Japanese Buyout Firms Bank on Corporates

Japan’s private equity firms, in search of new cash for investments, are gearing up to sell a chunk of their domestic assets this year to the nation’s cash-rich corporates, writes Reuters. Japan’s corporates bought $44.3 billion worth of companies from private equity firms in 2011, almost six times more than the year earlier, according to Thomson Reuters data.

Reuters – Japan’s private equity firms, in search of new cash for investments, are gearing up to sell a chunk of their domestic assets this year to a willing group of buyers – the nation’s cash-rich corporates.

Japan’s corporates bought $44.3 billion worth of companies from private equity firms in 2011, almost six times more than the year earlier, according to Thomson Reuters data. And their appetite is far from sated as they seek new growth avenues, even if they have to pay a premium.

“This is an ideal form of exit for investors in private equity funds, because corporate buyers tend to pay higher prices than private equity firms,” said Kazushige Kobayashi, managing director for Capital Dynamics, a large European fund of funds.

Japan’s private equity industry, while a promising one, has historically been a difficult market for buyout firms to operate in, though deal activity across the board has perked up lately.

Among potential deals, Europe’s Permira could sell Arysta LifeScience, in what would be one of the largest ever private equity deals in Japan. Permira bought Arysta in 2008 for 250 billion yen ($3.02 billion).

Homegrown Japan firm Unison Capital could sell the popular sushi chain, Akindo Sushiro. Both Permira and Unison Capital declined to comment.

Many private equity firms raised funds in 2006 and 2007, before the leveraged buyout boom burst in 2008. Their investment cycle usually lasts around five years and they typically sell assets to bolster their returns on investments as they approach investors for new money.

With Carlyle seen hitting the fundraising trail soon, and with mid-sized funds Tokio Marine Capital, Polaris Capital and Longreach Group already in the process of raising funds, more assets are expected to be offloaded.

Polaris and Tokio Marine are already trying to sell drugmaker Showa Yakuhin Kako. The sale process started in October but a buyer has not been named yet.

PREMIUM BUYERS

According to UBS Securities, Japanese companies had a cash pile of 6.9 percent of GDP in the third quarter of last year, compared with 2.4 percent for U.S. companies and 1 percent for European firms.

Japanese companies are ready to pay a premium because they believe an acquisition would often bring synergies with the current business, Kobayashi of Capital Dynamics said.

A recent example of a company’s willingness to undertake an acquisition at a premium is Mitsui Soko buying peer Sanyo Electric Logistics from Longreach Group.

Mitsui Soko, whose operating profit has remained almost flat for five years, paid 24.2 billion yen for shares in Sanyo, almost half of its own market value.

Longreach’s sale price on Sanyo Electric shares was 36 percent higher than what it paid to buy them in mid-2010. That compared with a 3.6 percent rise in Japan’s benchmark Nikkei 225 index over the same period. But the exact return on the investment is not clear because information on debt has not been disclosed.

“It was a big acquisition for us but we decided to go ahead because we believed there would be a synergy between our business and Sanyo’s,” said Norio Miyashita, head of Mitsui’s corporate planning division.

NOT AN EASY MARKET

Japan has not been an easy market for private equity investors, who struggled to find investment opportunities after raising a pile of capital to invest in the country during the global buyout boom in 2006 and 2007.

At the time, Japan was seen as a natural market for private equity buyouts, a mature economy with large companies which could sell off non-core assets to streamline their businesses – ideally suited to leveraged buyouts.

The reality proved more difficult, with Japanese owners reluctant to sell to private equity firms.

Some Japan-focused funds have returned money they raised in 2006 and 2007 without investing it. Others have closed shop.

Carlyle, the only global buyout firm with a dedicated Japan fund, returned part of the money to investors in 2009 after failing to find enough assets to invest in, while Advent International closed down its Japan office altogether in 2011.

Japan’s Advantage Partners is mulling extending the investment period on its current fund, and this month told Reuters it does not have immediate plans to raise a new fund.

And as sovereign wealth funds and pension funds who invest in private equity are cutting underperforming managers from their portfolios around the world, new fundraising promises to be far from easy.

Even exits can be tricky.

Korean private equity firm MBK Partners had its plans to sell software developer Yayoi, which it bought in 2007, dealt a blow when the frontrunner for the asset, Orix Corp walked away from the auction.

Joji Takeuchi, co-founder of Tokyo-based Brightrust PE Japan, an advisory firm for private equity investors, said while an initial public offering is often a preferred form of exit for investee company managements, post-IPO stock fluctuation can leave a considerable risk at the private equity investors because only a portion of the shares could be sold at the IPO.

“There has been a number of cases where shares in a company peaked at the time of IPO and started falling since then,” Takeuchi said. ($1 = 82.8300 Japanese yen) (Additional reporting by Stephen Aldred in HONG KONG; Editing by Muralikumar Anantharaman)