Asia’s Private Equity News Source avcj.com June 16 2015 Volume 28 Number 22

EDITOR’S VIEWPOINT Investors wait for nore big-ticket deal flow Page 3

NEWS Apax, Archer, CITIC Goldstone, Future Fund, Hony, KKR, MLC, Quadria, Sequoia, Shoreline, TPG Page 5

FOCUS Why local banks are still a force in deal-sourcing Page 14

INDUSTRY Q&A Masamichi Yoshizawa of The Longreach Group Page 15

CONTRIBUTED ARTICLE Purchasing power? Bain & Co’s Jim Verbeeten on creating value PE investors find new ways to unlock value in Japan’s consumer sector Page 9 Page 19

ANALYSIS FOCUS

A boardroom battle Monetizing science Japan’s corporate governence challenge Page 12 Venture capital taps university start-ups Page 16

PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM JAPAN 2015 Anything is possible if you work with the right partner

Unlocking liquidity for private equity investors www.collercapital.com London, New York, Hong Kong EDITOR’S VIEWPOINT [email protected]

Managing Editor Tim Burroughs (852) 3411 4909 Staff Writers Andrew Woodman (852) 3411 4852 Winnie Liu (852) 3411 4907 Large check limbo Holden Mann (852) 3411 4964 Creative Director Dicky Tang Designers IT IS NOT A PHENOMENON UNIQUE TO more in 2014 – and 11, 14 and 11 in the three Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow Japan. Pick a major Asian market with public years before that – the mid-market space is not markets trading at or close to an all-time high discouraging. While valuations are a concern, Senior Research Manager and you find a cumulative private equity industry participants say they can rely on a steady Helen Lee investment figure that is lagging the previous stream of opportunities involving companies Research Associates Herbert Yum, Jason Chong, year’s pace. that face succession planning issues or require Kaho Mak The Nikkei 225 Index is up 34% on a 12-month support to achieve certain expansion goals. Senior Marketing Manager basis. At the end of May, it surpassed the previous Bain’s Ooedo-Onsen investment was as Sally Yip peak set at the height of the technology boom succession-planning deal, but a fair portion Circulation Administrator in 2000. Nearing the mid-point of 2015, private of these larger transactions are carve-outs Prudence Lau equity investors have deployed $1.9 billion in the from domestic conglomerates. Eight of the 16 Subscription Sales Executive country. This compares to $6.5 billion for 2014 as biggest deals announced since 2012 fall into Jade Chan a whole. The average for the previous five years is this category. As the country’s gargantuan Manager, Delegate Sales $7.7 billion and approximately 450 deals. conglomerates come under economic and Pauline Chen In percentage terms, the drop-off in Japan political pressure to boost performance, private Director, Business Development is more severe than in any other major Asian equity investors hope to see more divestments Darryl Mag market. Meanwhile, in Australia, where the AlixPartners is also bullish, citing the 97% of Manager, Business Development S&P/ASX 200 Index has challenged pre-global respondents in its latest Asia-Pacific corporate Anil Nathani, Samuel Lau financial crisis highs, PE investment is up year- restructuring and turnaround survey who Sales Coordinator on-year. Contrasting outcomes reached due to a expect increased activity in Japan as companies Debbie Koo common factor – the ability of large-ticket deals recognize the importance of timing in corporate Conference Managers to move the needle in leverage buyout markets. reorganization. Jonathon Cohen, Sarah Doyle, Not all deal values are disclosed, but AVCJ For private equity firms that have raised ever- Conference Administrator Research has records of six investments worth larger pan-regional funds, Japan is a key market. Amelie Poon in excess of $100 million in Japan so far this year. Alongside Australia, it is – for now, anyway – one Conference Coordinator Fiona Keung, Jovial Chung They are led by Bain Capital’s acquisition of span of few destinations where it is possible to write hotel operator Ooedo-Onsen for $423 million. large checks. They need Japan to deliver on Publishing Director Australia has seen three deals of $1.4 billion divestments. Allen Lee or more, including the $6.2 billion acquisition of GE Capital’s Australia and New Zealand consumer lending unit. Japan hasn’t seen a $1 billion- Incisive Media plus deal since KKR bought a majority stake in Tim Burroughs Unit 1401 Devon House, Taikoo Place Panasonic Healthcare in 2013. Managing Editor 979 King’s Road, Quarry Bay, Hong Kong Given there were 14 deals of $100 million or Asian Venture Capital Journal T. (852) 3411-4900 F. (852) 3411-4999 E. [email protected] URL. avcj.com Japan private equity investment Beijing Representative Office 20,000 600 No.1-2-(2)-B-A554, 1st Building, No.66 Nanshatan, Chaoyang District, Beijing, People’s Republic of China 15,000 500 T. (86) 10 5869 6203 F. (86) 10 5869 6205 E. [email protected] 10,000 400 Deals US$ million The Publisher reserves all rights herein. Reproduction in whole or 5,000 300 in part is permitted only with the written consent of AVCJ Group Limited. ISSN 1817-1648 Copyright © 2015 0 200 Australia China Hong Kong India Japan Singapore South Korea Buyout Growth/pre-IPO PIPE Start-up/early-stage Other No. of deals Source: AVCJ Research

Number 22 | Volume 28 | June 16 2015 | avcj.com 3 Private Equity & Venture Forum Korea 2015 15 September, South Korea - Westin Chosun, Seoul

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Driving the creative economy through SIGN UP private equity and venture capital BY 3 JULY AND SAVE 5 reasons to attend US$300 Discover the next big hot sectors in Asian private equity and the 1regions that will be best placed to provide returns in five years' time Understand how domestic fund managers are helping 2 Korean companies expand overseas Uncover the strategies, regions and intermediation levels 3 that Korean LPs traditionally prefer Hear what new industries are currently attracting VC funding 4 worldwide and how Korean GPs can collaborate with foreign VCs Find out the return requirements and expectations of LPs in Korea 5 Simultaneous translation is For the latest programme, please visit avcjkorea.com available

