sectors for investment at the briefing, but according to media reports, Carlyle is seeking to acquire Osaka-based Wako Pure Chemical Industries from drug maker Takeda Pharmaceutical in a deal that could fetch over $1 billion.

In the past, Carlyle has focused on Japanese mid-cap companies across a range of industries, with typical investments ranging from $100 million to $500 million. The firm’s recent investments from its third Japan-focused buyout fund include Tokyo-based software company WingArc1st, bean sprout company Kyushu GGC, and dietary health foods company Sunsho Pharmaceutical.

Tomioka’s comments suggest that the firm sees promise in some of Japan’s large-cap companies, which in recent years have been increasingly willing to sell non-essential parts of their businesses. Japan’s technology, chemical, and heavy-industry sectors are ripe for divestitures, according to a Deloitte report; that is because in the past, conglomerates in these sectors tended to prioritise revenue growth over profitability, but due to intensifying global competition and weaker domestic demand, it has become more important to sell off underperforming units and focus on boosting profits in their core businesses.

Carlyle has raised three Japan-focused funds – Carlyle Japan Partners, a ¥50 billion 2001-vintage vehicle; Carlyle Japan Partners II, which was launched in 2006 and raised ¥165.6 billion; and Carlyle Partners III, which was launched in 2013 and received ¥119.5 billion in commitments.

Carlyle Japan Partners delivered a minus 1.3 percent internal rate of return (IRR) while Carlyle Japan Partners II delivered a 34.2 percent IRR as of 30 September 2015, according to fund performance data from CalPERS.

Since Carlyle’s current Japan focused-fund has about $1 billion in capital commitments, there are several ways it could finance the larger deals it’s eyeing. Reuters reported for example that the firm could use money from another Asian fund, or it could partner with a strategic investor or other financial investors.

Since setting up a Tokyo office in 2000, the firm has invested in 24 companies and exited about half of those, including software package systems company Broadleaf and advanced materials manufacturer Covalent. Carlyle’s investments are generally used to expand its portfolio companies’ business beyond their roots in Japan and to enhance operational efficiency, the firm said on its website.

Limited partners in the firm’s Japanese buyout funds include the California Public Employees’ Retirement System (CalPERS), Caisse de dépôt et placement du Québec, Teachers’ Retirement System of the State of Illinois, and China Development Industrial Bank, according to PEI data.

Carlyle is currently raising capital for Carlyle Asia Growth Partners V, which has a target of $1 billion, according to PEI data.

A spokesperson for Carlyle said that the firm had no comment.