Making amends

There were few in the Japanese private equity industry that were not shocked when news broke in October that a former partner of Japanese buyout firm Unison Capital, identified by an LP as Kenichi Kiso, died in undisclosed circumstances the day after he was fired.

Unison had fired Kiso as soon as it learned he was being investigated by the Japanese Securities and Exchange Surveillance Commission (SESC) for insider trading.

“Insider trading, even by a junior guy on the team, is a major problem. It shows LPs that your internal compliance and regulations are rather weak and it undermines their confidence in how well the organisation is being run,” notes an Asian fund manager.

The pay cuts are the classic Japanese style of apology. They want to show regret and responsibility in the most symbolic way.

Although Kiso’s death led the SESC to suspend its investigation, Unison commissioned its own third party committee to investigate the allegations. The committee, comprising three external attorneys, also reviewed Unison’s internal controls and policies pertaining to prevention of insider trading.

The committee’s report, released in late December, found Kiso had been “continually engaged in numerous transactions in securities listed on Unison Capital’s restricted securities list” since joining the firm in 2002.

John Ehara

While the committee concluded no one else at Unison had been involved in insider trading, it noted an environment of “excessive mutual trust” at the firm which reduced its effectiveness to check and counter such activities.

The firm acted immediately to mend fences. One of its first steps was to prohibit staff from trading in any Japanese equity securities until a year after the termination of their employment at the firm. It also vowed to monitor more closely all financial investments held by staff.

Another significant measure taken by the firm’s five remaining partners was a self-imposed pay cut for a period of one year. Lead partner John Ehara has deducted 40 percent from his monthly salary, while the other four partners, Tatsuya Hayashi, Tatsuo Kawasaki, Osamu Yamamoto and Kiyoto Matsuda, have taken off 30 percent.

“In light of the findings of the report by the third party committee, we felt that this was necessary to underscore management accountability,” the firm stated in an email.

“The pay cuts are the classic Japanese style of apology. They want to show regret and responsibility in the most symbolic way,” says a GP familiar with the firm.

Unison has also set up a compliance committee and is considering commissioning audit firms to support operational audits. It intends to have audits conducted on information security as well.

The firm’s quick action was well received. “The partners handled the situation very well. I don’t think most of Unison’s LPs have problems with how things have progressed since the incident as speedy, appropriate steps were taken and the partners have been forthcoming throughout,” says a source familiar with matter. “They also spent a lot of their personal money to investigate this.”

Still, it remains to be seen how much the incident has sullied the firm’s reputation among the country’s deeply conservative corporate world. There is danger that it may impact the firm’s standing in the business community and call into question its ability to deploy its third private equity fund, which closed on ¥140 billion in August 2009.

“It is hard to tell how this will affect Unison. There is some damage to its reputation for sure, but only time will tell if this affects their ability to access certain opportunities and find a deal. No one will know for between six months and 18 months,” an industry source in the country said.

There is also the fact that the incident casts a shadow over Japan’s entire private equity industry, which already struggles with a less than favourable reputation. As one of the country’s pre-eminent firms, a blow to Unison is also a blow to other GPs and may impact fundraising in the next few months, according to another Tokyo-based industry source.

Let’s hope the scars heal quickly.