Japan: Let's Not Make A Deal

Despite a few big transactions, private-equity buyouts by foreigners are scarce

The word is out that private equity can be a money spinner in Japan. The number of buyout firms doing business in Tokyo has risen from a single local fund in 1997 to at least 69 local and international funds today. Asian Venture Capital Journal estimates $5.5 billion of fresh private-equity money entered Japan in 2004 -- four times the amount in 2003. Private-equity heavyweights such as Carlyle Group, Cerberus, Lone Star, and Ripplewood Holdings have all made names for themselves in recent years with big-ticket deals, including Ripplewood's pioneering sale of Shinsei Bank -- which it had acquired for $1.2 billion and later sold a 35% stake of for $2.4 billion. That was Japan's biggest private-equity exit ever. "The big foreign funds have high expectations for Japan's buyout market and for larger-size deals in particular," says Motoya Kitamura, a vice-president at Alternative Investment Capital, a Tokyo fund-of-funds investor.

Unfortunately, the foreigners' hopes are being disappointed. It turns out that it's not so easy to pull off a big-ticket buyout in Corporate Japan. So far this year the flow of fresh deals has slowed -- just 39, vs. 52 a year ago, says Thomson Financial. And the value of private-equity buyouts is at $1.4 billion, vs. $2.1 billion this time last year. At that rate, the market will be hard-pressed to top the $7.5 billion rung up last year, or even the $6 billion in 2003. "All the signs are that there's too much money chasing too few deals," says C.J. Wilson, founder of Global Alliance Ltd., an M&A investment advisory firm.

Tellingly, there hasn't been a single $1 billion-plus transaction since Nikko Principal Investments Ltd. completed a protracted $2.2 billion buyout of call-center operator BellSystems24 Inc. last October. What's more, market watchers say the pipeline, for the time being, is down to a trickle. That's a problem for those 69-plus investors with money to burn. CVC Capital Partners Ltd., a British buyout firm, raised $1.9 billon this month in a venture with Citigroup (C ) for an Asia buyout fund, 30% of which is allocated to Japan. London-based private-equity specialist Permira Advisers Ltd. announced plans in April to open a Tokyo office. And in January, Unison Capital Inc., a Japanese private-equity firm, raised $700 million from domestic and foreign investors for a new Japan fund -- 50% more than targeted.

Why the deal slowdown? A recovering Japanese economy is one reason. Rising earnings have eased the pressure on Corporate Japan to undertake radical restructuring and spin off weaker business units. Plus, when opportunities arise, foreign firms are at a double disadvantage. In smaller deals, analysts say, local players tend to have better business contacts and are prepared to accept lower returns. In big transactions, foreign firms still suffer from an image as "vulture" investors bent on dismantling Corporate Japan.

THINNING RANKS

Consider the recent battles for retailer Daiei (DAIEI ) and Mitsui Mining Co., two ailing companies under the control of state-backed Industrial Revitalization Corporation of Japan (IRCJ). Despite competitive bids from foreign investors such as Wal-Mart Stores (WMT ) and Cargill, the IRCJ chose a joint bid from Marubeni Corp. and Advantage Partners Group, a Japanese private-equity firm, whose $416 million investment in Daiei makes it the largest private-equity deal of 2005. Similarly, a Nippon Steel Corp.-led bid won out over a rival offer from New York.-based WL Ross & Co. for Mitsui Mining. "The difference with deals like Shinsei was that no Japanese investors were interested," says Tatsuo Kubota, a senior advisor with WL Ross.

Such failures are thinning out the ranks of foreign players. PPM Capital, a British buyout specialist, closed its Tokyo operations at the end of last year, citing difficulties finding worthwhile transactions. Similarly, HSBC (HBC ) and UBS (UBS ) shuttered their private equity arms in Tokyo last year.

Yet most members of the private equity set continue to do business, even if that means smaller buyouts under the media radar. "There are lots of deals we don't hear about," says Hal Morimoto, general managing partner at Astoria Consulting Group in Tokyo. And some say the best is still ahead. "Japan's at the entry point compared with the U.S. and Europe," says Atsushi Abe, Japan representative at JPMorgan Partners Asia (JPM ). Given the big bets on its private-equity market, Abe's peers can only hope he's right.

By Ian Rowley in Tokyo

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