Japan Forum Explorer: Sponsors see ample pipelines with technology, services and healthcare assets

Data InsightDealspeak 26 June

Japan Forum Explorer: Sponsors see ample pipelines with technology, services and healthcare assets

Ahead of our Mergermarket Japan Forum to be held on 29 June, we analyze private equity pipeline activity based on Mergermarket’s Likely to Exit (LTE) predictive algorithm. Mergermarket's LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.

Conditions for private equity M&A activity in Japan are in sync with the summer matsuri season despite the global economic turmoil, bolstered by the country’s continued ultra-low rate monetary policy and shifting dynamics for exits, dealmakers said.

General Partners (GPs) that have portfolio companies in Japan are seeing plenty of capital deployment opportunities, they said. These range from non-core divestitures driven by corporate governance pressure to boost shareholder returns rather than purely conserve capital to founder-backed companies seeking a solution to succession issues, they noted.

GPs have record dry powder and the Bank of Japan’s decision to buck the global trend in the face of inflation from supply chain shortages and the war in Ukraine, keeping interest rates stubbornly low, enables buyers to secure financing to commence deals.

Overseas private equity firms are also shifting their focus to Japan for capital allocation, attracted by lower geopolitical risk and the depreciating yen, they say.

“Private equity firms have been actively acquiring companies in the past many years, but the exit deal flow has just shown signs of a pick up,” a Tokyo-based M&A banker pointed out.

 A second Japanese banker echoed this view and said that many GPs are seeking to exit from portfolio companies that they were not able to sell during the pandemic.

The current environment in Japan is quite good for private equity firms to exit from their portfolio, said Megumi Kiyozuka, President, CLSA Capital Partners said.

“I’ve never seen such favorable sentiment in my two-decade professional career,” he added.

The path for trade sales also seems to be smooth, as many Japanese companies continue to be acquisitive because they are encouraged to allocate their accumulated net cash to investment to grow by shareholders, he continued.

Private equity buyers are also aggressively seeking secondary buyouts to spend their accumulated dry powder, he said. Banks are helping them by providing financing and that bolsters such trend, he added.

Shinichiro Kita, senior partner and Head of Japan Buyouts, Advantage Partners, told Mergermarket in his recent interview in May that the firm intends to field secondary buyouts as well as other opportunities.

Sometimes the average GP five year holding period, is not enough to get the full benefit from reforms to an organization’s structure and the fresh strategy they implement, Kita said, pointing out how a new private equity firm can take a fresh perspective on driving an asset’s value.

Meanwhile, the Nikkei 225 has seen a tremendous rally this year, up some 27.15% year to date at JPY 32,698.81 as of 26 June. Rising Japanese stock market valuations are another encouraging factor, CLSA’s Kiyozuka said.

“Investors are coming back to the stock market. IPOs could be more reactivated later this year and this may encourage some private equity firms that are considering IPO exits for their portfolio,” Kiyozuka noted.

Historically, GPs tend to prefer to invest in technology, services, and healthcare businesses, and assets in these sectors always catch a buyer’s eye when they seek an exit, deal makers said.

The second M&A banker said that any sort of semiconductor-related business is among popular assets whenever it comes up for the sale despite the industry being cyclical, as this is a growing segment.

Kiyozuka pointed out that companies which are involved in software development and e-commerce are also particularly popular among tech companies.

PE-backed technology companies include BPEA EQT-backed Pioneer Corp, a manufacturer of car audio and navigation system, with LTE score of 55/100. Pioneer, which has been held by BPEA a little over the median 4 year period for exits, appointed Sanjay Dhawan as chairperson last year. The group is reportedly considering relisting in 2025.

Longreach Group-backed Japan Systems, the Tokyo-based system developer, is another potential technology exit with LTE score of 51. Japan Systems only delisted just over two years ago, but the company’s strong management experience in M&A helps boost exit potential.

Meanwhile, in the service sector, staffing companies are constantly attracting buyers due to social needs corresponding to the labor shortage, dealmakers pointed out.

BPEA-backed TRYT Group, the Osaka-based recruiting and temporary staffing agency, is the most significant example as the business is considered as the largest PE-owned staffing company, they said. TRYT announced 20 June that it would go public in July. BPEA had been taking a dual track exit strategy for this company and considered an exit in 2021, but did not trade due to a mismatch in valuation expectations, as reported by Mergermarket. The group attempted another sale in 2022.

A Tokyo-based private equity executive added that a temporally staffing company which dispatches professionals, such as IT engineers, is more attractive assets than usual staffing companies.

Bain Capital-backed EmberPoint (formerly known as Cheetah Digital’s Japan MailPublisher business) with LTE score of 55 is another 2019 vintage. EmberPoint made a bolt-on acquisition of a Japanese corporate data management, RenoSys in November 2020, which is an input in its exit potential.

Hitowa Holdings, Tokyo-based company engaged in house cleaning and daycare facilities, has LTE score of 56 and was bought by Polaris Capital Group in 2019. The group operates in hot PE sectors such as nursing homes and day care and has loans maturing in September 2023.

Another potential future nursing home services exit could be Bain Capital-backed Nichii Gakkan, the Tokyo-based healthcare service provider with LTE score of 54. Bain acquired Nichii Gakkan in 2020, it has historically strong management M&A capabilities and is just short of the median 4 year private equity exit sweet spot.

Healthcare companies are generally believed to be popular assets, but buyers are looking for targets quite selectively, because some companies are easily affected by government revisions of national health insurance (NHI) drug prices and nursing care compensation to curb social welfare spending, dealmakers said.

NHI drug prices are the prices of insurance-covered prescriptions that a payer/patient pay to medical institutions and pharmacy, according to Ministry of Health Labour and Welfare of Japan’s presentation material. Prices are set uniformly under the health insurance system in Japan and revised every year.

In April, the government announced it reduced the prices of 48% of insurance-covered drugs available in Japan, according to Asahi Shimbun.

Under such system, it would be hard for some private equity firms to consider investing in an original drug maker, because it is difficult to tell an equity story, the sector banker said.

CLSA’s Kiyozuka pointed out that that healthcare businesses that can contribute to improve quality of life of people, such as a company offering non-invasive therapy products, these also tend to draw interest from buyers.

Meanwhile, contract development and manufacturing organisations (CDMO) are among popular assets in the healthcare space as their businesses are less affected by the NHI drug price revisions directly, the banker continued.

CDMOs are playing a more important role in recent years under the horizontal specialization trend of drug development and manufacturing, the banker noted.

Using CDMOs enables pharmaceutical companies to allocate financial resources to develop new drugs to achieve growth in the booming biopharmaceutical space, while set them free from heavy capital expenditure for facility investment, the banker added.

A notable recent deal in this sector is BPEA’s exit sale of Bushu Pharmaceuticals to KKR in December 2022 for an undisclosed sum as announced. Nikkei reported that the deal value was JPY 100bn.

Analysis by Mimi Lee and Manu Rajput

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