Carlyle Group is the latest firm to raise a dedicated pot of capital for investing in Japan, adding to the roughly $2 trillion in dry powder private equity firms have globally to spend amid the coronavirus-induced downturn.
The Washington, DC-headquartered firm held the final close on Carlyle Japan Partners IV last week on ¥258 billion ($2.4 billion; €2.2 billion), more than double its 2013-vintage predecessor.
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PEI caught up with Kazuhiro Yamada, managing director and head of the Carlyle Japan buyout advisory team, to discuss how the market is expected to weather the covid-19 storm.
What was the rationale behind raising more than double your previous Japan fund?
We’ll do the same number, or a slightly larger number of deals and the cheque size will increase, particularly for corporate carve-outs. Historically, around half of our transactions have been business succession, half corporate carve-outs, but over the past few years there have been a greater number of carve-out opportunities so we’re chasing more of those.
Corporate carve-outs are typically auctioned so we may need to pay a higher price. We’re expecting to spend $200 million to $400 million in each transaction, and we can collaborate with the US and Asia funds or co-investors for larger opportunities.
How is coronavirus likely to impact PE activity in Japan?
Most deals are going to be on hold. However, even if short-term performance deteriorates, good businesses should recover soon and, as a global firm that’s been in Japan for 20 years, we’re able to identify a good business. Over the next six months to one year, we’ll be focused on monitoring these types of businesses and buying at a reasonable price.
Valuations were very high just before the coronavirus situation but now the question is what’ll happen to EBITDA and it’s too early to know what prices are going to look like. Everyone’s being more cautious about spending as a result, and generally speaking, multiples might come down, but not significantly as there’ll still be competition.
Liquidity will be down and buyers are going to be scared, which is also going to impact exit activity globally. Yet earlier this month, we sold our stake in Meisui Bijin, a Japanese manufacturer of bean sprouts, to Shinmei Holdings. We’re not short-term capital and can accelerate exits when buyers are more confident. At the moment, our first priority is to protect our portfolio companies and continue to add value.
How has the pandemic affected your existing portfolio?
Every business is going to have some impact from coronavirus but it’ll differ for each case. We’re working closely with portfolio management teams to analyse all potential scenarios, review business contingency plans and provide real-time insights on the evolving situation through our global network. At this moment, there is no significant impact on our existing portfolio companies.
We’ve carefully assessed the next two years of performance and so far none of our portfolio companies are expected to breach covenants, even in the worst-case scenario. We tend to use a 50:50 debt to equity ratio so they’re also not overleveraged. In addition to that, most of our portfolio companies are cash-generative and have less [capital expenditure]. We haven’t drawn down from credit facilities to pile up cash, but we’ll be in close communication with the banks.
We don’t have a complete coronavirus playbook but we’ve learnt from the global financial crisis. We have a weekly call with each fund head where we share our experiences.
What are you telling LPs?
Many investors are a little scared by coronavirus and would like to know what’s going on, so it’s important to give candid and immediate feedback. Last week, Carlyle sent an update to LPs explaining the current status and we’ll also notify them of any significant events in future.
Kazuhiro Yamada is a managing director and head of the Carlyle Japan buyout advisory team. Prior to joining Carlyle he was a senior vice-president of Daiwa Securities SB Capital Markets and previously worked in investment banking at Sumitomo Bank, now Sumitomo Mitsui Banking Corporation.
– This article’s headline was updated on 31 March to reflect that every business is expected to be impacted by covid-19, rather than each portfolio company.