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avcjkorea.com #avcjkorea Private Equity & Venture Forum Korea 2015 NEWS 15 September, South Korea - Westin Chosun, Seoul AUSTRALASIA Shoreline closes Fund III at Warburg Pincus part exits $500m China Biologic Archer buys D&B’s China-focused distressed debt and special Warburg Pincus has raised $241.5 million by situations investor Shoreline Capital has closed reducing its stake in US-listed biopharmaceutical Australasia credit unit its third fund at $500 million. The GP has also developer China Biologic Products. The PE firm Archer Capital has agreed to buy Dun & reached a first close of $115 million on an sold 2.3 million shares at $105 apiece, reducing Bradstreet’s (D&B) Australia and New Zealand- overflow vehicle. About half of Fund III has its stake in the company from 42.8% to 33.6%. based credit data business for A$220 million already been invested across several transactions ($170 million). The company provides credit- and there are almost 1,000 non-performing Morningside leads $15m checking and debt recovery services, delivers loans (NPL) in the portfolio. In addition to GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjkorea.com data-based sales and marketing solutions, and NPLs, Shoreline targets distressed and non- Luqa Pharma investment offers risk assessment and analytics in a variety distressed opportunities that generally arise from Hong Kong-based pharmaceutical developer of areas. inefficiencies in China’s financial system. Luqa Pharma has raised a $15 million Series A round of funding led by Morningside Ventures. Driving the creative economy through SIGN UP Australia’s MLC to open US The capital will be used to expand Luqa’s operations and commercialize its product range. private equity and venture capital BY 3 JULY office AND SAVE MLC Private Equity, which is part of National Nordic Capital backs Australia Bank’s wealth management division, will open an office in New York to cover investment Chinese car seat maker reasons to attend US$300 opportunities in North America and Latin European GP Nordic Capital has acquired Max-Inf, America. The office will be led by Andrew Kwee, a Chinese manufacturer of children’s car seats, 5 who joins the firm from LGT Capital Partners. to complement its existing portfolio investment in UK child safety products firm Britax. Max-Inf Discover the next big hot sectors in Asian private equity and the GREATER CHINA makes child car restraints that are both exported regions that will be best placed to provide returns in five years' time and sold domestically under the brand name 1 The private equity firm’s previous fund, Baby First. Online property insurer Shoreline China Value II, closed in March 2013 at $303 million. It followed a $178.2 million debut Social e-commerce start-up Understand how domestic fund managers are helping raises $931m vehicle, raised in 2008. The investor base for Fund Korean companies expand overseas Zhong An Online Property Insurance, which was III is drawn from the US, Canada, Europe and Asia, raises $10m 2 set up by affiliates of Alibaba Group, Tencent with government and private pension funds Chinese e-commerce discovery site Red has Holdings and Ping An Insurance, has raised featuring most prominently. Commitments also raised more than $10 million in Series B funding Uncover the strategies, regions and intermediation levels RMB5.78 billion ($931 million) from Morgan came from endowments, foundations, insurance from GGV Capital. Red operates an e-commerce that Korean LPs traditionally prefer Stanley, China International Capital Corp, Keywise companies, family offices and high net worth platform that offers discounted goods from 3 Capital Management, SAIF Partners, and CDH individuals. Several of the endowments and overseas. The items available are chosen by users Investments’ wealth management platform. They foundations have backed Shoreline since Fund I. living outside of China, who post the products what new industries are currently attracting VC funding will take a 19.4% stake in the business. The decision to raise an overflow fund came along with photos and their opinions. Hear after the GP found it had more than enough 4 worldwide and how Korean GPs can collaborate with foreign VCs Hony, CITIC Goldstone buy opportunities in which to deploy the $500 million GoGovan gets $10m Series corpus. It went back to investors and invited into Bright Dairy them to increase their allocations. The overflow B round Find out the return requirements and Hony Capital and CITIC Goldstone will cover close fund is expected to reach a final close of $200 Hong Kong app-enabled logistics start-up expectations of LPs in Korea to three quarters of a RMB9 billion ($1.45 billion) million within a month. GoGoVan has raised $10 million in Series B round 5 Simultaneous private placement by Shanghai-listed Bright of funding. Investors in the round included Hu translation is Dairy, which will be used fund the acquisition Zemin, the former CEO of Android app store available For the latest programme, please visit avcjkorea.com of Israel-based Tnuva Food Industries from its reported valuation of $250 million, but in recent 91 Wireless, and social media firm RenRen. parent, Bright Food Group. Bright Dairy will sell years it has been loss-making. Launched in July 2013, GoGoVan offers on- Registration enquiries: Carolyn Law T: +852 3411 4837 E: [email protected] approximately 559 million shares at RMB16.10 demand delivery services via an app connects apiece. delivery drivers with customers. Enquiry Sponsorship enquiries: Darryl Mag T: +852 3411 4919 E: [email protected] Sequoia, Fosun support Bona Film take-private Apax sells restaurant chain Nest forms accelerator with Asia Series Sponsor Co-Sponsors Sequoia Capital and Fosun International are Golden Jaguar supporting a take-private offer for Bona Film Nissan Apax Partners has agreed to sell Chinese Group that values the US-listed Chinese film Infiniti, the luxury car unit of Japanese automaker high-end restaurant chain Golden Jaguar to distributor at around $832 million. Sequoia, Fosun Nissan, has teamed up with Hong Kong-based Hong Kong-listed Carnival Group International and Dong Yu, Bona’s founder and chairman, are incubator Nest to launch a platform that Holdings for HK$253.4 million ($32.7 million). The willing to pay $13.70 per share in cash for all will support start-ups developing smart city private equity firm acquired the asset in 2011 at a outstanding American Depository Shares. solutions. Up to eight companies will receive Join your peers avcjkorea.com #avcjkorea Number 22 | Volume 28 | June 16 2015 | avcj.com 5 NEWS

capital plus mentorship from specialists in smart KKR’s Panasonic Healthcare participated. AST provides off-grid solar power to cities, hardware, manufacturing, transportation, the telecom and banking industries, supplying and technology. agrees $1.1b Bayer bolt-on energy to telecom towers and ATMs. Panasonic Healthcare (PHC), the Japanese medical equipment manufacturer in which Swiggy raises $16.5m from NORTH ASIA KKR acquired a majority stake last year, has agreed to buy Bayer’s diabetes care business for Norwest, Accel, SAIF Polaris acquires Japan EUR1.02 billion ($1.15 billion). PHC is a leading Indian food delivery platform Swiggy has manufacturer of blood glucose monitoring raised $16.5 million in a Series B round led by massage salon operator meters and sensors for diabetics. Bayer Diabetes Norwest Venture Partners, along with existing Japan’s Polaris Capital has acquired massage Care (BDC) is a key distributor of PHC-made investors Accel Partners and SAIF Partners and an salon chain Factory Japan Group (FJG) for an products and so the acquisition represents a step unnamed investor. The company plans to use the undisclosed sum. The investment was made via towards vertical integration. funds to expand its coverage area and improve Polaris Private Equity Fund III. FJG operates 200 The Bayer unit is present in 125 countries and its technology and logistics services. salons under the Karada Factory brand. generated sales of EUR909 million in 2014. PHC’s sales came to JPY134.3 billion ($1.09 billion) for Healthcare player La Renon MC-Seamax closes shipping the financial year ended March 2013. gets $16m from Sequoia fund at $300m La Renon, an Indian developer and manufacturer MC-Seamax Managagement, the US-based GP of pharmaceutical drugs and services, has raised backed by Japanese conglomerate Mitsubishi, INR1 billion ($16 million) in Series A funding from has reached a $300 million close on its maiden Sequoia Capital. The company, which focuses on fund intended to take advantage of depressed treatments for chronic kidney disease, will use prices in the global shipping industry. The close the funds to improve its R&D efforts. is less than half of the $750 million the GP had been looking to raise when is announced the fund in 2013. SOUTHEAST ASIA Japan approve $80m for TPG joins $129m university VC fund “Together we will leverage our experience PropertyGuru deal Japan’s Ministry of Economy, Trade & Industry and network to create a global diabetes care Singapore online property portal PropertyGuru (METI), and the Ministry of Education, Culture, solutions powerhouse in an effort to make this a has raised S$175 million ($129 million) from Sports, Science & Technology (MEXT) have transformational transaction for the diabetes care TPG Capital, Australia’s Square Peg Capital, and approved a JPY10 billion ($80 million) investment industry,” Johannes Huth, KKR head for Europe, Indonesian media company Emtek Group. The by Osaka University into its recently launched Africa and the Middle East, and Hiro Hirano, company will use the new investment to support venture capital arm. The fund will back university- the company’s Japan CEO, said of the BDC its expansion plans in Southeast Asia. initiated start-ups looking to commercialize acquisition. innovation based on academic research. KKR paid JPY165 billion for an 80% stake Navegar backs Philippines- in PHC in a deal announced last September. Panasonic had decided to retain 20% of based TaskUs SOUTH ASIA the business and wanted a partner to help Manila customer support outsourcing start-up drive growth. Cross-border M&A was a key TaskUs has received a $15 million series A round Quadria closes maiden consideration. By the time the transaction closed from the Philippines-based Navegar Fund. TaskUs, in April, KKR’s Capstone operations unit was which is headquartered in California but operates healthcare fund at $304m already working with the company on a number in the Philippines, handles customer support Quadria Capital has reached a final close on its of potential bolt-on acquisitions. requests from US tech companies including Uber, maiden healthcare fund at $304 million. The Groupon and Tinder. fund, which will focus on mid-sized healthcare companies across South and Southeast Asia, announced plans to acquire rival chain DT Malaysia unveils equity reached a first close of $107 million in late 2013. Cinemas for INR5 billion. crowdfunding platforms Multiples to up stake in Future Fund leads $40m The Securities Commission of Malaysia (SC) has announced six registered crowd equity India’s PVR Cinemas round for solar firm platforms that will be allowed to raise capital Multiples Alternative Asset Management has Australia’s Future Fund has led a $40 million for small businesses and start-ups. The six agreed to invest INR3.5 billion ($54.6 million) investment in India-based Applied Solar platforms - which are all set to launch operations in Indian cinema chain PVR Cinema, raising its Technologies (AST). Existing investors Bessemer by the end of this year - are Alix Global, Ata Plus, stake in the company to 19.6%. The investment, Venture Partners, Capricorn Investment Group Crowdonomic, Eureeca, pitchIN and Propellar which PVR comes just days after the company and the International Finance Corp. also Crowd+.

