A FRIENDLIER FACE

The runaway success enjoyed by US private equity firm Ripplewood Holdings when it exited a 33 percent stake in Japan's Shinsei Bank via IPO earlier this year has been well documented, as has the way in which the profit Ripplewood made polarised opinion. To some, the swift turnaround of a former basket case showed that Western private equity firms could provide a welcome (and, some would add necessary) panacea for the Japanese business world.

Others were more sceptical. They pointed out that during the long years of recession, private equity in Japan was inextricably linked with vulture investors circling over strippable assets. Ripplewood's use of a tax loophole to ensure its profits from Shinsei stayed out of the hands of Japanese taxpayers (whose money had kept the company afloat long enough for it to be viable to investors in the first place) was, they maintained, an unwelcome reminder of private equity's true nature.

Perhaps it's time to consider, nine months on from Ripplewood's exit, whether the cheerleaders or the naysayers hold sway in the post-Shinsei world. Struggling conglomerate Daiei provides some interesting insights here. The company's lenders would like to place the company, which has debts of around $9.15 billion, in the hands of the Industrial Revitalisation Corporation of Japan (IRCJ), a state-backed turnaround body. Daiei, on the other hand, is resisting this pressure by holding out for private investment (yes, you heard it right).

Unlikely as it may seem, there is no lack of interested parties: the company has reportedly received overtures from the likes of Ripplewood, Goldman Sachs (in alliance with US retailer Wal-Mart), Cerberus Capital Management and a domestic private equity consortium. But why would it choose these “asset strippers” in preference to the comfort blanket of state aid?

The answer to that is a surprising one. The IRCJ is understood to be keen to take an axe to the majority of Daiei's sprawling activities – ranging from credit cards to a baseball team – and focus it on just one activity, namely supermarket retailing. In comparison, private equity firms appear to be the preferable alternative. For example, as well as combining Daiei's retail activities with those of Wal-Mart's existing retail partner Seiyu, sources say the Wal-Mart/Goldman combo would like to invest in some of the target's other business areas, though details at this stage are sketchy.

But can private equity really be seen as a soft option? The perception of private equity as a possible strategic partner is certainly beginning to carry some weight. Subsequent to Shinsei but prior to the Daiei discussions, Carlyle Group achieved what many observers saw as a seminal breakthrough in terms of foreign-based private equity funds' growing acceptance by Japanese corporations when it acquired mobile phone service provider DDI Pocket for $2 billion in June.

The deal attracted plaudits because of the support Carlyle received both from vendor KDDI Corp, which retained a ten percent interest going forward, and from existing investor Kyocera Corp, which used the transaction to increase its stake from 13 to 30 percent. It was also interpreted as a sign that large Japanese companies could be persuaded to entrust a Western investor with a company's growth rather than its break-up.

Current negotiations to acquire a stake in consumer finance group Takefuji also provide an interesting case in point. With long-time suitor Newbridge Capital having apparently been given the cold shoulder by the vendor, it could have easily been interpreted as evidence that foreign buyout houses still have their work cut out to achieve total acceptance in Japan.

In fact, the key issue here appears to be the degree of influence a buyer will allow the controlling Takei family following any deal. According to local media reports, Newbridge reportedly insisted that the family would have to surrender voting rights on the remaining shares that it did not acquire. Goldman Sachs, which now appears to be in pole position for a deal, is believed to have waived any such demand.

Far from indicating a continuing suspicion of financial buyers' motives, the Takefuji and Daiei talks may instead illustrate something quite different: not just engagement with private equity firms on the part of vendors, but a determination to wring out the best possible terms. This would be yet another significant step for the Japanese market: let's not forget the cynics' view that Ripplewood would not have been able to celebrate such a mammoth home run without the unwitting collusion of naive sellers.