The tide has turned in the Japanese market. Limited partners that had written off Japan because of growth concerns centred on its shrinking economy and ageing population are back, lured by favourable risk returns.
In turn, general partners – some of which have historically failed to hit their fundraising targets – are sucking up liquidity from domestic and international investors, ready to deploy into rising deal flow.
Ant Capital is among those collecting capital. The lower mid-market GP, which has invested in 27 companies through its Catalyzer fund series is now raising its fifth buyout vehicle. Targeting ¥35 billion, it is more than twice the size of previous 2012-vintage vehicle – and is expected to be oversubscribed.
On the surface, Ant’s numbers look good. They have 22 funds under their belt, and have always made money for their investors. Like other GPs, they target 30 percent IRR and a return on invested capital of 2.5x. Over their 16-year history, Ant has delivered a total return of 2.2x and a gross IRR of 21 percent. They are confident that this can be repeated.
Many local funds are raising capital. What makes you different in the eyes of investors?
John Cheuck: I would say our first and foremost differentiation is the team that we have built; we are unique and diverse. Our team has a mix of entrepreneurial and corporate DNA that is bound together with interest, experience and passion for financial returns and operational impact. All of our partners have run businesses or corporate divisions, either as entrepreneurs, corporate executives and/or professional investors. In each stage of the investment process, we put our multi-disciplinary expertise to work, identifying the right balance of financial and business strategy in our investment thesis and post investment operational and exit plans.
Of your 16-strong investment team, five members have worked together since Fund 1. How does that impact performance?
JC: We have been together for some time and have chemistry. Good investors have to be very resilient to different events in the market, good and bad, and to be resilient you need to show longevity, working together as a team. We’ve been through the Fukushima incident, the global financial crisis, SARs epidemic and Asian foreign exchange crises. We have been operating and investing in Japan as a team over three global economic cycles. In 2015, our founder sadly passed away, so we’ve also gone through a succession challenge and leadership change. Over this same timeframe, we’ve developed an ecosystem for investing that is built on hard work, a good reputation and trust between Ant Capital and business owners, corporate strategic buyers and financial intermediaries.
What are the elements of your ‘eco-system’?
Ryosuke Iinuma: There are two: management and deal sourcing. Most GPs recruit management externally, but we use our internal team. More than three-quarters of our team have experience in business operations or consulting before joining Ant. Actually, it’s very difficult to recruit talented professionals from large corporations due to the lifetime employment system.
At least one team member is seconded to oversee the portfolio company’s daily operations full time. Another two or three will support him with specific tasks like back-office functions, marketing or sales. With our “spirited hands on” approach and without cutting salaries or firing people, we focus on EBITDA improvements and changing the profit structure.
We coach management and develop KPIs [key performance indicators]. This is very important. By the third year of investment, the company management team operates at a blue-chip level and is independent.
Even after exit, if requested by portfolio company or strategic buyer, our team members have stayed on as the chief executive officer for one to three years to assist with the integration. Then they return. Ant is the only GP that does this. It builds a good relationship with strategic buyers.
And deal sourcing?
RI: We get good proprietary deals because of the quality of our hands-on involvement. If you look at small to mid-cap buyout deals in Japan, more than half are succession deals. The founder cares about the business after he exits. Other owners look at how we have improved the company, especially the branding and product lines, and come to talk to us.
JC: For example, Fund II investment cookie company Aunt Stella brought us confectioner Beard Papa [Muginoho] that brought us seaweed snack company Sokan, then soup stock company Marusaya. Some of our exits have similar stories where buyers have referred us and are sources for new deals. Our reputation is built on actual investments, exits and hard work. Some sellers are also attracted to us because of our corporate sponsors [Mitsubishi Corporation and Norinchukin Bank] and base of active international LPs. Our track record and corporate/fund structure have helped us build credibility.
Given minimal domestic growth rates, GPs often highlight their cross border capabilities. What is your overseas track record?
RI: There have only been a handful of cross border exits in Japanese private equity history and we have done two of them. [In 2010, the firm exited Honma Golf to Chinese conglomerate Marlion Holdings and Tri-Wall Japan to China’s CITIC Capital.]
JC: To be honest, cross border (growth) is very tough. Probably one out of 10 companies in our portfolio [can be taken overseas]. Or you have to make the opportunity yourself. Although we have the skill set, relationships, and the sensitivities to do this, we also like to focus on the cross border “efficiency” play as well. While only a small percentage of SMEs are export businesses, the majority have some component that involves importing goods and services from overseas. So, for six or seven out of 10 companies in our portfolio, we help them re-assess and streamline their supply chain. Sometimes we help by identifying new suppliers or manufacturing sites, sometimes we help to renegotiate supply contracts but we are always trying to help improve efficiencies in cost, delivery and quality and bring more options to the table.
