Private-Equity Vultures Fattened by Abenomics Cash: Japan Credit

Japan’s private-equity funds, once disparaged as vultures, are attracting investments from banks flush with cash from Prime Minister Shinzo Abe’s stimulus.

New Horizon Capital Co. is considering raising more money and extending a fundraising deadline because of demand from lenders, Chief Executive Officer Yasushi Ando said. Integral Corp. plans a second fund by the end of August. Buyout funds raised 92 billion yen ($930 million) last year in Japan, the most in three years and a 53 percent jump from 2011, according to data from Japan Buy-Out Research Institute Corp.

Lenders are responding to record excess cash and the highest volatility in sovereign bonds in a decade by returning to investments considered too risky after the 2008 collapse of Lehman Brothers Holdings Inc. The Tokyo High Court in 2007 called Steel Partners Ltd. an “abusive acquirer,” after a series of takeover bids were thwarted by targets using so-called poison pills or white-knight tie ups. Ando said his Tokyo-based fund is fighting that stigma by seeking consensus on restructuring proposals from a target’s managers.

“Japanese financial institutions are seeking alternative investments because they can no longer rely on income from sovereign debt,” said Yasuo Sugeno, a senior researcher at Daiwa Institute of Research in Tokyo. “The megabanks, which were the first to turn to private equity, are now being followed by regional banks and trusts.”

Unprecedented Easing

The Bank of Japan decided on April 4 to double monthly bond buying to 7.5 trillion yen and lengthened the average maturity of the purchases by twofold to about seven years. The announcement sent Japan’s benchmark 10-year bond yield to a record low of 0.315 percent the following day. The rate surged to almost double that level in the same session and was down 1/2 basis point at 0.585 percent as of 11:55 a.m. in Tokyo today.

Customer deposits held by Japanese lenders exceeded loans by 176.3 trillion yen in March, central bank data show. The average interest rate on long-term yen loans from the country’s banks fell to 0.942 percent in February, according to data compiled by Bloomberg.

The financing for buyout funds in Japan last year was 16 percent of the record 560.8 billion yen in 2006, according to Japan Buy-Out Research Institute numbers dating back to 1997. The funds invested 498.9 billion yen in 2012, compared with 1.245 trillion yen in 2008, the busiest year on record, the data show.

Investor Demand

New Horizon Capital, which started operations in 2006, is considering extending plans for its second fund by three months from the end of June to meet increasing demand from investors including Shinginko Tokyo Ltd. and Kyoto Shinkin Bank, Ando said. The company is considering increasing the fund amount to 20 billion yen from 15 billion yen, he said.

“With funds there is a chance of losing the entire principal, so we have set a limit on the amount and will not invest beyond that,” said Nobuhito Fukuda, the manager of the corporate planning department at Shinginko Tokyo. “We have also made commitments to other funds and are examining new opportunities case-by-case.”

Elsewhere in Japan’s credit markets, Hokuriku Electric Power Co. hired Mizuho Financial Group Inc., Nomura Holdings Inc. and SMBC Nikko Securities Inc. for a 20 billion yen sale of eight-year bonds this month, according to a statement from Mizuho. The utility last sold debt in February raising 20 billion yen of 1.158 percent 10-year notes, according to data compiled by Bloomberg.

Bond Returns

Japan’s corporate bonds have returned 0.85 percent this year, versus a 1.87 percent increase for the nation’s sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has gained 1.98 percent.

The yen traded at 98.87 per dollar at 11:55 a.m. in Tokyo today, after weakening to a four-year low of 99.95 last month. The currency has plunged more than 12 percent against the greenback this year, the most among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.

Japan’s benchmark 10-year securities yielded 118 basis points less than similar-maturity U.S. Treasuries, compared with 98 a year earlier, data compiled by Bloomberg show.

The cost to insure Japan’s sovereign notes for five years against non-payment was at 60 basis points yesterday, down from 82 basis points at the start of the year, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the private market. A drop in the contracts signals improving perceptions of creditworthiness.

Bull-Dog Sauce

In June 2007, New York-based Steel Partners, run by investor Warren Lichtenstein, made a takeover bid for Bull-Dog Sauce Co. The Tokyo-based condiments maker’s board rejected the offer, allowing all of its other shareholders to convert warrants into common shares, diluting Steel’s stake to less than 3 percent from 10.15 percent. Steel’s subsequent legal challenge was struck down by the Tokyo High Court, which called the firm an “abusive acquirer” in its ruling.

In 2008, shareholders led by Steel ousted the management of Aderans Holdings Co., a Tokyo-based wigmaker. It was the first success in the fund’s quest to force changes at Japanese companies.

Abe’s plan to revive the world’s third-largest economy has helped push Japanese stocks to levels unseen since before Lehman’s collapse. The Topix index of Japanese shares has climbed 62 percent since Abe’s Nov. 15 call for “unlimited” monetary stimulus.

Integral’s Fund

Integral, a Japanese private equity firm established in 2007, plans to raise 30 billion yen for a second fund by the end of August as equities surge, a partner and representative director Nobuo Sayama said in an April 9 interview. The fund will invest in seven to 10 companies over the next five years and has already received about 11 billion yen from at least one national bank, several regional lenders and pension funds, Sayama said.

Its first fund was started in September 2008, the month Lehman Brothers collapsed, and made investments in six companies, including buying TYO Inc. shares in December 2010 at 49 yen, according to Sayama. The advertisement company’s stock closed at 200 yen yesterday.

The average interest rate on long-term loans from Japan’s six so-called city banks, which include Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho, dropped below 1 percent for the first time in January and was 1.01 percent in February, according to data compiled by Bloomberg. The rate for regional banks was 1.097 percent, after matching a record low of 1.075 percent in December, the data show.

“The demand is unlike anything we’ve experienced before, with customers coming to us in search of opportunities,” Ando of New Horizon Capital said. “There is a time lag to the actual investment, which will probably take place in the July to September period.”

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