Deal Mechanic: Driving Simplex's US expansion

Simplex, a Tokyo-based fintech company, had an almost 20-year history, over 500 employees and close to 40 percent market share in Japan’s sell-side capital market trading system when The Carlyle Group acquired a majority stake for an undisclosed amount in August 2013.

The company was also in the FinTech 100, an annual global listing of leading technology providers to banking and financial services companies. Simplex provided front-end dealing systems and middle-office risk management software mainly to Japanese mega banks and major securities firms, including Bank of Tokyo Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation and Mizuho Bank.

Eight of the 10 major securities companies in Japan use the company’s products. Among its businesses, its retail FX services, which provide proprietary trading solutions using a commission-based volume revenue model, were the largest revenue producer for the company.

“We knew from the beginning the company had an edge over its competitors,” Carlyle Japan managing director Kazuhiro Yamada tells Private Equity International. “We wanted to capture the upside in enhancing company sales and improving its marketing capability; Simplex has a great chance of becoming a global player.”

It was also one of the last deals from the firm’s second Japan buyout fund, Carlyle Japan Partners II, a 2006-vintage vehicle that closed on ¥165.6 billion.

Like most negotiations in Japan, Yamada says the deal took years to complete. He adds that because private equity is not as mainstream in Japan as in the West, it takes time to build that level of trust. For the firm it was three years – from initial talks with Simplex CEO and president Hideki Kaneko, to price negotiation and discussions on exit opportunities, to a nerve-wracking 12-hour deadline to come back with a new proposal after a rival bidder emerged on the scene.

Post-acquisition, Simplex delisted from the First Section of the Tokyo Stock Exchange in October 2013 and three months later had undergone a corporate reorganisation of its subsidiaries.

“When we bought the company our investment thesis was to grow the business domestically, improve profitability, and then grow it overseas,” says Yamada.

The first priority for Carlyle was to make sure Simplex had a better understanding of its clients’ needs and provided the right solutions to their business – this would allow them to identify which products were generating the most revenue.

Instead of waiting to receive requests for quotations, Yamada says Simplex put staff on-site to work with clients on developing better systems. “Having staff on-site and engaging with its clients is Simplex’s uniqueness. To give an example, Simplex helps core clients create a three-to-five-year system capex roadmap,” he says.

“It’s costly but a strategic way for us to find out and better understand the needs of the clients. That strategy was well implemented at many of the top tier financial institutions, and Simplex is able to get more business from them.”

As a result, the firm started new services including an equity and FX dark pool, which allows institutional investors to buy and sell large blocks of securities without showing their hand to others and thus avoiding market impact.

One advantage of being in a global business network is having industry experts on hand to help create value. Carlyle made use of this by leveraging the One Carlyle platform, its team of global experts, to support Simplex’s plans to gain a foothold in the US.

“We brought Simplex’s management team to the US to collaborate and exchange ideas with our US technology team and ex-CEOs of Carlyle portfolio companies, leveraging the One Carlyle network for new business opportunities,” Yamada says.

During this process, Carlyle’s US technology team reviewed Simplex’s overseas marketing strategy and introduced industry experts to the company. Subsequently, 

Simplex teamed up with a local partner in the US to expand sales and boost the development of new trading platform products for its next stage of growth.

Enhancing the corporate infrastructure was another value creation initiative Carlyle focused on.

Yamada says the firm asked Carlyle operating executive Yasuo Nishiguchi, a former CEO of Kyocera Corporation, to act as an external director to enhance Simplex’s governance structure. “For 24 months, we worked together and highlighted the importance of cashflow and tightened cashflow control by using our deal pipeline and KPI monitoring system.”

Through these initiatives, Simplex’s net income almost doubled in three years.

Along with governance, the firm also optimised Simplex’s business portfolio, divesting its non-core subsidiary Virtualex Consulting through an initial public offering in June 2016.

By the time Carlyle sold its shareholding back to company management in October 2016, the company’s revenue had increased by 25 percent, EBITDA had grown to approximately 45 percent and its products were being used across Asia.

Yamada highlights that good people and products are fundamental to Simplex’s success. And he expects the company to grow its domestic base even further as more financial institutions in Japan are opening their systems to fintech.