6 avcj.com | June 16 2015 | Volume 28 | Number 22 This announcement appears as a matter of record only. April 2015

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To understand how AVCJ Research can help you with your data needs, please call: 852-3411 4961 or email [email protected] avcj.com COVER STORY Customized Research Report [email protected] Asian Private Equity Big spenders Japan’s gradual economic recovery could deliver a wealth of new opportunities in the consumer space. But Data Made Simple to realize true value, private equity firms must look deeper, or in certain cases, further

IN FASHION-CONSCIOUS JAPAN THE time consumer sector saw similar levels of activity and refrigerators. The obvious reason is that domestic apparel market is currently worth was 2012 when $719 million was committed durables include larger, non-essential purchases JPY11.5 trillion ($93 billion), according to the to 11 companies. Given the concentration of that are more likely to be impacted by a sudden Ministry of Economy, Trade, and Industry (METI). capital into a small number of investments, it is downturn in consumer confidence. Clothing label Mark Styler has been spending the all but impossible to gauge the impact of the “Durables have traditionally been a very last decade trying a grab its chunk of it. macroeconomic climate on deal flow. difficult segment and generally speaking these AVCJ Research can provide The company has made substantial progress An understanding of the broader economic companies are too large for us to pursue,” your firm with timely and since its founding up in Tokyo’s trendy Shibuya trends, however, does offer some interesting says Megumi Kiyozuka, managing director district in 2005. Mark Styler has built a portfolio context. According to METI, consumer activity at CLSA Capital Partners. “On the other hand, accurate research support of 17 women’s fashion labels, opened 170 appears to be recovering. Overall retail sales consumables are a more realistic area for growth.” own-branded stores, and developed its own came to JPY11.5 trillion in April, up 5% year- CLSA’s recent investment in food and to help you simplify and e-commerce portal, Runway Channel. The on-year – the first monthly increase since the beverage maker Asamiya falls into this expedite your workflow. We company is understood to have generated JPY37 consumer tax was introduced. However, this category. The company’s strength lies in its billion of revenue in the 2014 financial year. was tempered by the release of the consumer focus on low-cost manufacturing achieved conduct in-depth research CITIC Capital, which acquired Mark Styler last confidence index for May, which at 41.4 was through operational efficiencies and value month for an undisclosed sum, wants to build down slightly from the previous month. chain integration. The PE firm hopes to expand and provide insightful on this success in Japan by expanding the brand As for the general economy, last week it was Asamiya’s product lines across the country. analysis in a bespoke report portfolio and scaling up the online stores. At the same time the Chinese GP hopes to replicate the that fully meets your data company’s success overseas. “There is a lot of operational improvement requirements. Mark Styler is one example of an attractive niche within Japan’s consumer retail space for potential, and store footprints haven’t necessarily private equity investors both inside and outside been built out nationally” – David Gross-Loh the country. But the sector is still recovering from its share of macroeconomic headwinds. AVCJ’s industry standard data is used by the world’s leading firms in their The most recent challenge was the announced that first-quarter annualized GDP CLSA’s activity in the high-end consumer fundraising, investor relations communications and deal due diligence consumption tax hike introduced in April of last growth reached 3.9%, beating a preliminary products space stands in stark contrast to this year – the first increase in 17 years – that saw the estimate of 2.4%. On a quarter-on-quarter basis, strategy. Kiyozuka explains this is a symptom of activities. AVCJ Customized Data Service includes: value-added tax on retail goods rise from 5% to the economy expanded by one percentage increasingly bifurcation in the consumer space 8%. A further planned hike to 10% was scheduled point, a second consecutive three-month period where the best opportunities for growth can be for October but has since been kicked back of growth since last year’s recession. Meanwhile, found in companies that offer either a premium ✔ Pan-Asian Industry Reviews/Regional Reports – timely updates to 2017. Consumer appetite has further been the Nikkei 225 Index is at its highest level in 15 brand that taps into rising disposable incomes or ✔ Specific industry and financing stage research impacted by a weakening yen, which has added years, having gained 34% in the last 12 months. a cost-competitive growth model. to the cost of imported goods. For private equity, this means valuations are If Asamiya sits at one end, then Baroque ✔ Comprehensive statistics on investments and funds For GPs seeking to create value, simply relying continuing an upward trend that began when Japan, an apparel business CLSA sold to China- on the resilience of the Japanese shopper and Prime Minister Shinzo Abe introduced his three- focused CDH Investments and Belle International ✔ Exits strategic analysis the sector reclaiming some semblance of its pronged package of economic reforms in 2013. in 2013 sits at the other. former strength is not enough. There are longer- “It is a good thing overall, but in terms of Carlyle’s Tomioka expresses a similar view. ✔ Market peers comparison term trends, notably the changing needs of an entry valuations, some companies are even in “Anything with a luxury brand for which people ageing domestic population and rising demand the 10-12x EBTIDA range as a result of the current are willing to pay a premium is in a good for Japanese products overseas, to be leveraged. condition of the equity markets,” says Takaomi segment of the consumer sector,” he says. Private equity firms’ skill-sets must evolve in line Tomioka, managing director with The Carlyle “Otherwise it has to be something that people with the sector. Group. “This is higher than the historical sector need to purchase, for example skincare products average, but it is still lower than in the US.” for women.” Consumer analysis When it comes to the types of consumer Emmett Thomas, head of Asia with Advantage AVCJ data show there have been seven private sub-sectors GPs are targeting, there are a couple Partners, notes that bifurcation is also a function To understand how AVCJ Research can help you equity investments so far this year in the of different strategies. The overwhelming of geography. The private equity firm’s portfolio with your data needs, please call: 852-3411 4961 or consumer and retail space worth a combined majority of private equity investment has includes apparel firm Credge, which has $346 million. This compares to $410 million tended toward consumables, such as food and much in common with Baroque Japan and is email [email protected] across nine deals for the whole of 2014. The last clothing, over durables, such as cars, electronics concentrated in urban areas, specifically Tokyo. avcj.com Number 22 | Volume 28 | June 16 2015 | avcj.com 9 COVER STORY [email protected]

“There is still a lot of opportunity in Japan Japan’s retail sales and this is underappreciated. There is a lot 15,000 12 of operational improvement potential, and 10 store footprints haven’t necessarily been 12,000 8 6 built out nationally,” says David Gross-Loh, 9,000 4 managing director at Bain. “There is often a lot 2

