Loving thy neighbour

Japan’s mid-market-focused GPs are increasingly looking to China to drive growth in their portfolio companies.

As the world’s third largest economy, many of Japan’s mid-market companies have never needed to look much beyond the country’s borders for business.

Recently, however, they have been waking up to the growth opportunities on their doorstep.

“In the past year or two lots of Japanese companies have started to realise there is growth potential in Asia,” says Daisuke Kawano, partner at mid-market firm ACA. “Many had been focused solely on the Japanese market, but have now started to look for upside by looking at new markets like China or India.”

As in everything, China is the biggest lure – and as Japan’s neighbour, it is the most obvious place for Japanese companies to look to for growth.

 “In 1990, the US was Japan’s largest single export destination with 32 percent of all exports. At that stage China wasn’t even in the top ten. Nine years later, in 2009 the US had shrunk to 16 percent and China had become the largest export market, with a 19 percent share,” states Iinuma Ryosuke, senior managing partner at Ant Capital.

It is a statistic Ant has been looking to exploit, specifically targeting a growth in Chinese revenues – for example with its 2005 investment in Trywall, a manufacturer of corrugated cardboard for importing and exporting – as a means to achieving overall revenue growth.

As Japan’s economy has stagnated post-downturn, the China play has become even more important to Japanese companies and in fact, several GPs say a quicker recovery has been seen at those companies which have an established China connection. And given the outlook for Japan’s economy – which is forecast by the International Monetary Fund to grow 2.4 percent this year, compared to China’s 10.5 percent – an outward-facing focus will only become more important for the survival, let alone growth, of Japanese businesses.

“What would be a complete disaster for Japan is if no GPs could take Japanese firms and turn them into global companies – or take them into Asia, especially China,” says Mark Chiba, Hong Kong-based group chairman and partner at The Longreach Group. “Japan needs GPs who can get business done in a local way, but truly drive portfolio companies to globalise with world class operating metrics.”

However, it is not just on the growth side that China, and the rest of Asia, are proving a boon to Japanese private equity. According to Ant Capital’s Ryosuke, some 20 Japanese companies were bought in 2009 by Chinese companies – making China’s corporate world a good place to look for exit opportunities. For fast-growing Chinese companies on the other hand, the purchase of Japanese – and other – companies is a good way to buy into an established brand, or superior technology.

While the rapid ascent of the Chinese economy is delivering real benefits to Japanese businesses and investors in some areas, the flipside of the trend is the threat posed by Chinese competition. Even this, however, can have an upside, says Emmett Thomas, a Hong Kong-based partner at Advantage Partners: “Among the things that will hopefully give a push to Japanese CEOs is the rise of China – this creates a threat for some Japanese companies.”