3i Links with IBJ in Japanese MBO Venture

3i Group and Industrial Bank of Japan (IBJ) in April unveiled a joint venture to target Japan’s nascent buyout market. The new company, 3i-Kogin Buyouts, combines the extensive MBO expertise 3i has developed in the UK and Continental Europe with the unrivalled business network of IBJ within Japan.

3i has a 60% stake in 3i-Kogin Buyouts and IBJ holds the remaining 40%. The joint venture partners will launch an initial fund of 20 billion (euro 158 million) for investment via 3i-Kogin Buyouts, to which they have committed 10 billion pro rata with their shareholdings in the new firm.

Charles Richardson, 3i’s director of corporate affairs and business development, said that 3i-Kogin expects to attract capital both from existing 3i clients in the US and Europe and from new sources in Japan and elsewhere in Asia.

Chris Boulton, a 3i local director based in Tokyo, will be president of 3i-Kogin Buyouts and Junri Oda of IBJ has been appointed managing director. The partners intend to recruit a further senior executive and other investment staff locally in the near future.

3i-Kogin Buyouts represents a further development of the long-standing relationship between 3i and IBJ. For the past decade, the two groups have operated another joint venture, 3iBJ, which has invested around

GBP50 million (euro 75 million) in more than 190 Japanese companies. 3i originally owned a 40% minority stake in the development capital joint venture but has recently reduced its stake to less than 20%.

The formation of 3i-Kogin Buyouts reflects the strategic objectives of both partners: 3i is continuing to expand its international network throughout Europe and Asia, while IBJ is extending its investment banking capabilities.

A spokesman for IBJ commented, “Considering the growing need for corporate restructuring among Japanese companies, [3i-Kogin] will be in a position for them to solve such problems through MBOs”.

Charles Richardson pointed to “a growing sense in Japan that it is time for change in the corporate world”. As well the expected wave of restructuring and consolidation in the wake of the recent economic turbulence experienced by Japan and other Asian markets, other forces for change have emerged. These include a greater focus on maximising shareholder value and a growing perception that the age of “jobs for life” has passed.

Despite these factors, a Japanese buyout market will not develop overnight. “Most of the handful of buyouts seen in the country to date have involved the Japanese subsidiaries of foreign corporations, and indigenous groups are unlikely to be quick adopters of the buyout concept.

“We are not expecting an instant revolution but do hope to see gradual change as MBOs are increasingly recognised in Japan as one method of effecting corporate restructuring”, said Charles Richardson.

Commenting on 3i-Kogin’s ambition to introduce MBOs to the Japanese corporate market, Brian Larcombe, 3i’s chief executive, drew parallels with 3i’s experience in Germany.

Charles Richardson said members of the group’s Asian team had also pointed to structural similarities between the German and Japanese markets, not least the population of aging owner-managers who founded businesses in the years following World War II and now need to resolve ownership succession issues.

In addition, Japanese industrialists share with their German counterparts a reputation for building solid, hierarchical businesses and taking a longer-term strategic view than many of their Anglo-Saxon competitors.

Although significant differences persist between the German private equity market and the UK or US models, slow initial adoption of the buyout concept in Germany was followed by a rapid ascent of the learning curve, and Germany is now seeing a huge groundswell of buyout activity.

3i-Kogin’s first priority, therefore, will be extensive marketing of the MBO concept throughout its target market.

Charles Richardson said that 3i-Kogin has not set hard and fast rules regarding target deal sizes or structures. “When we have the infrastructure and funding in place, we must first market our concept and assess the opportunities that emerge before refining a product to suit market requirements”. The fund will invest exclusively in Japan; 3i will continue to address opportunities elsewhere in Asia through its Singapore office.

IBJ should prove a powerful ally for 3i as the firm seeks to penetrate the Japanese market. Established in 1902, IBJ was one of the prime movers in corporate finance in Japan and made a significant contribution to the development of the country’s industrial base. Because IBJ is not controlled by any particular corporate groups, the bank has been able to maintain good relationships with a broad constituency of customers in the corporate and financial sectors; last year, IBJ topped the investment bank rankings in Nikkei Financial’s annual popularity polls.

The formation of alliances with leading international partners offering complementary financial products constitutes an important plank of IBJ’s drive to enhance its investment banking capabilities.