% you can do on the product and pricing side. 0 6,000

JPY billion JPY -2 These companies are usually under-run and -4 undermanaged.” 3,000 -6 -8 Tatsuo Kawasaki, co-founder of Unison 0 -10 Capital, reports a similar experience with Akindo Sushiro, a sushi restaurant chain the firm acquired Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 between 2007 and 2008 for around JPY18 billion. % change on previous year Retail sales (JPY billion) Unison reinforced management and then drove Source: Ministry of Economy, Trade & Industry (METI) up profits through marketing and bringing in part-time workers. Once the platform was improved, the company was able to roll-out additional stores and it was eventually sold to PE investment in Japan’s consumer sector Permira for $1 billion in 2012. 800 15 “There is a certain consistent methodology in approaching multi-locational strategy-based 600 12 retail businesses,” say Kawasaki. “We think there is some sector growth to be obtained on one hand, 400 9 and efficiency gains on the other hand, through Deals operational improvements.” US$ million 200 6 Focusing on making a business better at home is also a lower-risk strategy than seeking 0 3 expansion overseas – especially in markets where 2008 2009 2010 2011 2002 2003 2004 2015ytd local tastes are so different that it requires a No. of deals Investment (US$ million) fundamental re-thinking of the business model. Source: AVCJ Research And the Japan model is itself unique by Asian standards: there is an opportunity to leverage the country’s ageing population. Then in the lower-cost space, Komeda Coffee Japanese corporations are not able to identify Carlyle’s Tomioka estimates that around 25% – which has since been sold to MBK Partners – successors,” he adds. “They must do something of the population is above 65 years old, and targeted lower middle income consumers by with their businesses and they are looking more than 40% will 65 or more by 2050. His firm focusing on locations outside of Tokyo. to private equity for a means of monetizing sought to capitalize on this trend by investing “There is no doubt a theme of low cost their shareholding and introducing new in dietary supplements manufacturer Sunsho innovation, of finding business models that management.” Pharmaceutical last year. Unison also sees deliver value to consumers who are not in a Indeed, succession opportunities often opportunities by targeting consumer groups position to pay high prices for products and represent the situations in which private equity that are not only ageing but also have rising services,” Thomas says. He goes on to describe is best placed to add value. Founders are often disposable incomes. another current Advantage investee – massage well-equipped to handle the marketing and “It means there is a higher propensity to chain Riraku – as “a very innovative company with customer side – that is how they achieved scale consume certain services,” Kawasaki says. “This a business model that is tapping into the low- in the first place – but have neglected to build could include leisure activities, and a wide range cost mentality.” up a management team suitable to run their of health-orientated activities and services such business. As a result, it can harder to attract a as health clubs, massage and wellbeing.” Improved access higher level of professionals with functional Valuations aside, getting access to consumer experience in areas such as supply chain Outward bound companies has arguably never been easier. The management and procurement. These dynamics do not apply to all investments. sector remains highly fragmented in Japan, Bain Capital’s investment in Domino’s Pizza In certain cases, there is not room for dominated by family-owned businesses that in Japan captures several of these issues. The PE firm companies to expand at home or the changing many cases face succession issues and require acquired the master franchise in 2010 in deal that demographic trends are just not relevant to the a partner to assume control and drive future valued the business at JPY6 billion ($66.5 million). product. Alternatively, the overseas potential of a growth. One of the first steps was to use the Bain network business might be too big to ignore. Advantage’s Carlyle’s Tomioka says there are plenty to bring in a new CEO and management team Thomas, who is based in the firm’s Hong Kong of consumer-focused companies where the that could improve operations and aggressively office, explains that around two third of his firm’s founding family still owns 51% or more and is expand the restaurant chain’s footprint. portfolio companies are pursuing some kind of directly responsible for day-to-day management. Domino’s Pizza Japan is also an example of cross-border strategy. “Based on our data, more than two thirds of the capacity for growth in the domestic market. Pokka, a drinks company that Advantage

10 avcj.com | June 16 2015 | Volume 28 | Number 22 COVER STORY [email protected]

delisted in 2005 and later sold to brewery giant in recognized the potential in leveraging the While it may not be appropriate in all cases, Sapporo in 2011, is an example of this. so-called “cool Japan” factor. Overseas brand overseas expansion is increasingly part of The business already had presence overseas recognition was also central to the value creation consumer-oriented companies’ business model but wasn’t making any money. However, its thesis when Carlyle acquired Oyatsu, the – not least to insulate against macroeconomic brand was strong and there was every reason company behind ramen snack brand Baby Star, in headwinds back home. On this basis, transactions to believe it could achieve popularity in the May of last year. Baby Star is something a cultural such as CITIC’s investment in Mark Styler could region simply by virtue of being Japanese. icon in its home market but this market wasn’t be more common place. For global and pan- “As it was Japanese, the product was seen as growing fast enough. The PE firm was never regional private equity players, these companies being very safe, and having little food safety going to achieve its desired returns without are a good fit: they are natural partners for brands risk,” says Thomas. “It is also from a country that launching the brand elsewhere in Asia. that may lack the resources of expertise to go is perceived to be developed and have very “More and more people like Japanese food overseas independently. fashion-forward type products.” and Japanese tastes,” says Carlyle’s Tomioka. “Now This is not lost on the Japanese GPs, some of Like many other consumer companies, is a good time for Japan to export its culture and which are adapting their traditionally domestic- Pokka’s problem was poor overseas distribution. grow businesses that tie into this culture and into focused coverage and competencies in order to Advantage drew up a development plan with Japanese intangible assets.” meet the needs of such companies. the management team that identified countries Advantage has been present in Hong Kong into which the business should expand first. A new skill-set since 2008, but is increasingly looking at how It effectively targeted geographies in which This phenomenon is not limited to food and Asian activities can support its Japanese portfolio. Coca-Cola was not the market leader: the Middle drink. Earlier this year, The Longreach Group Thomas stresses there is a growing number East, and parts of Asia and Africa. With a proper bought bridal jewelry specialist Primo Japan from of success stories his firm can point to that distribution strategy in place, Pokka’s overseas Baring Private Equity Asia. The domestic market underscores the value of looking overseas. operation went from accounting for around 5% is solid but gradually shrinking due to the same “Offering this value is important to our of profit to 40% over a five-year period. demographic factors that make other businesses success in Japan. If we can’t configure ourselves, “When we eventually sold it to Sapporo, they attractive. to deliver that value to our investee companies really valued the fact there was a strong set of Longreach therefore plans to use Primo’s then we think that is going to undermine our brands and strong set of distribution channels current network of 10 stores in Taiwan and two competitiveness as a GP in Japan,” he says. “So for that they could use for with their bigger assets,” in Hong Kong as a platform for expansion into us having the ability to help companies move Thomas adds. Greater China, where demand for high-end overseas is an important part of being successful Advantage is not the only GP to have Japanese goods such as jewelry is expanding. in Japan.”

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To subscribe, call Sally Yip at +(852) 3411 4921 or email [email protected] avcj.com ANALYSIS [email protected] Thin end of the wedge? Japan’s corporate governance code will not trigger a torrent of non-core divestments, but it may encourage boards to think strategically about how – and with whom – they can improve performance

ALL BUT FOUR OF THE PEOPLE SITTING behind Singapore and Hong Kong. It closed (OECD), is agnostic as to the corporate on Walmart’s 16-strong board of directors are the gap, in part due to policy initiatives, but governance structure used: the board of independent. Those appointed by the US-listed continues to be let down by weak corporate directors plus kansayaku corporate auditors supermarket retailer to safeguard the interests governance rules and practices. Thailand, favored by most Japanese companies; the of shareholders and offer strategic advice to Malaysia and India all performed better than Western-style nomination, compensation and management include the current or former Japan in this category. audit committees; or the hybrid model of a top executives of Yahoo, Coca-Cola, American “Among the various stakeholders, employees, board of directors and an audit committee with Airlines, Leo Burnett and KPMG International. customers, government, alumni and the local supervisory functions. Moving through the ranks of the Fortune 500 communities have oftentimes been prioritized The code is also flexible and non-prescriptive. it is a similar story. Chevron’s 12-member board over shareholders. And when you consider the There is an acceptance that companies outside of features 11 independent directors; at Ford Motor senior lending banks, they too are often favored the TSE’s First and Second Sections may struggle it is 12 out of 15; at Bank of America, 11 out of 13; over equity owners,” observes Hiro Hirano, Japan to comply, and a willingness to accommodate and at Google, seven out of 10. CEO at KKR. “To enhance governance oversight, them, provided suitable explanation is While the New York Stock Exchange and it is important that equity shareholders have a provided for non-compliance. The five general NASDAQ require that domestic member firms larger consideration.” principles cover the rights and fair treatment of have a majority of independent directors, the The policy initiatives the AGCA refers to fall shareholders, cooperation with stakeholders, Tokyo bourse is more lenient: the minimum is one. Three of Toyota’s 15 directors are Independent directors at Japanese listed companies independent; at SoftBank Corporation it is three out of 10; at Kirin Holdings, three out of nine; and 100 at Panasonic, three out of 17. In this context, the recommendation in the 80 newly implemented corporate governance code that companies appoint at least two 60 independent directors doesn’t appear particularly groundbreaking. Indeed, it is questionable % 40 whether two dissenting voices would have any impact on the “company men” hegemony that 20 characterizes many Japanese boardrooms. 0 “It is the right idea and the right direction First Section Second Section Mothers JASDAQ JPX-Nikkei 400 in which to be pushing companies,” says David None One More than one Gross-Loh, managing director at Bain Capital. Source: Tokyo Stock Exchange, 2014 “Having said that, it is by no means an instant solution. Two outside directors is not significant enough to sway the ultimate discussion. While under a revitalization strategy that received proper disclosure and transparency, board you might get some new perspective, I think the cabinet approval in mid-2013. It is generally seen responsibilities, and shareholder engagement. voice of the board will still be dominated by the to encapsulate much of the structural reform “The code will be the basis for engagement internal management team members.” envisaged in the “third arrow” of Prime Minister between companies and shareholders. In the No one expects an immediate transformation Shinzo Abe’s economic stimulus package. past shareholders had found it difficult to discuss in corporate behavior, but to a number of Since then, a stewardship code has been certain corporate governance-related issues investors, this and other reforms could be the enacted outlining the responsibilities of because there was no set of principles to which thin end of the wedge. Boards that are more institutional investors; the JPX-Nikkei Index 400 companies were subject to,” says Ken Kiyohara, accountable and are more open-minded about has been introduced, which assesses candidates a partner at Jones Day. “Management did not strategy might be more willing to consider based on criteria such as return on equity (ROE), understand or pretended not to understand divesting non-core assets that are a drag on the appointment of independent directors, and what was being asked.” performance. This could in turn stimulate private transparent reporting; and proxy advisory firm More detailed recommendations include equity deal flow, or so the theory goes. ISS has recommended voting out directors of performance-related pay for management companies that fail to achieve an ROE of 5%. teams in order to better align their interests with Structural shortcomings The corporate governance code, based those of shareholders, and a reexamining of the Japan placed third in the Asian Corporate on principles set out by the Organization for cross-shareholdings that proliferate in corporate Governance Association’s (AGCA) 2014 rankings, Economic Cooperation and Development Japan. However, the independent director issue

