Japan ripens for exits

Several recent divestments in Japan have been well above average multiples, highlighting the country’s increasingly liquid market.

Multiples for several divestments in Japan over the past 12 months have exceeded what sources say is the general expectation of 2.5x – 3x.

In 2012, Unison Capital sold sushi restaurant chain Akindo Sushiro in a secondary sale to Permira and J-Star sold Japanese mail order business Iki Iki to a corporate buyer — both at 8x multiples, Private Equity International reported earlier. 

In 2013, Advantage Partners sold coffee shop franchise Komeda Coffee to MBK Partners at an 7x multiple and in a particularly outsized deal sold condominium management group Community One to a corporate buyer, reaping a multiple of 22x, according to industry sources.

Richard Folsom, representative partner at Advantage, declined to comment on his firm’s exit multiples. But he told PEI that Community One was acquired from a distressed seller in 2008 and Advantage helped it to increase EBITDA 3x through both organic growth and add-on acquisitions. 

Advantage has bought companies in less-cyclical sectors such as food services, consumer retail products and fundamental business services, he added.

“During the financial crisis and economic downturn, both [Komeda and Community One] continued to perform well and overachieve their targets,” Folsom said. “That’s something you can find in specific companies.”

Japan’s exit volume has generally been increasing. In 2003, there were only 11 private equity exits, which increased to 40 in 2012, according to figures from Brightrust PE Japan. The highest level came in 2011 when 58 companies were exited. 

Divestments have typically been trade sales. But new leadership and a fiscal stimulus that has helped the stock market are raising expectations of a pickup in IPOs. The Carlyle Group had two IPO exits in Japan in the last four months. Bain Capital may exit Japanese restaurant chain Skylark, which it bought in 2011, in an IPO early next year, according to a Bloomberg report. 

In addition, valuations have been comparatively low. 

“You can buy something relatively inexpensive at 4-5x EBITDA and maybe get to 8-9x.” said Emmett Thomas, partner and head of Asia for Advantage, speaking at the PEI Asia Forum in Hong Kong. “Growth in revenue and profitability can happen in a stagnant market environment. It shows how much inefficiency exits in the domestic market.” 

In addition, Japan has a shortage of equity capital, Tatsuo Kawasaki, partner at Unison Capital, said at the PEI Asia Forum. “Japan has a lot of money but little equity capital available relative to the corporate market. That’s the reason why the pricing can be relatively inexpensive. It will probably stay that way a while because new funds can’t be raised overnight.”

Peter Hwang, a director at Pinebridge Investments, pointed out at the Forum that the aggregate fund pool in Asia grew substantially over the last three years, but Japan accounted for only 2 percent of that total.

“The fundraising figures [for Japan] are quite meager. That’s a clear sign there is more opportunity due to a demand/supply mismatch.”

PEI will hold the Global Alternative Investment Forum: Japan in Tokyo on April 17 at the Mandarin Oriental. The event will bring together Japan’s most active institutional investors and global alternatives managers to explore the risks and rewards facing Japanese LPs as they diversify into alternative outbound investments.