“This market commonly represents is a bit of testing of patience.”

Tatsuo Kawasaki, co-founder of Tokyo-based Unison Capital, speaks to PEI Asia about the close of the firm’s third fund and the Japanese private equity industry.

In August, Tokyo-based Unison Capital closed its third fund on ¥140 billion ($1.5 billion). Fund III will target management buyouts, spin-offs of business units from large corporations, ownership succession transactions and other buyout investments that can help companies grow.

Founded in 1998 by Tatsuo Kawasaki, John Ehara and Tatsuya Hayashi, Unison Capital presently manages two other private equity funds. The firm raised ¥38 billion for its first fund in 1999 and ¥135 billion for its second fund in 2004.

This June, the firm was featured in The PEI Asia 30, PEI Asia’s inaugural ranking of the 30 largest private equity firms from the Middle East and Asia Pacific. Unison Capital was fifteenth, having raised approximately $2.6 billion over the last five years.

* Unison Capital Partners III is one of the largest funds raised in Asia this year. How confident are you of deploying your fund in the market at this time?

Very much so. We’ve been doing this for the last 10 years, that is, investing in different sizes of companies but within the target arena that we have set, which is somewhere around ¥5 billion to ¥20 billion of equity target. That’s what we like and what we need in terms of fire power, given the fairly high levels of corporate activity that usually takes place in the economy. So I don’t think it’s that much of a difficulty.

* What was behind the firm’s decision to close fund III short of its original target?

We started off with a target of ¥200 billion. On the one hand, closing the fund on ¥140 billion is purely a reflection of investor appetite. On the other hand, there was a sense that ¥140 billion is enough for us to pursue our strategy. So it was a combination of both. As far as [LP] appetite goes, things have changed drastically for a lot of investors across the board so it’s just a reflection of the environment.

As always, fundraising comes with some challenge. It’s never automatic. I think we’re very fortunate to have strong support from existing investors. Close to two-thirds of capital for Fund III came from existing LPs. Our LPs are pretty diversified between Japan and non-Japan Asia, Europe and North America. Also, we were fortunate to run into investors with large portfolio sizes that have also expanded into Japan as part of their portfolio expansion. So, in the end, fundraising went as smoothly as one can expect from the current environment.

* In light of the financial crisis, have you seen an increased tendency on part of large Japanese conglomerates to divest non-core assets?

I think so. None of this would have happened 10 years ago. Today, at least a lot of companies think about it and go through with programmes to review their business portfolios. It’s probably happening at a slower rate than many of us might wish to see happen in the Japanese market. But I think we’re looking at a growing trajectory in that regard. At the same time, many companies, large or small, are faced with performance issues, given the changing economic environment. For some it makes a lot of sense to think about buying time, if you will, and selling non-core businesses out of their portfolio.

* Do you see sufficient investment opportunities in Japan?

One thing that this market commonly represents is a bit of testing of patience. It took us a while to create a platform that is sufficient to penetrate into the corporate community here. You have got to have a team of capable investment professionals residing in Japan. One has to make a long-term effort to penetrate the market and that’s probably what drove some of the non-Japanese GPs, who have options not to be here, to pull out.

There have been some disappointments perhaps, in terms of the growth of the market. It is still at the infancy stage where those in or around the trade believe in its potential for significant impact, but the actual rate of penetration in the market is still very limited compared with the overall corporate activity in Japan.

* What EBITDA multiples are currently available for buyout transactions and what is the state of bank lending in Japan today?

Roughly speaking, EBITDA multiples are anywhere around 2x to 6x. There are some outliers, needless to say. Bank lending is cautiously opening up compared to the first six months of this year, which was very difficult. In many ways, it is a function of liquidity. It’s all down tremendously just as the rest of the world has seen in terms of acquisitions and loans and lot of it has to do with that ability to underwrite loans, which is slowly starting to happen.