12 avcj.com | June 16 2015 | Volume 28 | Number 22 ANALYSIS [email protected]

is arguably the most noticeable, and also the liquid stocks “that are social clubs rather than companies. Of the transactions for which easiest criteria on which to gauge progress. companies.” Second, while he accepts there valuations are disclosed, only 12 cross the $200 According to the TSE, 1,595 of the 3,414 are individual companies that could be better million threshold. There are two $1 billion-plus companies across its four boards had run, he disputes the notion that governance deals: KKR’s acquisition of a majority stake in independent directors as of July 2014. The 46.7% woes are responsible for wider economic Panasonic Healthcare in 2013 and Bain Capital’s ratio compares to 33.8% the previous year. First underperformance. purchase of a 50% interest in Jupiter Shop Section companies are leading the way: 61.4% “The usual suggestion is there is something so Channel from Sumitomo Corp. the previous year. had independent directors, up from 46.9% in deformed in the structure of Japanese business Kazushige Kobayashi, managing director 2013. However, only 390 – or 21.5% – of the 1,814 that it’s impossible for Japan to grow,” Kinmont at Capital Dynamics, estimates the number First Section companies had more than one says. “Our basic perception is that it’s the other of sizeable deals could rise to 2-3 year from independent director and the average is 1.57. way around. All things thought to be bizarre the current annual level of zero to one on the In a response issued in January to the draft and to represent failures of a structural nature back of corporate restructuring and change-in- code, the ACGA advised the Financial Services are really just outgrowths or symptoms of a long management strategies. Agency that companies need at least three or period of poor economic performance -and poor one third independent directors if they are to economic performance is itself caused largely by Value propositions deliver objective oversight. “The quality of the repeated policy error.” However, it is worth noting that corporates individuals chosen as independent directors – Corporate divestments should be seen in a coming around to the benefits of divestments their character, expertise, business experience similarly nuanced light. It is generally accepted is only part of the puzzle. The onus is also on and broader understanding of the interests of all that Japanese companies have too many private equity firms to present themselves stakeholders, including shareholders – is critical,” non-core businesses and would benefit from as credible buyers to the board of the parent the ACGA added. shedding some of them, but sales are ultimately company and the management of the subsidiary. It is a concern shared by KKR’s Hirano, who driven by economic factors. Ford of KPMG FAS In both the Panasonic Healthcare and Jupiter questions whether there are presently enough notes that holding company structure prevalent Shop transactions, the parent company retained experienced CEOs available to fill more director in Japan often removes the economic incentive a stake in the business in the expectation of roles. However, director quality is meaningless if to divest assets. He thinks it is challenging to participating in future upside. the issues under discussion are not substantive. change this mindset without also tackling According to Gross-Loh, Bain had been in “If there are meaningful discussions between broader structural employment flexibility and discussion with Sumitomo for a number of years informed executives and independent directors incentive compensation issues. about a range of businesses. It identified Jupiter one would expect it to be beneficial to corporate Tatsuya Kubo, managing director at Shop as a non-core asset but wanted a partner to governance,” says Paul Ford, a partner with KPMG HarbourVest Partners, also questions to what develop the company, particularly in the internet FAS in Tokyo. “You can have the best independent extent investors can get traction on divestments space. “We showed them some work we’d done directors in the world but if all they are doing is as a result of the code alone. “People make these with retail and media companies in the US and following a superficial agenda at the meeting decisions, not governments – and you have to they were impressed,” he explains. There was no then there is a risk that they just become window ask yourself why people would make changes,” auction process. dressing.” he says. For Panasonic, the priority was finding a Yet numerous industry participants insist the partner with medical knowledge and capital Early days traction is there. While government pressure to drive growth within the healthcare unit, and It is too early to tell how willingly Japanese is a factor, it is not the only one. For example, cross-border M&A was a key consideration. By companies will embrace the spirit of the code, companies are facing greater competitive the time the deal closed in April, KKR was already using it as a rationale for engaging in more pressure in their core areas, which might working with the company on a number of intensive discussions with shareholders and accelerate decisions to offload assets in other potential bolt-on acquisitions, and one of these taking difficult strategic decisions. At the other areas. At the same time, corporate Japan is came to fruition last week with an agreement to end of the spectrum, companies might comply looking overseas and it is difficult to justify buy Bayer’s diabetes care business. from a public relations perspective but otherwise investing in expansion in non-core areas. Other There will no doubt be situations in which stick to business as usual. parties, however, may be willing to provide the divestments happen as a result of pressure to pay A potential differentiating factor is if reform required capital and expertise. down debt, but few boardroom discussions will is proved to deliver improved performance. Masamichi Yoshizawa, representative director focus on fire sales. Rather, should the corporate Confronted by the emergence of a two-tier and partner at The Longreach Group, contrasts governance code have its intended impact, market in which companies that fully implement the situation now with three years ago. Then, the Japanese companies will be encouraged to think the code reap the benefits through improved parent company would give the subsidiary three strategically about their assets in the context of share prices and those that reject change options: stay as part of the groupand improve wider performance. Private equity firms may be struggle, the laggards will come under pressure profitability, be acquired by private equity, or be pushing on an open door but admission still rests to up their game. Not everyone buys into the acquired by a competitor. Most management on the ability to add value. potential upside of the code, though. teams would go for option one. Now the choice “Compared to where it was 15 years ago, the Alexander Kinmont, CEO of Milestone Asset is often limited to options two and three. PE is an CEOs of big companies are more serious about Management, which invests in small, financially interesting proposition for management teams listening to us,” KKR’s Hirano adds. “It may take productive publicly traded Japanese companies, because they may retain a degree of autonomy. time for them to make decisions but doors are says he has no problem with the quality of AVCJ has records of approximately 220 not being closed. CEOs have to think about how governance. There are two reasons for this. First, buyouts in Japan since 2010 and 20% of them they can improve ROE and how they can enhance he believes most of the fault lies with large cap, could be described as carve-outs from larger their concentration on core businesses.”

