Taking stock after the quake

At press time, few private equity professionals in Tokyo were focusing on the possible medium- to long-term impact of March’s devastating earthquake and subsequent tsunami on the country’s private equity industry.

“People are concentrating on the victims, whether the nuclear situation will be contained and how to recover from the scale of physical destruction,” says Hideaki Fukazawa, president and managing partner at Tokio Marine Capital.

For Fukazawa, the most pressing business concerns since the quake have been to check on the safety of Tokio Marine Capital staff and their families – all of whom are fine – and those at portfolio companies. Answering the “many kind, warm and supportive emails” from worried LPs has been another priority task, he adds, stating his gratitude for the concern.

Though Tokyo, where the bulk of Japan’s private equity industry is concentrated, incurred very little physical damage in the earthquake on Friday 11 March, business has been stalled by continued aftershocks and the rolling power cuts put in place to ease the country’s energy shortages – not to mention the fact that a mere 240 kilometers north of the city, the future of the stricken Fukushima nuclear power plant still hung in the balance at press time, casting the threat of nuclear contamination over the city, too.

Such uncertainty in fact moved some foreign private equity and financial services firms – The Blackstone Group, Partners Group, and law firm Clifford Chance among them – to shutter their Tokyo offices and relocate staff temporarily in the immediate aftermath of the earthquake, until greater clarity could be gained on the situation at Fukushima.
But while personal safety remained topmost in people’s minds, only a week after the quake there were already signs of tangible impact on private equity activity at the transaction level.

Among the financial news on 18 March, for example, was a Reuters report indicating bankers had put on hold the financing of Bain Capital’s reported $3.4 billion bid to buy restaurant chain Skylark while they assess “potential business disruption”. Reuters had been unable to reach Bain for comment, but it can only be imagined that the firm may also have been thinking along similar lines given the nature of Skylark’s business.

As Hisao Tateishi, founder of Tokyo-based Next Capital Partners, points out: “Right now, general economic activity is very slow – there are power outages, shortages; people are staying at home and not eating out or shopping. It doesn’t bode well from a portfolio perspective.”

With uncertainty set to be a feature of Japan’s economic activity for some time, it may be a while before bankers and private equity firms are willing to pick up the thread on transactions that were being worked on prior to the earthquake and tsunami.

“Many Japanese people are trying to compare this earthquake to Kobe in 1995,” says Fukazawa, who adds that in terms of the percentage of the country’s GDP directly impacted by the earthquakes they are comparable – in both cases the disaster zones account for about 4 percent.

However, he points out that in the Kobe earthquake Tokyo remained completely unaffected. This time, even though Tokyo is physically undamaged, business has been severely disrupted –“It makes it much harder to predict the long-term impact”, he states.

For private equity firms, this means the growing activity levels recorded so far in 2011 may be stymied.
“Our team already has three good exits in 2011. We believe Japanese established companies’ appetites are quite strong backed by the cash in their balance sheet,” Ryosuke Iinuma, senior managing partner at Ant Capital, told sister magazine PE Asia, before adding: “I wonder if the earthquake will stop this positive trend?”

Fukazawa shared similar sentiment. “Just before this earthquake, the mood in Japan was that it had recovered more than we had expected – there had been a [private equity] transaction appearing every day in the Japanese press,” he says. “So we are not quite sure to what extent this earthquake will affect that.”

Also uncertain at this stage is the disaster’s impact on fundraising. As reported previously by PE Asia, many of Japan’s middle market-focused private equity firms – including Tokio Marine and Next Capital – are in the midst of fundraising, and many are targeting foreign LPs for the first time.

“We have some commitments secured from Japanese investors and a first close anticipated in springtime,” says one Tokyo-based manager. “We hope that will continue as scheduled, but most potential LPs are life insurance companies, banks and pension funds – their first priority will be how to go beyond the fiscal year end [on 31 March] with this sudden plummet in their portfolio.

“They will need to reconsider their asset allocation, which may bring further delay in their private equity allocations,” he adds.

But at press time such thoughts were mere speculation. Tokyo’s private equity managers have many more pressing issues to attend to.