Carlyle Japan Eyes Industrials, Domestic Deals

(Reuters) – Japan’s industrial, healthcare and technology sectors are the main focus for the Carlyle Group, the co-head of its Japanese unit said, as the firm looks to invest locally in the post-disaster environment in companies with a clear ability to compete abroad.

Carlyle, the only major private equity firm with a Japan-focused, yen-raised investment fund, will concentrate more on companies in the range of 10 billion yen to 40 billion yen ($125 million to $500 million), in the buyout firm’s efforts to keep its Japan investing going at a time when some of its peers are pulling back.

“Our focus is so-called TMT – technology and telecommunications – also consumer and healthcare. And we also focus on general industries,” Tamotsu Adachi, co-head of Carlyle in Japan, told the Reuters Rebuilding Japan Summit in Tokyo on Monday.

“What we focus more on are companies with the potential capacity for global expansion. We see those companies as opportunities.”

Japan is a country where foreign investors have historically struggled to successfully churn out acquisitions and exits. Several major buyout firms never touch Japan investing, and some have shut shop.

The March 11 disaster has cast a spotlight on foreign investors in Japan, and what strategy they will pursue amid depressed asset prices, global economic uncertainty, and massive regional rebuilding effort.

Adachi seemed more intent on investing in a Japan company with global ambitions, rather than putting money into a domestic powerhouse that is content to stay put. He said that the market dive after the quake did present Carlyle’s existing Japan portfolio companies with the opportunity for a roll up acquisition of a local rival.

Adachi also set Carlyle’s sights higher, adding that for Japanese companies to be competitive in the current climate, there needs to be consolidation with the company’s top industries, citing the planned merger of Nippon Steel and Sumitomo Metal Industries as an example.

He said among the roles that Carlyle can play is providing the money needed for these types of deals. “We believe we can play a role to push this trend by providing the risk capital to those companies,” he said.

Washington DC-based Carlyle is one of the world’s largest private equity firms, with $106 billion under management. It was one of the first U.S. buyout firms to establish a broad operation in Asia, and has investments in companies ranging from Dunkin’ Brands, to Water Pik to Hertz.

Carlyle in 2006 launched a 215.6 billion yen fund designated for Japanese investments, known as Carlyle Japan Partners ll, but at the end of 2009, it had reduced the size to 165.6 billion yen.

Adachi said Carlyle plans to raise another Japan fund denominated in yen but he would not offer specifics.

Carlyle in March completed its acquisition of ball bearing maker Tsubaki Nakashima Co from a private equity unit of Nomura Holdings despite the disruption caused the earthquake and tsunami that hit northeastern Japan.

The purchase, valued at 66 billion yen ($814 million), was the largest buyout by a private equity firm in Japan since Bain Capital bought telemarketing firm Bellsystem24 Inc from Citigroup in 2009 for around $1 billion. The volume of global private equity deals nearly doubled last year to $227.5 billion, including debt, according to Thomson Reuters. But that is well below the 2007 total before the global financial crisis.

In Japan private equity deals fell 43 percent last year to $3.2 billion. So far this year about $1.4 billion worth of transactions have been conducted.

This year’s year-to-date figure stands at $111 billion, on 1,681 deals, on pace for a significant slowdown from 2010. Carlyle has also invested in Chimney Co, an operator of pub restaurants, and Broadleaf Co, a provider of software package systems for the auto industry in 2009.

The deals, each of which was worth around 20 billion yen, showed that even a firm with abundant cash like Carlyle could focus on smaller deals in Japan.

“The quake will serve as a trigger to change Japan, that is my expectation. Corporations who had a hard time making decisions, can look at localization of their operations,” Adachi said.

“The quake, of course, I feel strong condolences” to people impacted by it. “For the rejuvenation of Japan, I hope this will be a positive trigger for that.”

(By Junko Fujita and Michael Flaherty; editing by Chris Gallagher)