Number 22 | Volume 28 | June 16 2015 | avcj.com 13 FOCUS [email protected] Information arbitrage Japan’s banks do not have the power that they once did to source deals, but they are far from irrelevant. GPs say these institutions still have a role to play, though their advice must be considered carefully

BANKS WERE ONCE THE MAINSPRING OF million, though in most cases they fall between the case for a particular deal, even seeking Japan’s nascent private equity industry. They $10 million and $80 million. investments to prop up a company that has knew the lay of the land and could connect In addition to succession, small-cap become insolvent. inexperienced GPs to companies that they would companies are increasingly turning to GPs for “The banks can pull the plug, but they are otherwise overlook. support in growth initiatives. Hideaki Fukazawa, reluctant to do so,” says New Horizon’s Ando. Yasushi Ando, CEO and COO of New Horizon president and managing partner of Tokio Marine “They ask us to put in some money to save them, Capital, says that those days are long past. Now Capital, says that banks have proven useful in and finally they agree to make some provision for companies have become more comfortable these situations as well, since his firm cannot the loans. So it happens at the very last minute. dealing with GPs on their own. “Awareness of maintain contacts with every company that That’s a problem, because this sort of thing private equity is prevalent among local banks, might present such an opportunity. actually makes things quite difficult. They should that’s true. But now, rather than local banks, the “If this is a big company or traditional approach us much earlier.” companies themselves come to us, pop into our company, we have other ways of getting access,” However, Joji Takeuchi, CEO and co-founder office to consult what they should do,” he says. says Fukazawa. “But as far as family businesses of Brightrust, argues that these transactions are While banks may not enjoy their previous dominance, their influence hasn’t disappeared entirely. Several PE players observe that financial “It’s the big banks that have long-term business institutions are always looking for ways to involve relationships with these good companies in themselves in the deal process, and though views on their effectiveness vary, most feel that rural areas. They may listen to the pitch if it is banks have significant staying power. One significant advantage that banks still presented by these trustful big banks” – Gregory Hara hold is that of information. While many of Japan’s better-known companies are now confident are concerned, they are not well accustomed no more likely than other types to generate seeking financing themselves, others – due to dealing with PE. Access to regional banks is a conflicts of interest, since PE deals by their nature to size or to location – are still unfamiliar with much more efficient way to make appointments.” involve multiple parties trying to promote their private equity. There is a lack of trust when Though banks have their uses when it comes own concerns. In his view, conflict is more likely presented with proposals by GPs, and banks can to finding deals, GPs tend not to consider them to occur between a reluctant company and a serve as intermediaries in these situations. as a first source. There are several reasons for this, bank pressing for a PE investment; but even in “It’s the big banks that have long-term and all have to do with their perceived lack of these cases the outcome is better with a deal business relationships with these good objectivity. For one thing, many banks have their than without it. companies in rural areas,” says Gregory Hara, own affiliated PE funds and these groups may get “The bank is happy with professionally- director and president at J-Star. “They may listen first option on deals that come in. managed GPs coming in with the capital. The to the pitch if it is presented by these trustful big “Because they are somewhat related, there is owner may not be that happy, but it’s better than banks.” a better fee arrangement between bank-related removing all funding,” Takeuchi says. “As long as GPs and the banks. Therefore the bank has an everybody agrees to what they are going to do, I Lacking heirs incentive to bring the deals to their related GPs don’t see anything unethical in there.” Succession issues most commonly convince first,” says J-Star’s Hara. “I’m not saying it’s a bad Though GPs have their issues with banks as an otherwise uncertain company to consider deal or good deal, but sometimes the leftovers a deal source, they agree that the institutions a private equity investment. In cases where are brought to independent funds like J-Star.” can provide an essential service. Banks realize the aging founder of a family-owned business At the same time, bank-related GPs may not this too, and far from reducing their influence, has not found a suitable successor, he may be under the same kind of pressure to produce some forward-looking institutions are attempting rely on the advice of a bank with which he has returns as independent firms. If they are willing to build up their role in the PE ecosystem by a longstanding relationship when assessing to accept lower rates of return then deals that investing in their in-house capabilities. prospective third-party buyers. reach them through bank channels may not be “Some advanced regional banks have realized Bank-sourced deals are not specifically of interest to independent players anyway. that if they don’t have a good M&A advisory tracked, but according to data collected by PE business, or don’t have a good understanding of advisory firm Brightrust Partners, succession Potential conflicts business succession from an equity point of view, situations, which are often sourced by banks, Another common issue with bank-sourced deals they will be pushed out by other banks,” says comprise about 10% of the deals they have is transparency. When a bank finds a deal, it has Tokio Marine’s Fukazawa. “Most of the leading advised on. Size can vary hugely. Brightrust a large amount of control over the subsequent Japanese regional banks now have in-house M&A records acquisitions of this type as high as $500 process. There may be a temptation to overstate advisor staff.”

14 avcj.com | June 16 2015 | Volume 28 | Number 22 MASAMICHI YOSHIZAWA | INDUSTRY Q&A [email protected] A question of carve-outs The Longreach Group made a name for itself acquiring non-core assets from Japanese corporates. Masamichi Yoshizawa, a partner with the North Asia-focused firm, expects more of these deals

Q: Japan’s new corporate continue to invest in order the parent or the subsidiary? some GPs rely quite heavily on governance code is intended to maintain its competitive A: Subsidiaries in Japan still have a leverage. Valuations become to improve accountability and position. The company wants lot of autonomy and can drive more reasonable in areas that performance. Can it generate to focus on social infrastructure strategy, but the situation is are not so popular, such as more private equity deal flow and IT. The electronics-related changing somewhat. Five years manufacturing. While we are through divestments? machinery space, which includes ago, the parent would say to not going to do a lot of deals at A: It is not a paradigm shift but it’s a a precision drilling business the subsidiary, you have three very high valuations, once we good trend. The code is creating like HVM, does not fall under choices: stay in our company find an interesting company motivation for better corporate its core competence. Sanyo with room for improvement on governance. Companies must Electric Logistics was a bit the management side and the engage more with outside different. Panasonic had bought potential to expand into Asia, we shareholders and they can look Sanyo and ended up with three are able to go after it. to improve return on equity logistics companies under a through actions such as carve- single umbrella. It didn’t want Q: Does bridal jewelry specialist outs to private equity. three companies doing similar Primo Japan fall into this things, so it decided to sell one. category? Q: The code recommends that A: There are 650,000 couples listed companies have at least Q: How important is the cross- getting married every year in two independent directors. Is border angle in Longreach’s Japan – the market is stable but that enough to bring outside carve-outs? gradually shrinking. At the same influence to bear? A: It is very important. There are time it is a very fragmented A: The good news is that board companies that already get meetings will have more real most of their revenue from discussions and decision- outside of Japan but the “Valuations become more making processes – because customers are Japanese. They the inside board members and want someone that can connect reasonable in areas that are not so management representative will them to Asian, European and popular, such as manufacturing” have to explain their strategy American companies that to the independent directors, can become real clients. They and the directors represent often have good products and and improve profitability, be market and there are no big shareholder concerns. However, technologies but they lack acquired by private equity and names; Primo is the number the board could still contain management capabilities to enhance global competitiveness, one player by units sold with the independent directors, by drive marketing to non-Japanese or be acquired by a competitor. strong market share growth saying that they understand clients or financial capabilities And the strong preference was momentum. It can develop the concerns but a decision to do cross-border M&A. When for option for number one. Now further in the domestic market has to be made and there is looking to expand a non-core the parent isn’t able to allocate by continuing to increase this limited time, and so on. Again, subsidiary into Asia, the CEO of the resources required for option share. We also have 10 stores in I believe it is a good first step a large conglomerate might ask one, which means there is a Taiwan and two in Hong Kong for corporate Japan to become himself two questions. One, can choice between working with and we are going to open more more globalized but there is still I find any good management private equity and retaining in China, so there is a strong a long way to go. within the company to lead this a degree of independence or Greater China growth path. expansion? Two, can I really use being acquired by a competitor, Generally in China and Asia, Q: Longreach’s carve-outs capital to develop this non-core which may mean greater stability demand for quality Japanese include Hitachi Via Mechanics asset? If the answers are no and but less independence. brands is strong. We consider (HVM) in 2013 and Sanyo no, then he might turn to a specialty consumer investments Electric Logistics in 2010. How private equity investor that has Q: What impact are strong public only if there is very strong market did these deals come about? the resources, management and market valuations having on share or market momentum A: Hitachi understands that global financial capabilities to help that deal flow? domestically and the ability to competition is getting tougher, subsidiary go into Asia. A: The deal flow is there but expand into Asia. We also attach so it cannot allocate resources sometimes valuations are great importance to the quality to areas in which it cannot Q: Are carve-outs driven more by too high for us. We also see of management.