For instance, our seaweed snack company Sokan is the market leader in Japan. We set up a partnership with Tao Kae Noi (TKN), the largest seaweed snack company outside of Japan (actually in the world), which happens to be in Thailand. TKN helped us to jointly develop a set of new flavours targeting Chinese tourists in Thailand. On the flipside, we helped them analyse their products for distribution and marketing in Japan. Together, we are discussing new business opportunities and also how to co-operate and streamline our supply chains which are predominantly based on Japanese, Korean and Chinese suppliers.
How would you encapsulate your approach?
JC: We like family-owned business succession deals. We try to be the son of the business owner that they never had, from a generation that has domestic and overseas smarts; we are young, aggressive, but still very humble and respectful. ?
Case Study 1: THE LONG GAME
Operating partner Koji Nishitani’s commitment to Honma Golf did not end when the company was sold to a Chinese firm
When Ant Capital exited its majority stake in Honma Golf in 2010, four years after acquisition, unusually for a private equity firm operating partner Koji Nishitani remained with the company.
Nishitani, who joined the GP in 2009 from financial service group RHJ International, had been seconded as chief executive officer to the golf equipment manufacturer and retailer in line with Ant Capital’s use of internal expertise to shape its portfolio company’s management skills.
In the face of a market shrinking 5-10 percent annually, Nishitani set about overhauling the corporate culture and management structure, and revamped the brand at the company established in 1959 by the Honma brothers. EBITDA increased from $2 million annually to $30 million.
As testament to Nishitani’s success, the acquirer, Shanghai-based Marlion Holdings, requested that he remain on board to help with the integration. From 2010-2015 Nishitani served as president. His continued presence also gave comfort to Japanese employees, who were a little nervous at the prospect of a Chinese owner. The decision paid off. Honma generated a return of 4.7x for Ant Capital.
Case Study 2: THE SECRET SAUCE
Ant Capital’s investment in Marusaya shows how it can take family businesses to the next level.
When family-owned food seasoning company Marusaya Company came onto the market it presented a tasty opportunity for Ant Capital. The company is one of a handful manufacturing and distributing traditional premium katsuobushi (preserved bonito fish) seasonings (pictured) and dashi (soup stock). It was the first in the fragmented ¥42 billion market to come up for sale. In March 2016, Ant Capital acquired 100 percent of the business.
As makers of natural ingredients critical to many Japanese dishes, its profitability was stable and its customer base of 10,000 well diversified, ranging from noodle shops and speciality culinary retailers to Michelin-starred restaurants. But, having been family-run for two decades, Ant Capital identified several ways to make the company more efficient and boost EBITDA, including taking advantage of the fact that most of Marusaya’s customers were completely price in-sensitive when it came to buying the ‘secret sauce’ that represents only 1 percent of their cost per serving.
Ant Capital’s operational help focuses on using key performance indicators in its management decisions and improving its financial planning and accounting. Ant Capital is also assisting in the development of a business infrastructure database to make operations more transparent and to boost product development.
Using the GP’s previous experience in the food industry, gleaned through its investments in cookie maker Aunt Stella, confectioner Muginoho and snack food company Sokan, the manager has initiated a review and restructuring of the company’s 21-strong sales team, the expansion of Marusaya’s sales channels, repositioning Marusaya’s national brand, and streamlining production – particularly of its premium products – and improving inventory management.
Critically, Ant Capital is helping the company expand out of its local market, where it already has 13 percent market share, by capitalising on global demand for their products through establishing an international distribution network.
Come exit, the GP hopes that Marusaya, the first in its niche to undergo a private equity makeover, will be attractive to larger players in the seasoning market such as Kikkoman and Ajinomoto.
The fundraising climate: BACK IN THE LIMELIGHT
Diamond Dragon Advisors chief investment officer Kyung Kim describes a market coming of age
Why are LPs excited about Japan again?
More LPs recognise this is an attractive market for buyouts, especially in the mid-market. SMEs are more keen to talk to private equity GPs. A lot of entrepreneur-owned businesses know that private equity funds are not vulture funds. They also recognise the value of selling to private equity funds rather than corporates. They have observed how GPs align interest with management for improved performance, and have seen businesses grow, both domestically and across Asia especially in Taiwan, Korea and the big dog China. Owners are seeking buyers.
What impact has this had on local GPs?
Many fundraisings are oversubscribed. One issue is how to stay in the mid-market size range without getting too big. Most have kept their funds below $500 million. The landscape of investable GPs targeting the mid-market is maybe 20. It’s not a lot in such a large economy. The deal flow can accommodate them but vetting deals and avoiding overpayment is critical. Value-add post investment is also very important. A good entry valuation could be more challenging, but disciplined and experienced GPs can still outperform.
What does a typical Japanese GP look like?
Each one has its own flavour or style and sources deals based on very specific relationships. Certain GPs have a nose for sniffing out good deals, but they do not necessarily have a brand name. They know how to invest in situations that are perceived to be more risky. Others are better branded and deals come to them. However, these are not necessarily the best deals. In either case, due diligence is key. GPs need discipline to identify investments with good entry and exit potential.