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Business trends

Japan buyout firms ready $5.5bn for new round of investments

Country's anemic bond yields spur demand for alternatives

Japanese private equity firms invested in a record 750 companies last year.

TOKYO -- Japanese private equity firms will set up new funds worth roughly 600 billion yen ($5.5 billion) over the next few years to serve investors starving for higher returns in a time of continued low interest rates.

Unison Capital is preparing to launch a fund this year that is expected to eventually raise about 100 billion yen. The fund will mostly target midsize companies in the restaurant and drug store sectors due to their stable cash flows.

Polaris Capital Group, known for its aggressive acquisitions, will raise around 200 billion yen, more than twice the 75 billion yen raised in 2017. Tokio Marine Capital has a roughly 60 billion yen fund in the works.

New Horizon Capital has kicked off a round of fundraising that will take in about 20 billion yen by April. Investors include regional banks and the Organization for Small & Medium Enterprises and Regional Innovation. "We even had investors bring us potential investment targets," said New Horizon CEO Yasushi Ando.

The historically low yields that have become a fixture of Japan's bond market are fueling the inflow of client money. By contrast, the average buyout fund generates annual returns in the double digits. Japanese funds have caught the attention of overseas pension funds and university endowment managers.

Keystone Partners expects to raise between 30 billion yen and 50 billion yen. The firm specializes in investments in hotels and Japanese-style inns, a business area projected to grow steadily as more foreign tourists visit the country. Keystone will also support business improvement through lending.

Advantage Partners will also introduce a new fund.

Last year, funds invested in 750 Japanese companies, data from Tokyo-based acquisition adviser Recof shows, an all-time high and 25% higher than the year prior. It was announced last month that Nomura Capital Partners and U.S.-based Carlyle Group will jointly spend 57 billion yen to purchase Okinawa's Orion Breweries, Japan's fifth-largest beer maker.

Companies that have been spun off from larger corporations and businesses that lack successors to take over for aging managers have found new homes in the buyout firms' portfolios. Many of these targets have streamlined management and improved earnings thanks to the buyout firms' expertise in corporate revitalization.

However, there is no guarantee of continued success. The higher cost of acquisitions due to competition between buyers is a major issue.

When Godiva put its East Asian chocolate business up for sale, it sent out feelers to multiple Japanese candy makers. But they quickly withdrew because of the staggering price tag. Private equity firms are the only ones left, duking it out in a bidding war.

Higher purchase prices risk driving down returns. Recently, some companies have been bandied about between firms in a way that resembles a speculative money game.

Buyout firms have already built up cash reserves to record levels, and an additional 600 billion yen would deepen their pockets further. The last time the firms had so much money to play with was around 2006 and 2007. But the pricey acquisitions made during that period tanked in value shortly thereafter, when the global financial crisis struck.

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