Dealflow in Japan is slow, particularly large-cap transactions. Does J-Star believe the small-cap market is any different?
First of all, there are just so many potential [small-cap] transactions. Last year we had the earthquake, but even in 2010, the potential targets for transactions were more than 1000. It’s commonly known that deals with `undisclosed' amounts (which have numbered above 1000 every year since 2003), are all lower than $100 million. Because if someone is after a deal over $100 million, it's kind of hard not to disclose it. Therefore, our universe is more than 2000 potential targets, and has been so consistently. We are chasing these 2000-plus potential deals, but we don’t bid at auctions. In most cases, it’s done through a one-on-one negotiation. In domestic M&A, there are very few buyers at this moment, so J-Star can be one of the most active buyers in the smaller space.
Does J-Star have any competition in Japan’s small buyout market?
To tell you the truth, we don’t see many competitors. Because the deal volume is so large, competitors will have their own proprietary transactions, and we have our transactions. From an investment perspective, it’s a scary thing to make an investment in a small company. There is Riverside, of course – their fund size is probably similar, deal size probably similar. But again, in real transactions, we don’t see them much. So they have their own sourcing capabilities. A lot of [it has to do with] demand and supply. GP economics say bigger is better. Many have $500 million funds and target large deals. Managing a $150 million fund and having eight on staff, like J-Star, we don’t have that luxury. [We] target companies in the $30 million to $60 million enterprise value range. It’s mostly been the strategic buyers — Japanese corporations — that have been our competitors.
Large Japanese companies are trying to expand abroad due to stagnant growth at home. Do you see that trend with small companies as well?
Yes, that is a trend, no matter if the corporate size is big or small, and we do have some activity in that ourselves. For example, our portfolio company Olive des Olive has about 70 store outlets in Japan and about 140 store outlets in Chinese markets. So definitely they would like to grow in Asia’s emerging markets. And we as private equity are very actively supporting their activity in emerging countries. Another is Taiheiyo, which has two plants in Japan, but also plants in Kunshan and Shanghai. We’re also supporting their setup of a joint venture in India. So it’s a big trend, but it’s a difficult strategy – smaller companies need some kind of support, in a managerial sense as well as capital. Even Japanese strategic buyers tend to prefer buying overseas companies, but it’s not an easy strategy to execute.