How is the bold economic experimentation in Japan impacting on private equity?
The sentiment has changed significantly since 2012. When `Abenomics' started, everyone was unsure of the future direction of the Japanese economy. People were cautious about taking action. Now it’s a bit different. In general, Japanese CEOs and CFOs sense it’s time for them to really restructure. People believe that there is a direction to the economy for the next 24 months and therefore CEOs and CFOs can make decisions. Many companies are now really thinking about how they can improve EBITDA.
Having said that, there are some companies who are now assured the economy is good due to the economic stimulus and so they don’t have to worry about restructuring.
What are the main issues for Longreach in Japan in 2013?
Asian integration. It’s very clear that Japan is getting more integrated into other Asian economies. We see an opportunity to acquire a Japanese company that wants to expand into Asia but has no expertise. We would bring in capital and management.
Another issue is the importance of finding the right management talent that can come from the outside and work with the company. We are a buyout firm and tend to hire full-time management – a CEO and CFO – for our companies who are under our governance. With restructuring, keeping the existing management team can be a mistake in Japan. If you can change the management, you can change the company culture and you can unlock great value in a Japanese company.
Several large Asia funds have been raised or are in market, and a big portion of that capital is likely to come into Japan. Will that impact valuations?
The competition will be growing in the category of very large buyouts. In Japan those are still limited and they are always done through auctions. If this was an efficient PE market, all global firms would be at many auctions and the highest bidder would get the company. This is how it is in the US. Not in Japan. Most owners don’t want to auction off their companies because they say the company is `like my daughter” and “I want to talk to a potential owner I can trust’. Many owners still have the goal to find a trusted buyer who can take care of their company. And unless a firm has been in Japan for at least ten years, those transactions are hard to do.
A second category of transactions is $100 million – $500 million [enterprise value], which we target. These companies typically want Asian expansion or have an international expansion strategy and need partners. Our deal pipeline is quite strong. It goes back to the CEOs finally making decisions on restructuring. This is first the time since 2003, when Longreach started in Japan, that we see the most quality transactions ever, if not quantity.