Number 22 | Volume 28 | June 16 2015 | avcj.com 15 FOCUS [email protected] Getting schooled For the past decade, Japan’s universities have been working with venture capital to commercialize their research. Recent developments in the public and private sectors suggest this relationship is evolving

IMAGINE YOU NEED A NEW KIDNEY, for a long time has been the only fund focusing funds. It was at this time that national universities but instead of having to wait for a donor and purely on university start-ups, leveraging its underwent partial privatization, which meant matching blood type, all you need do is push exclusive relationship with the University that every institution became a corporation. As a a button on a printer. It may sound like science of Tokyo. While the number of potential result, the University of Tokyo had more freedom fiction, but a start-up led by a group of scientists investments in this space remains relatively small to launch partnerships with the private sector, at University of Tokyo-based start-up Cyfuse is compared to the wider VC universe, Tomotaka and so UTEC was born. working to turn it into science fact – eventually. Goji, managing partner with UTEC, believes that There is only one other fund affiliated with The technology could change the world but is changing. a national university: Kyoto University’s Miyako the gulf between research paper and finished “The number of university-related start-ups Capital. Set up in 2007 with a corpus of $45 product is often huge, which means raising has picked up significantly over the past decade,” million, Miyako is now seeking $60 million capital can be a challenge. The likes of Cyfuse he says. “According to the government statistics, for its second fund. Like UTEC, the fund does need backing from with investors that not only there are currently about 1,800 university spin not receive financial support from its affiliated have resources but also the patience to deal with offs in Japan – and about 200 of them are university but instead raises capital from external university-initiated start-ups. investors. It is understood a large portion of its University of Tokyo Edge Capital (UTEC), which funds comes from corporates looking to get led Cyfuse’s $4.8 million Series A round in early “If an early-stage access to intellectual property developed at 2013, has spent the last decade trying to bridge Kyoto University. this gap. Established by University of Tokyo in investor is able to cooperation with the government’s Ministry of carve out a technology Long arm of the state Economy, Trade & Industry (METI), and supported However, in most respects government money by bevy of private companies and state-backed and match it with a has played a major role. The state-backed entities, its aim is to aid the commercialization of Innovation Network Corporation of Japan (INCJ) Japanese research. business, or if they is not only one of the largest investors in UTEC UTEC is not alone. Other early-stage investors have the capability to funds, but also regularly co-invests in deals. have spotted the opportunity presented by Recent examples include Quantum Biosystem, university spin-outs. The Series A also included support the technology a start-up that develops instruments used to Nissay Capital, Nippon venture Capital, and to commercialization, automate the DNA sequencing process, and Industrial Growth Platform. Meanwhile, the Microwave Chemical, a Osaka University venture Series B that took place in March saw a total of then it is compelling, seeking to commercialize innovative chemical 12 investors, including the original four backers processes using microwaves. plus the likes of DBJ Capital and Jafco, commit but not just anyone can Part of the reason government participation $12 million. is necessary is because very early-stage start- do it” – Shinichi Takamiya This ecosystem appears to be growing. ups have not generated sufficient returns to Recent legislative changes have also prompted attract many private investors. While UTEC may universities to set up their own funds. Moreover, University of Tokyo-related companies. But before have succeeded in its remit of supporting the at least one new independent VCs – Tokyo’s UTEC was set up it was quite rare.” commercialization of innovation, it has had few Beyond Next Ventures – has been set up to It is difficult to say how many have received home runs. Its first JPY8.3 billion fund, which specifically target university spin-offs. But is the VC funding. For its part, UTEC, which has been launched in 2004, had a money multiple of 1.3x opportunity really that compelling? involved a largest share of university spin-off seed and an IRR of around 7%. rounds, has supported 66 companies to date. In Consequently, private venture capital firms Getting an edge doing so, UTEC has launched three iterations of like Globis – an investor in a handful of UTEC- “The opportunity is interesting but it is also its fund; the latest vehicle was launched in 2013 backed start-ups – usually comes in at a later difficult to execute,” says Shinichi Takamiya, a with a corpus of JPY20 billion ($162 million). Due stage. But even then there is a risk. partner with Globis Capital Partners. “If an early- to the support it gets from the government (in “Typically when we work with UTEC they go stage investor is able to carve out a technology terms of capital) and from the university (in terms in at the seed stage, and then we come in at the and match it with a business, or if they have of deal flow and expertise), few investors have Series A round when there is already a proven the capability to support the technology to enjoyed the same level of access. product,” says Globis’ Takamiya. “The most difficult commercialization, then it is compelling, but not Goji helped establish UTEC in 2004 after part is assessing the technology and evaluating just anyone can do it.” being drafted in from METI where he worked whether it will become the next standard in its For that reason, earlier venture capital rounds on the draft Japan Limited Partnership Act and sector, or whether it has the competitive edge.” in this space are dominated by the UTEC, which current regulatory framework for venture capital Takamiya adds that when it comes to

16 avcj.com | June 16 2015 | Volume 28 | Number 22 FOCUS [email protected]

commercialization, venture capital firms like Education, Culture, Sports, Science & Technology on single strong relationship with one university,” Globis not only provide capital but are also (MEXT) for a JPY10 billion ($80 million) explains Ueha. “But have a broad network among well-placed to use their networks to assist in investment from Osaka University. universities.” areas such as marketing and making additions This development is not welcomed by Beyond Next is also unique within the private to management, or working with academically- everyone. The University of Tokyo has not set sector in that it focuses solely on university- focused founders that might have limited up a fund. “We were very skeptical about the initiated start-ups, whereas the likes of Globis entrepreneurial experience. University of Tokyo managing VC funds and we and Jafco have a broader remit and target the The relationship between government- had objected,” explains Goji, “Now the university segment opportunistically. However, it is worth supported funds and private sector funds is more has changed its policy concerning the fund. We noting that Ito previously led the university start- complementary in this respect. On particular basically asked them to consider setting up a up section within Jafco’s investment team and example of Globis investing in a UTEC-backed fund-of-funds, and will not do direct investments.” has a track record in this space. enterprise is Phyzios, which develops mobile One of his bigger successes was Cyberdyne, apps based on physics simulation software. UTEC Conflict avoidance a futuristic robot suit maker that spun out of provided seed capital; Globis came in at the For UTEC, the government decision to allow Tsukuba University in Ibaraki. The company, Series B stage; and the company was acquired by universities to invest in their own fund is unlikely which raised JPY7.8 billion in it Tokyo IPO last Google in 2013. to have an impact in the immediate future. year, now has a market cap of around JPY309 To help bring these start-ups to Series A However, Miyako Capital’s position with regards billion. Investments like these supports Goji’s and beyond, the government has taken a to Kyoto University Innovation Capital is unclear. view that there is potential for more private new approach by handing over more control The GP remains affiliated with the University but sector involvement. He adds that as the to the universities. Notably, the Industrial could potentially be competing with a new fund management teams behind university spin-outs Competitiveness Enhancement Act has for deals or even for capital. become increasingly sophisticated, venture overturned the previous ban on national These concerns about potential conflicts of capital will become more engaged. universities investing in venture capital. interest are partly responsible for Beyond Next “The mindset of the venture capital industry Three universities have since applied to Ventures, a new university venture capital fund has a changed dramatically over the last 10 set up their own funds to focus on research set up by former Jafco team members Tsuyoshi years, and they are more proactive in taking risk start-ups: Kyoto University Innovation Capital, Ito and Kengo Ueho, who serve as COE and at an earlier stage,” says Goji. “So I would rather Tohoku University Venture Partners, and Osaka partner, respectively. Their firm is not affiliated the government was more involved in helping University Venture Capital. The latter recently with a particular academic institution. private sector venture capital activity rather than received approval from METI and the Ministry of “Our position is unique in that we do not rely directly doing it on their own.”

