KKR among PE firms piling into Japan

Global investor interest is rekindling in Japan’s private equity markets, with large firms such as Kohlberg Kravis Roberts looking to raise money in the country.

Prime minister Shinzo Abe’s aggressive fiscal stimulus to boost the economy has sparked a fervour in the country not seen for two decades, and a number of PE funds are understood to be seeking new capital to invest there, including Advantage Partners, Bain & Co, Carlyle, Polaris Capital Group and Unison Capital.

Although Japan has its sceptics, with some saying ‘Abenomics’ is 20 years too late, most are enthused about the country, with global investors noting a renewed drive to improve corporate governance. It’s also implied that government officials are pushing Japan’s pensions to support its quantitative easing programme in order to invest back in the country.

For one, $75 billion KKR – which raised $6 billion for a pan-Asia PE fund in December, the largest amount raised for the region – is keen on the country.

“There is optimism in Japan right now,” Joseph Bae, managing partner at KKR Asia, tells AsianInvestor. Although there are “fundamental challenges facing the Japanese economy [that] aren’t going to be fixed in six to 12 months”, KKR sees “Abe’s administration as one of encouraging industries to grow and be more profitable".

The firm will undoubtedly make more investments in the country in the near future, Bae says. “We foresee investment opportunities increasing, both as a result of the new policies and also because of the acceptance private equity overall is gaining in Japan."

Still, he concedes, “gaining acceptance takes time to build. We knew that when we started in Japan in 2006, and we are in Japan for the long-term”. He declined to detail specific deals KKR is considering.

The firm has been bulking out its Japan team recently, hiring turnaround specialist Hirofumi Hirano from AlixPartners as chief executive of its Japan division in April and appointing Hiro Shimizu of Goldman Sachs and Sakae Suzuki from McKinsey & Co as directors in March.

Last year, KKR attempted a $1.3 billion buyout of Renesas, a financially struggling Japanese chipmaker, but was outbid by state-backed fund Innovation Network Corporation of Japan.

In 2012, there were 23 buyouts in Japan with a total deal value of $5 billion, roughly half the $10 billion worth done in 2011, according to Mergermarket.

China, too, offers plenty of opportunities, says Bae, noting an important change as the economy shifts from being chiefly export-driven to consumer-focused.

Although there needs to be “a significant rebalancing of the economy”, he argues that there’s a growing number of  “extraordinarily entrepreneurial” Chinese families seeking advice and investment, making it an ideal time for PE investors to enter the mainland.

“In China, private equity firms can add tremendous value to young growth businesses, particularly first-generation entrepreneurs who are building new businesses and hungry for operational help, strategic advice and global connectivity to take their businesses to the next level,” Bae says.

Technology is a good sector to watch, he adds, noting that Chinese tech companies have huge advantages over other Asian counterparts, simply due to the sheer size of the mainland’s consumer market.

“The advantage Chinese companies have over Koreans for example is their enormous domestic market. The Koreans did it the hard way – by exporting to the West."

Bae declines to comment on specific Chinese companies KKR is considering or discuss how much the firm hopes to raise this year.

Foreign investment into Asia will likely increase over the next few years, said Michael Chae, head of international private equity at Blackstone at the recent FT Asset Management Summit in Hong Kong. Investor apprehension over the US presidential election, the fiscal cliff and the “hangover” from the last financial crisis appear to be abating somewhat, he notes.

However, Chae cautions that the Asian countries “are not natural private equity” markets, noting they are still very much in formation and are very cyclical.