This is the first part of an interview with JIC’s CEO and CIO who exclusively shared their investment strategies and goals with Mergermarket. Part II can be found here.
State-backed Japan Investment Corporation (JIC) is exploring potential private equity investment opportunities in five focus sectors in Japan as it is set to take private JSR [TYO:4185], the listed semiconductor material maker, later this year.
In an exclusive interview with Mergermarket, CEO Keisuke Yokoo flagged the metal, chemical, auto components, healthcare, and semiconductor industries as its primary target sectors. But he quickly added that its wholly owned subsidiary JIC Capital (JICC), which takes a lead in private equity and large growth investment, has yet to make new investment decisions in any of those areas.
Founded in September 2018, JIC manages funds worth JYP 1.1trn (USD 7.4bn) mandated for buyout and large growth investment; a JPY 900bn joint fund of JIC and JICC, and JICC’s JPY 200bn fund.
Regarding the chemical sector, JIC would be willing to talk with petrochemical companies with an interest in initiating a sector consolidation via JICC’s investment, he noted.
The intentions of Japanese companies “are not clear yet,” Yokoo said. He emphasized the need for proactive initiatives from private-sector companies before JICC can proceed with full-fledged studies on sector investments.
JIC and Japan’s Ministry of Economy, Trade and Industry largely agree on the need for restructuring in the petrochemical sector, although specific details have not yet been discussed.
Five of seven major Japanese petrochemical companies reported a sharp fall in profitability in 1Q23 due to deteriorating market conditions. This has fueled media speculation over the possible consolidation of Japan-based basic petrochemical units.
Mitsubishi Chemical Group [TYO:4188], Japan’s largest chemical company by sales, earlier announced that it is seeking a joint venture with domestic peers to consolidate its petrochemical business in FY24 (ending in March 2025). Since December 2021, the company’s CEO Jean-Marc Glison has repeatedly said he wants to lead “an industrial restructuring” but no major deals have yet to emerge.
Support industry growth
JIC’s key mission is to boost the global competence of Japanese strategics by promoting industrial consolidation among others, according to its government-set investment criteria.
Yokoo still emphasized that JIC is not a state-run fund, meaning that the organization independently decides on deals and does not require government permission as long as they align with the investment criteria.
JIC should not strain market competition and activities as a government-affiliated investor, he continued.
Therefore, Yokoo has instructed JICC not to exceed the fair value by placing a higher price in order to gain dominance in the competitive bidding process within the private sector.
On 26 June 2023, JICC rocked Japan’s semiconductor industry by announcing a plan to launch a JPY 900bn tender offer to take-private JSR. The offer is tentatively scheduled for December-end.
“JSR is producing materials indispensable for semiconductor production. Strengthening international competitiveness (in the semiconductor industry) is one of the top priority agendas to strengthen industries of our country,” the CEO noted.
As such, JICC is navigating further opportunities to invest and promote consolidation in the semiconductor sector, Yokoo said adding that acquisitions of photoresist-producers are not ruled out.
JIC may also consider M&A in the "upstream or downstream” segments of semiconductor production processes, he said without elaborating.
Prior to the deal with JSR, JIC had already discussed with JSR CEO Eric Johnson about possible industrial restructuring strategies, Yokoo continued.
“We had agreed on the outline of what we should do. Otherwise, we would not have been able to make the investment decision,” Yokoo said.
JSR also said on 26 June during the media briefing that one of the key reasons for accepting JICC’s offer is that it believes it could “gain momentum for industry restructuring” by cooperating with the state-backed investor.
JIC’s Chief Investment Officer Toshiyuki Kumura meanwhile added that JSR's acquisition of domestic peers could raise antitrust issues.
“It may not be a very easy task” for JSR to consolidate domestic peers, he opined.
According to a Nikkei report, five Japanese companies – JSR, Tokyo Ohka Kogyo [TYO:4186], Shin-Etsu Chemical [TYO:4063], Sumitomo Chemical [TYO:4005], and Fujifilm[TYO:4902] – comprise 90% of the global photoresist market in 2021.
But Japanese semiconductor-related companies are reportedly facing risks of being acquired by foreign rivals given their small market value. JSR’s market cap is JYP 842bn (USD 5.7bn), less than one-fifth of US rival DuPont [NYSE:DD], and that of Tokyo Ohka Kogyo is only JPY 375bn (USD 2.54bn).
Yokoo also shared concerns about the relatively small size of Japanese players in the semiconductor space. It was one of the reasons for the JSR deal and it aims to help strengthen Japan’s industrial competitiveness in the global market, he noted.
PE deals, no exits yet
In addition to JSR, JICC has made two other PE investments since its foundation. In 2022, it acquired an 80% stake in a JV between UACJ [TYO:5741] and Nippon Light Metal Holdings [TYO:5703]. This March, JICC also announced an agreement to buy a 20% stake in Hitachi Astemo, an automotive firm jointly set up by Hitachi [TYO:6501] and Honda Motor [TYO:7267], for an undisclosed sum.
All three deals were realized largely thanks to the targets’ agreements on JICC’s policy goals, rather than the price, according to Yokoo.
Hitachi and Honda are also keen to increase R&D investments for CASE (connected, autonomous, shared, and electric vehicles) technologies, Kumura said. It was one of the reasons that they had approached JIC asking for participation, he added. Japanese automotive-related companies should invest in R&D more actively to respond to rapidly evolving CASE technologies, the CEO noted.
JICC has yet to invest in the healthcare business. It is considering investing in the sector but will examine the potential targets carefully to meet the policy goals, Kumura said.
For example, if JICC investment addresses the production shortage of generic medicines in Japan, it might not involve “international competitiveness” or “creation of new businesses for Society 5.0” mentioned in its government-set investment criteria, he added.
The story continues to Part II