Profound cultural differences notwithstanding, the Japanese middle market seems a lot like the “good ol' days” of the US middle market, when deal flow was proprietary, prices were cheap and competition was scarce.
So says Ozaki Kazunori, the co-founder and chief investment officer of Nikko antfactory, which is currently raising $50 million in international capital for a middle-market private equity fund called Catalyzer II. The Tokyo firm already has $114 million in commitments from Japanese institutions.
The space prowled by Nikko – investments that require between $20 million and $30 million in equity – constitutes the vast majority of the Japanese mergers and acquisitions market, says Kazunori. The firm comes across deals through the personal connections of the founders, and also through introductions made by accountants, lawyers, tax advisors and local banks. Kazunori says he never pays more than four times EBITDA.
A big difference from the West is that Japanese small- to mid-size business owners almost never want to sell their companies outright. Nikko, therefore, typically acquires between 35 percent and 51 percent of a company.
The firm has already had some success with its strategy. Catalyzer I, which raised $40 million in 2001, has had three exits. One of them, the Japanese cinema division of Richard Branson's Virgin, was sold to a strategic buyer for a nearly 120 percent IRR. An exit of an auto auction business through a public listing has led to a partially realised 48 percent IRR, according to the firm.
Strategic acquisitions of less than $100 million are an “easier decision” for Japanese corporations, says Kazunori. And they always pay cash. Other Japanese middle-market firms include Unison Capital Partners, MKS Partners and Advantage Partners. Of course, much more attention has been won by the big buyout market, patrolled by the likes of Ripplewood Holdings and JAFCO. Kazunori used to be a director of JAFCO and says Ripplewood once tried to recruit him. Clearly, he sees bigger things in the smaller deal market.
DUBAI'S ABRAAJ INTO PAKISTAN
Abraaj Capital, the Dubai-based private equity investor, has made its first investment in Pakistan by committing $7 million in growth capital to BMA Management, a financial securities adviser and manager. BMA, which is a member of the Karachi Stock Exchange, offers brokerage and financial advisory services to Pakistani and international clients and has acted as domestic adviser or manager in some of the country's most prominent privatisations. Abraaj chief executive Arif Naqvi said the fresh capital would be used to broaden BMA's range of services to include retail brokerage, asset management and private equity. Its investment came from the Abraaj Buyout Fund, which closed in June 2003 with commitments of $116 million.
In what has been a busy month for Abraaj, the firm also launched a new real estate fund, which aims to raise $100 million. The fund will primarily target the Middle East, but will also consider niche opportunities in South Asia and Western Europe.
SOUTH KOREA TO EASE RESTRICTIONS
The South Korean government is reported to be considering introducing new regulations that would remove restrictions from the country's domestic private equity investors. In the aftermath of the Asian financial crisis, the government attempted to attract foreign capital with laws that acted in favour of overseas buyout houses while hampering local operators – for example, by reducing the stake they could own in a business.
But after media criticism of the fortunes being made by US buyout firms through lucrative exits from Korean companies, the government appears set to level the playing field by the end of this year. The proposals appear to be giving encouragement to local investors. ([A-z]+)-based Hana Bank recently announced plans to launch a new $100 million fund, while Korea Development Bank, Woori Bank and Shinhan Financial Group are all reported to be lining up fund launches.
FIRE SETS LIGHT TO INDIAN REAL ESTATE
Fire Capital has launched India's first private equity real estate fund, with a target of $50 million. Gaurav Dalmia, owner of Indian real estate development firm Landmark, is the main sponsor and cornerstone investor of Fire Capital. The fund, which has so far raised $20 million from Indian high net worth investors, will target the residential, multi-use, office and retail sectors. Dalmia said the fund would invest in about ten projects and would aim for returns in excess of 30 percent.
Other Indian private equity funds launched recently include Chryscapital, which is raising a $250 million fund from US investors for the Indian mid-market, and the second Swiss government- backed BTS-IA fund, which is targeting $50 million.
HASTINGS KICKS OFF NEW FUNDRAISING
Hastings Funds Management, the Australian asset manager founded by Australian Rules football star Mike Fitzpatrick, has announced plans for a second private equity fund and recruited a new member to its investment team. The firm, which is now 51 percent-owned by Westpac, has fully invested its first $A97 million (€57 million; $69 million) fund, which it launched in 2001, and is now targeting $A150 million to $A200 million for its successor. Hastings has increased the size of its private equity team to six with the recruitment of David Dawson from ANZ Private Equity.
LINKLATERS IN SEMINAL JAPANESE MERGER
UK-based law firm Linklaters has announced plans to merge its Japanese practice with domestic law firm Mitsui Yasuda Wani & Maeda, in what would be the first international merger in Japan's legal services industry.
The firms are seeking to take advantage of new legislation that comes into effect in April 2005 permitting multinational law partnerships. At present, foreign firms in Japan are prohibited from directly employing Japanese-qualified lawyers.
MYW&M has engaged in a wide variety of private equity work in Japan, in both the fund and transaction arenas.
3I BACKS SINGAPORE'S PEARL ENERGY
3i, the London-based international private equity firm, has invested $15 million growth capital in Pearl Energy, the Singapore-headquartered exploration and production (E&P) business. Pearl was established in 2002 with financial backing from Indonesian private equity firm PT Austindo Nusantara Jaya (ANJ), which is wholly owned by the Tahija family. The firm has since built up a portfolio of oil and gas interests in Indonesia, Thailand and the Philippines.
3i has invested in 40 oil and gas companies around the world, including John Wood Group, the UK oil service company that achieved an IPO in 2002.
PELLITERI HEADS LONDON ASIA US PUSH
London Asia Capital, the Chinafocused investment and corporate finance advisory firm, has established a New York office to help its portfolio companies access the US capital markets for follow-on funding and potential listings. The US operations will be headed by Joe Pelliteri, who has over ten years' experience on Wall Street with Dresdner Kleinwort Wasserstein, BZW, SBC Warburg and Kidder Peabody.
London Asia, which is listed on London's Alternative Investment Market, has two principal activities: an investment arm seeking to back profitable growth businesses; and an investment banking services unit advising on fundraising, IPOs and M&A.