Keynote interview: J-STAR

J-STAR, the winner of PEI’s firm of the year category in Japan in our 2016 awards, is one of the country’s leading private equity firms with a string of successful deals. Here Yuki Kashiyama and Kazumasa Ohara explain how a dedicated operating team can help companies transition to new management.

What is unique about J-STAR’s internal operating team?
YK: Our diverse backgrounds – from consultancy to manufacturing, biotech and law – is one feature of which we are most proud. A typical operating team would have ex-consultants and senior executives with domain expertise. Although we are slightly more junior than what the industry would normally have in an operating team, all of us have operational experience as C-level executives at local small and medium enterprises, which we believe is very critical in the Japanese market in order to work effectively with a management team of a portfolio company.

External consultants generally work for a project for a large corporation together with the project members from the company. After the project team puts together the plans, usually those project members from the company would be responsible for implementing and executing the strategy. However, J-STAR’s portfolio companies do not usually have such corporate staff, and everybody is working in line with operations. This means we would need to provide more than what we proposed in the PowerPoint presentation. More importantly, we also need to provide the execution power, and to do this you need to understand the dynamics of the company, how it operates daily, and work closely with management to extract value from the operations.

What is your team’s primary role?
KO: We believe that in principle, value creation should be driven by the management team and an operating team like us should act as a catalyst and provide supplemental execution power.

For example, a portfolio company needs additional management resources to tackle a specific job like post-merger integration. If the company determines it needs to hire a full-time employee, it will be fixed costs for an ad-hoc task, so a traditional approach considered is hands-on involvement of the investment team and/or the engagement of external consultants.

However, the investment team has significant time constraints and most management teams in portfolio companies are not often used to working with third-party consultants. For J-STAR, our operating team has more than four decades of combined experience in law and consultancy, in addition to our C-suite experience at SMEs, so we know what goes on in an acquisition because we used to be on the other side of the negotiating table. We leverage these experiences to support the management team for such special tasks.

YK: One of the important roles we have is to bridge succession issues in our portfolio companies. For example, our principal Kazumasa Ohara is now looking at some opportunities in this space and he’s been involved from the beginning, from supporting the deal team during diligence, to even taking up the role of interim CFO of the portfolio company while we search for the right talent. In general, that would entail working in the company for some 18 months, whenever needed.

Is a generalist approach critical to your work?
YK: J-STAR is focused on SMEs in Japan. We think having a generalist approach and the flexibility to adapt to a wide variety of sectors is crucial. As an operating team, therefore, we don’t have a specific industry focus. We believe that whatever we may not have in industry-focus, we more than make up for function-wise, for example, in providing support for optimising business and professionalising management, addressing succession issues, actively seeking strategic bolt-on acquisitions to boost growth, and supporting our companies conduct mergers and acquisitions.

We invest mainly in companies that have a great business model or are niche leaders. They are winning and excelling in the district or regional level but need help shoring up their weaknesses, and building up their strength and power.

Domain expertise can be helpful for some portfolio companies, but what we essentially do is to enhance the organisational decision-making and tackle the operational hurdles to optimise returns. Domain expertise is helpful, but in most cases not that critical to the value-creation initiatives in the company.

Can you tell us more about how your team bridges management succes-sion in your portfolio companies?
YK: We look for non-distressed special situations which includes resolving succession issues. Typically, in the company structure of our portfolio companies, the owner is in his late 60s or 70s, but the middle managers or heads of the factories are mostly mid-40s executives, who are used to following directions from the owners.

There are huge hurdles when it comes to business succession. For example, after the owner’s exit, it takes time for those middle managers to get used to organisational decision-making instead of choosing smaller tactical objectives, and to eventually make strategic decisions that affect and shape the direction of the business. That is why usually we need to step in and provide support to them.

KO: From time to time we cannot immediately identify the right targets for CFO or CEO to bring in, or candidates may not be available to join in a timely manner, or our understanding of the company may still be very limited even after extensive pre-investment due diligence and management interviews, so our envisioned right candidates may not be the right person to address the real problem.

Through the “bridging period”, we get to understand the culture, the dynamism of the company, and skill-sets required to boost financial performance, and consequently our selection will be much more calibrated to the company’s needs and culture. During this time, we can also engage with other managers in the company, and get them to understand the necessity to bring in external help. Communicating this with them successfully ensures good support when the new CFO or CEO takes the reins.

Succession is happening in every part of Japan. You may find a good candidate in prefectures like Tokyo, Aichi, and Osaka relatively easily but for the SME owner in rural prefectures, it’s more difficult to find a suitable replacement in a timely manner.

Japan’s top-heavy demographic creates challenges for the govern-ment and economy, how do you view this?

YK: Japan’s working-age population is expected to shrink to about half of the total population by 2060, in addition business owners are all ageing. These are two major societal challenges in Japan. Industries need significant productivity improvement and consolidation. We believe this is an opportunity for a private equity firm like us to create value by providing capital and operational solutions for successful business succession, consolidation and optimisation.

Can you give an example where you’ve navigated a significant succession-related challenge?
YK: When we invested in plastics manufacturer Kugami in 2014, the owner was nearing 70 and he didn’t have enough resources and energy to enter a new market. The company had operations in Japan and China but there was huge potential to expand overseas. What they needed was a private equity firm like J-STAR to tackle the succession issue as well as to pursue an expansion plan and to go beyond their home markets.

Post-investment we kick-started a selection process for M&A and identified Thailand and Mexico as potential growth markets. We decided on Mexico mainly because of higher expected growth and less competition, then conducted further due diligence on five shortlisted acquisition targets in Mexico. We then selected LouMac because it had a good location and a European and American customer base.

With this acquisition, Kugami became a unique tier 2 player in the auto industry with a significant presence not just in Japan and China, but also in North America. Kugami is now getting more interest and global quotation requests which was not the case previously.

Kazumasa Ohara, principal at J-STAR’s operating team, has worked closely with manufacturing company TSS. He was previously chief financial officer at Flowell Corporation, a fluororesin fittings manufacturer, and has worked at the corporate division of the Bank of Tokyo-Mitsubishi.

Yuki Kashiyama, an operating partner at J-STAR, has overseen the firm’s value creation activities at portfolio companies including Kugami, Tokai Trim and Primagest. Prior to joining J-STAR, he worked at Boston Consulting Group in Japan and set up his own biotechnology business in the US and Chile.