Opex Awards 2016: Asia, small-cap – DRC Capital

Tokyo-based electronic payment services company PayDesign, then called Design Check, had a net loss of ¥1.8 billion ($18 million; €16 million) when Japanese turnaround private equity firm DRC Capital acquired a 25.8 percent stake for ¥500 million in September 2008.

Instead of growing its core business, the company had started publishing collections of celebrity photos and developing hardware for payment processing terminals – an endeavour which DRC chief executive Hideo Aomatsu characterised as a “poor diversification of the business and into a completely different domain”.

As a consequence, PayDesign incurred extraordinary losses, management time was being diverted to support non-core businesses and staff morale was sinking, Aomatsu added. To complicate matters further, the company had a disparate shareholder structure that prevented rapid decision-making and a management team that was unprepared for a turnaround.

With these key problems clearly identified, DRC was quick to act in what it termed a “shrink-to-grow” strategy. First, it led a full withdrawal from the non-core and unprofitable businesses. PayDesign pulled away from the established mass settlement businesses where big players such as PayPal and Square were dominant, and instead zeroed in on specific customer segments to drive results. It expanded into home rental payments – unusual in Japan where rents tended to be paid in cash. The company also shifted away from large businesses towards small and mid-sized, which ushered in a new set of customers.

“The pinnacle of our efforts was the introduction of credit card payments for rent. Once the system was imposed, it worked so well – the transaction volumes more than doubled, from ¥50 billion in 2012 to ¥117 billion in 2015,” Aomatsu said.

DRC also launched a share buyback programme in 2012 by injecting ¥873 million of capital into the business. This dramatically reduced PayDesign’s investor base from nearly 4,000 shareholders to just 10 institutional investors, thereby increasing DRC’s stake to 87.5 percent, giving it full management control.

To bolster the management, DRC hired Masaaki Nakajima, a former banker at Sumitomo-Mitsui Banking Corporation as chief executive. Nakajima expanded the sales force and the system development maintenance team, and started an organisation-wide “corporate identity” project which is credited with boosting both staff morale and operational efficiency.

By April 2016, DRC decided to realise the investment through a strategic sale to Tokyo-listed fintech company Metaps for ¥2.5 billion. The transaction generated a gross money multiple of 3.4x and gross internal rate of return of 29 percent.

Judge Ivo Naumann, a partner with McKinsey & Company, said that the intervention by DRC addressed all of its shortcomings and led to a highly successful outcome. “In particular, the ‘shrink-to-grow’ strategy is something owner and managers often shy away from, but has been highly fruitful in this case. This initiative, combined with a strengthening of the management team and a clear strategy to address the corporate culture, are the fundamental components of this success case. It is these kinds of bold decisions that often are the decisive moments in a turnaround.”