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Business deals

Japan buyout firm sees more opportunities after Olympus deal

Japan Industrial Partners quietly expands amid coronavirus pandemic

Japan Industrial Partners is hoping to repeat its Vaio success with Olympus's camera business. (Sources photos by Kyodo) 

TOKYO -- Japan Industrial Partners is a business that is reshaping some of the biggest names in Asian manufacturing -- but it likes to keep a low profile.

With a staff of 30 people and run out of a small office in Marunouchi, the business district of Tokyo, the buyout firm discloses barely any details on its Japanese-only website.

But the company plays a major role in reorganization of Japanese industry, making headlines last month by announcing a plan to acquire Olympus's camera business. Previously it has acquired such companies as laptop computer maker Vaio from Sony, broadcasting and video systems maker Hitachi Kokusai Electric from Kohlberg Kravis Roberts, and defense equipment maker Nippon Avionics from NEC.

In doing so, the company has allowed Japan Inc. to pursue "deconglomeration" and greater specialization so as to better compete against their Chinese, Taiwanese and South Korean rivals. 

The growth of Japan Industrial Partners is also an indication of the growing acceptance of American business practices in Japan and the greater availability of talent needed for such an undertaking, including professional managers whom private equity firms can tap to lead their purchased companies.

Shinichi Inagaki, the company's managing director, expects demand for business unbundling will grow more in post-coronavirus Japan, as companies take a harder look at their operations and decide which businesses can adapt.

"Companies will start discussing business divestiture in greater earnest as they realize that the new normal is here to stay," Inagaki said in an interview.

"They will put their minds to the question of what they should focus on once they've dealt with the immediate challenge of the pandemic-induced recession," he said. "There are many big companies in Japan that require business reorganization."

Set up in 2002 with initial investments from Mizuho Financial Group and Bain & Co., Japan Industrial Partners is now a go-to place for Japanese manufacturers looking to sell assets. Often, it consolidates an industry by purchasing a number of operators and merging them, allowing the sellers to concentrate on their core business.

The buyout group manages 300 billion yen ($2.8 billion) in funds, with more than half coming from foreign investors such as university endowments. The remainder is provided by Japanese megabanks, insurers, regional banks and pension funds.

The client base has expanded beyond the customers of Mizuho and Bain after Japan Industrial Partners scrapped the capital partnership with them, becoming a top player in business carve-out. Between 2002 and 2019, the company has undertaken 19 carve-out deals worth 608 billion yen, putting itself just behind Bain Capital and KKR in total deal value in Japan, but ahead of Carlyle Group and Unison Capital.

At the moment, buyout deals are few and far between as heightened uncertainty over the course of the coronavirus pandemic has made it difficult to assess the real value of businesses, resulting in a sharp drop in merger and acquisition activity.

Data from Dealogic shows that investments by buyout funds in Japan have gone through cycles, with the first peak in 2007 and the second one in 2017 marked by Bain Capital's acquisition of Toshiba Memory. The solid stock market allowed buyout companies to cash out their investments through 2019. This year, however, exit deals have dried up. 

Private equity companies usually wrap up a fund in 10 years, aiming to make investments in the first three to five years then turn around the acquired companies in the next five years or so before cashing out and returning the funds to investors.

The business model has grown rapidly as investors have poured in money, looking for better yields amid ultra-low interest rates. Global private equity investments have grown at 20% a year in the last 15 years, according to Asset Management One, a Japanese asset manager.

Inagaki anticipates a shakeout this year. 

"As demand for private equity investments has grown, so has the number of funds. Competition has become very intense. Buyout funds that have invested in companies that are hit by the coronavirus pandemic, such as retailers, restaurant chains and tourism businesses, would struggle and have difficulty raising money for their next investment," Inagaki predicts. "The market will undergo a correction before a new upcycle."

Japan Industrial Partners' funds have not been affected by the pandemic so severely because of their focus on the electronics sector. The company's past funds have achieved their target return of 20-25% or more, except for one fund launched just before the Lehman crisis, which was nevertheless profitable.

The company says it has plenty of "dry powder" and is in no rush to raise new money. Its hands-on approach to business restructuring also means that the number of companies it can invest in is limited to up to 10. "We are expanding investments gradually," Inagaki said.

The company's limited portfolio and greater focus on the technology sector tend to make its performance tied to the global business cycle. The company is trying to diversify its investment into other areas, such as software, fashion and waste recycling, but its core expertise remains in electronics.

The 2014 acquisition of Vaio illustrates the company's approach to business turnaround.

Originally Sony's loss-making laptop business, Vaio was competing with global PC brands such as HP, Lenovo and Dell and chasing scale to compete. Under Japan Industrial Partners, Vaio has become a profitable niche player, focusing on producing laptop computers that are light enough to be carried around and as eye-catching as a MacBook, but also able to satisfy heavy-duty users. Inagaki says Vaio sales have been buoyed recently by an increase in business people working from home.

Japan Industrial Partners plans to apply a similar strategy to Olympus's camera business.

The division has been losing money under Olympus as smartphone cameras have taken market share from digital cameras. Olympus has also faced tough competition in the upscale market of cameras for professional and serious amateur photographers.

Inagaki thinks, however, that the brand can still be made profitable by playing to its strengths, such as its blur-free function, water-resistance and dust protection, features that are popular with outdoor photographers.

Olympus expects the population of such photographers to grow with the growing ranks of retirees in Japan. The acquisition will be completed by the end of the year after Olympus transfers the division into a separate entity.

Inagaki became an investment banker hoping to assist Japanese companies going global. That mission is still a work in progress.

Japan Industrial Partners has shown it is good at turning around domestic businesses of Japan Inc., but for many Japanese manufacturers, the biggest challenge is increasingly how to improve their operations overseas, not at home. 

One of its new investments, Kobelco & Materials Copper Tube, a maker of copper tubes for air conditioners and refrigerators, has plants in Thailand and Malaysia, for instance. Southeast Asia has become a vital region for Japanese manufacturers, Inagaki said.

Japan Industrial Partners currently does not have offices overseas. 

In the past, it has partnered with Bain Capital in some projects, but "developing a global support platform for clients will be a new challenge over the next few years," Inagaki said.

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