Japan lost its position as the worlds second-biggest economy to China awhile ago. But its beating out its Asian rival in one area at least: private equity. For restructuring experts such as KKR & Co.LP, whose founders recently declared Japan the companys “highest priority” outside the U.S., the smaller country offers much more attractive opportunities. And the reasons are as much political as financial.
That might seem surprising, given that the Chinese market dwarfs Japans. (Private equity investment value in greater China, including domestic yuan funds, averaged $72 billion annually in the past five years, compared to just $9 billion in Japan.) The mainland features growth companies galore and easy exit opportunities through initial public offerings in Hong Kong, the U.S. and soon, for tech firms, Shanghai.
Private-equity companies from around the world have raised billions of dollars to invest in China, hoping to take advantage of its domestic consumption story and tech frenzy. Even KKR has bought into Chinese firms such as pork producer Cofco Meat Holdings Ltd. and personal-finance platform Shenzhen Suishou Technology Co. Ltd.
Yet several factors undercut Chinas attractiveness. Typically, for instance, most targets arent as mature as those in Japan or the U.S.; theyre still in empire-building mode, so only minority stakes are available for purchase. Deals are in the range of a few hundred million dollars on average — small potatoes compared to Bains $18 billion purchase a couple years of ago of Toshiba Corp.s memory chip business. Valuations, too, are frothy.
By contrast, as in the U.S., Japans dying conglomerates offer rich pickings. They house a slew of underloved or non-core assets: About a quarter of the companies on the Nikkei 400 have 100 or more subsidiaries apiece, and many have more than 300 divisions below the parent company.
Theres a real chance to create global leaders from these assets –an opportunity that Chinas domestic-focused private equity investors dont enjoy. KKR, which has been in Japan since 2010 and invested in six carve-outs since then, has put this strategy to work with the healthcare business of Panasonic Corp., which it acquired in 2013. Since renamed PHC, the unit bought Bayer AG's diabetes care unit and is in the midst of acquiring Thermo Fisher Scientific, Inc.s pathology business. In 2016, KKR also bought auto-parts makerRead More – Source
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