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Carrots better than sticks for turnaround funds in Japan

Private equity funds such as KKR are increasingly seen by Japanese companies as allies rather than asset-strippers.

TOKYO -- Private equity funds operating in Japan used to get a lot of bad press. But these funds, once seen as practitioners of cutthroat U.S.-style capitalism, appear to have discovered that collaboration and persuasion often work better in Japan than simply calling for wholesale change in the way their investment targets are run.

     Panasonic's relationship with Kohlberg Kravis Roberts is a case in point. This month, the Japanese electronics company will sell its health care operations to the U.S. investment firm for roughly 150 billion yen ($1.47 billion). Since the two signed the deal last September, they have been working together to strengthen the business.

     "KKR has the expertise to help companies expand globally in all aspects, including supplying information and personnel," said Hirofumi Hirano, chief executive officer of KKR Japan.

No longer loathed

Turnaround funds are known to target unlisted companies and sometimes particular business units at listed firms, aiming to reap a profit when they go public or are sold off. Having gone through a slump after the global financial turmoil in 2008, they are making a comeback. The money raised by funds worldwide fell almost 60% from 2008 to about $295 billion in 2010, but recovered to $467 billion in 2013 on the back of global monetary easing.

     Private equity is a growing force in Japan as well. Domestic funds raised about 174.4 billion yen in fresh capital last year, up from around 91 billion yen in 2011, according to investment adviser Brightrust PE Japan. Recently, Unison Capital and Keystone Partners set up funds worth about 60 billion yen and 30 billion yen, respectively.

     And the funds' collaborative approach to the companies they target has prompted more businesses to embrace their help.

     Overseas investors have noticed a change in attitude among Japanese companies. New Horizon Capital CEO Yasushi Ando said he was bombarded with questions about whether Japanese businesses were no longer wary of turnaround funds when he spoke at a private equity forum in Hong Kong in January.

     Many small and midsize companies, looking to expand in Japan or overseas, partner with funds. Komeda, which operates some 550 coffee shops, mainly in greater Nagoya, received capital last year from MBK Partners. Seeing Komeda's potential to expand in the Tokyo and Osaka areas, MBK installed a former chief operating officer of McDonald's Japan as president of the chain to accelerate its nationwide growth.

Work with me

"Funds can be helpful for acquiring personnel as well," said Yuji Sugimoto, managing director at Bain Capital Asia.

     Companies can secure top-notch employees by tapping the networks of investment funds. Family restaurant chain operator Skylark, one of Bain's key investments in Japan, asked a former president of U.S. fast-food giant McDonald's to serve as its chairman.

     Wendel, one of the largest European funds, invested in Nippon Oil Pump, which controls 70% of the global market for trochoid pumps, used to adjust temperatures in machine tools. President Masato Nakao was attracted to Wendel's overseas network. "We hope to expand in Asia and Europe, which would've been difficult on our own," he said.

     Tamotsu Adachi, a managing director at The Carlyle Group's Japanese arm, said, "Midsize businesses with unique technologies and services that generate tens of billions of yen in annual sales can be promising investment targets."

Cutthroat competition

Last month, Cerberus Capital Management agreed to sell its shareholdings in Kokusai Kogyo to the Japanese company's founding family for more than 100 billion yen. Kokusai Kogyo was once a conglomerate that owned hotels and golf courses, but its earnings went south after Japan's economic bubble collapsed, and the U.S. investment fund acquired it in 2004.

     Another company that Cerberus invests in, railway and hotel operator Seibu Holdings, is slated to relist its stock as early as April. Some speculate the well-known vulture fund may pull out of Japan after it winds down its big investments in the country.

     Carlyle, KKR and Bain are among the long-established foreign funds that have built track records in Japan. And domestic funds, including those connected with financial institutions and trading houses, have produced some good results by working closely with companies. As the Japanese stock market recovers and earnings rise, there are fewer undervalued companies for funds to snap up. This could lead to a winnowing out of the business as some funds find it harder to deliver returns that satisfy investors. To survive, the funds will have to focus on their strengths.

     Competition with public-private funds is also intensifying. In addition to the Innovation Network Corp. of Japan, which has been around for a while, initiatives launched recently to support the government's growth strategy include an agricultural fund and the Cool Japan Fund to promote Japanese culture. Said to have 5 trillion yen available, including government guarantees, they could potentially squeeze private-sector funds.


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