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 The first steps a GP needs to take to develop an  How LPs evaluate ESG factors when ESG programme reviewing Asian GPs  The risks that are specific to Asia and how ESG  How sound ESG practices help you attract can be used to safeguard your investment buyers and maximise returns at exit  How you go from data gathering to reporting  The top 5 ESG considerations LPs look for portfolio-wide on ESG when evaluating a GP  The fundamentals for implementing a due diligence function that assesses every potential investment specifically for ESG risks and opportunities Limited Partners - Apply for the Complimentary Pass NOW! PLEASE CONTACT OUR PROJECT TEAM FOR: REGISTRATION ENQUIRIES: Pauline Chen t: +852 3411 4936 e: [email protected] SPONSORSHIP ENQUIRIES: Darryl Mag t: +852 3411 4919 e: [email protected] SPEAKING OPPORTUNITIES: Jonathon Cohen t: +852 3411 4968 e: [email protected] MARKETING AND MEDIA ENQUIRIES: Priscilla Chu t: +852 3411 4706 e: [email protected]

Co-hosted by Join your peers avcjesg.com #avcjesg ESG FORUM Co-hosted by: CONTRIBUTED ARTICLE 2015 [email protected] 18 September | Renaissance Hong Kong Harbour View Hotel SAVE US$300 Book before Creating value amid high valuations 19 June 2015 Japan buyouts may be expensive, but PE firms can still deliver strong returns. Proprietary deal-sourcing, Mitigate risk and value creation plans and thinking ahead about exits are the key factors, says Bain & Company’s Jim Verbeeten maximize exit returns PRIVATE EQUITY INVESTORS IN JAPAN auction, firms can improve their odds of closing much greater returns to equity than doing need to settle in for an extended period of corporate divestitures by allowing a corporate the same for a deal that may achieve only 0.2x elevated prices. Public valuations are setting seller to retain a minority stake. This allays fears MOIC. However, the effort required for that 20% with responsible a high benchmark while potential strategic that the carved-out business’ heritage may not improvement is likely to be similar. acquirers are armed with more cash than ever be safeguarded and can help overcome internal investing – JPY191 trillion ($1.6 trillion) in 2014 – and too resistance against selling to private equity. In Finding a buyer few options for growing organically. Moreover, PE the broader sense of flexibility on the capital Finally, there often is untapped opportunity in firms have raised significantly more funds in the structure, firms can also think about loan-to-own being more systematic and proactive in thinking The first event of its kind in the region, the past two years than in recent memory, fueling a arrangements or mezzanine financing. through the right exit. Many firms try to jump competition for deals that inflates prices. Once a deal closes, there is a host of ways into exit mode the moment that conditions feel inaugural AVCJ PRI Responsible Investment But high valuations don’t necessarily mean to add value through the ownership cycle. right. It is better to be clear up front on the likely Forum will provide a platform for education, it will be impossible to generate good returns. But the most important aspect is to develop a buyers who would value the business most, There’s a proven strategy for creating value in a value-creation plan with management. This year what they would be willing to pay for, and what benchmarking and the exchange of high valuation environment. we surveyed PE professionals in Japan about risks they will foresee and want to discount. ideas on how GPs operating in Asia can Winners take a creative approach to sourcing their experience creating value for portfolio The answers will influence the growth and deals. That often means looking for targets companies. All of them say that within the first investments a firm makes during ownership. For incorporate Environmental, Social and outside of competitive auction processes. Our analysis of deals worth over $50 million done Governance (ESG) principles across the between 2010 and 2014 in Japan found that Only half of those surveyed report that their companies in their portfolio. companies acquired via auction were priced at a median multiple of 9.8 – higher than the 7.4 value-creation plans deliver the intended results multiple paid for proprietary or semi-proprietary in most situations deals, where competition is less intense. Attend this educational Forum and learn: Know your market six months of ownership, they develop a robust instance, if the buyer is likely to be a strategic There are a number of ways PE firms in Japan value-creation plan for at least half of their player, it won’t make sense to invest in a new IT can improve their odds of tracking down the portfolio companies. But they often stumble system that may be scrapped on acquisition.  The first steps a GP needs to take to develop an  How LPs evaluate ESG factors when best deals. Because private equity penetration in when it comes to execution. Only half of those The best firms build an exit story, identifying ESG programme reviewing Asian GPs Japan is still relatively low compared with other surveyed report that their value-creation plans medium- to long-term growth opportunities developed markets, there is as much opportunity deliver the intended results in most situations. for the purchaser to pursue after the sale. They  The risks that are specific to Asia and how ESG  How sound ESG practices help you attract in finding a company willing to sell as there is In our experience, a major reason they fail to establish a fact base to support this story and run can be used to safeguard your investment buyers and maximise returns at exit in finding the most attractive industry to target. execute is that they haven’t fully aligned with pilots to demonstrate that the opportunities are Firms can focus on areas that are not on the management on the key priorities of the plan. real. A retail business could pilot a new format  How you go from data gathering to reporting  The top 5 ESG considerations LPs look for radar of competing firms, look for opportunities One of the keys to success is to update the or entry into a new geography. A packaged portfolio-wide on ESG when evaluating a GP to co-invest with corporations, and stay close to value-creation plan. Once a PE firm has owned software company might pilot a direct sales commercial banks for “thin capital” opportunities. a company for a couple of years, the market has channel. A staffing company might pilot a new  The fundamentals for implementing a due diligence In sectors as diverse as solar energy and moved on and the firm has probably achieved method of rotating their people to better-paying function that assesses every potential investment pharmaceuticals, specialization not only some of its priorities. Unless an exit is planned assignments. It turns a pie-in-the-sky idea into improves access to deals but also increases soon, it is vital to review and refresh the plan. something practical and believable. specifically for ESG risks and opportunities Limited Partners - Apply for the credibility. Sector expertise enables a firm to Only a third of PE firms surveyed in Japan say Even at high valuations, PE firms can make Complimentary Pass understand a business better than competitors, they do this for the majority of their investments. attractive investments by finding proprietary NOW! make quicker evaluations, and take on more An often-overlooked method for creating deals, aligning with management on a value- PLEASE CONTACT OUR PROJECT TEAM FOR: risk. It also facilitates the development of value in a high-valuation context is to focus on creation plan and refreshing that plan as needed, proprietary views of key industry trends. For the best-performing deals in the portfolio. It is focusing on the well-performing deals in their REGISTRATION ENQUIRIES: Pauline Chen t: +852 3411 4936 e: [email protected] example, a firm could investigate ways that the human nature to prioritize an investment that portfolio and building an exit strategy designed SPONSORSHIP ENQUIRIES: Darryl Mag t: +852 3411 4919 e: [email protected] government’s electricity deregulation road map is about to lose money, and we see many PE to reap the most value. That’s what it takes to SPEAKING OPPORTUNITIES: Jonathon Cohen t: +852 3411 4968 e: [email protected] opens up opportunities for PE. It could evaluate firms in Japan and elsewhere trying too hard to outperform. MARKETING AND MEDIA ENQUIRIES: Priscilla Chu t: +852 3411 4706 e: [email protected] government plans for healthcare reimbursement turn around losers – those projected to return pricing to determine which segments are less at less than 1x money on invested capital (MOIC). Jim Verbeeten is a partner in Bain & Company’s risk – and therefore more attractive for investing. Increasing enterprise value by 20% on an asset Tokyo office and a member of the firm’s private Co-hosted by Whether or not a deal is sourced through an that is on track to deliver 2.5x MOIC delivers equity practice. Join your peers avcjesg.com #avcjesg Number 22 | Volume 28 | June 16 2015 | avcj.com 19 10th Annual Private Equity & Venture Forum USA 2015 9 July • Harvard Club of New York City

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjusa.com Asia’s place in a global private equity portfolio

Top General Partners speaking include:

Mark Chiba Nathaniel Childres Richard Folsom Group Chairman & Partner Managing Director Representative Partner THE LONGREACH GROUP CHAMP PRIVATE EQUITY ADVANTAGE PARTNERS, LLP

Jenny Lee Daniel R. Mintz Rodney Muse Managing Partner Founding Managing Director Managing Partner GGV CAPITAL OLYMPUS CAPITAL ASIA NAVIS CAPITAL PARTNERS

View the full list of speakers at avcjusa.com

Featuring: GPs LPs 46% 160 10 32 Limited Partners 7 Participants Countries Speakers Asia-focused Represented 26% Sessions General Partners Network with America’s largest institutional investors looking to expand their portfolios and contacts within Asia. The brochure is now available, visit REGISTER avcjusa.com for full details on the conference agenda and how to register. NOW! Online: register at avcjusa.com/book-now Email: [email protected] or Call Jayla Tam at +852 3411 4935 For sponsorship enquiries, please email: [email protected] or call: +852 3411 4919

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