Why did Permira set up its first Asia office in Japan?
As part of the team who runs Permira, I was reviewing the potential for us to be in Asia. In 2004, we identified a big æpaperÆ opportunity in Japan. This was the only Asian market which met our criteria for size of deals and provided traditional leveraged buyout type opportunities.
We recognise that Japan poses unique challenges for private equity investors and the pace of investment will be slow. But, equally, we believed the time was right for us to establish credibility in the market and demonstrate our commitment to being a long term player by setting up shop here.
All signs point to the fact that this market will - eventually - boom.
Japan has been a difficult market for private equity. Why is that?
In terms of ranking of stakeholders, shareholders are not generally the first or second. This is for a variety of reasons. Institutional shareholders traditionally already have a context and relationship with the investee company. Management is oftentimes representing the interests of a number of stakeholders such as suppliers and employees. Corporate governance and low levels of attention paid to shareholder value are probably the weakest links of the current Japan Inc situation.
But we are positive that this is changing. Japan is bound to need more foreign inflows going forward as Japanese investors diversify their horizons and the markets in which they invest. This change will drive improvements in the corporate governance situation. The anomalies which exist today are detrimental to the growth of Japan Inc in the long term. I am optimistic and would also note that one characteristic of Japan is change sweeps across markets very quickly.
It is difficult to predict when this quantum change will occur but, when it does, the opportunity in Japan is comparable to the entire Europe.
What are the ingredients for successful private equity investing in Japan?
Stay focused û at Permira we are constantly evaluating opportunities but we donÆt pursue those which do not meet our parameters in terms of sector, structuring ability, size or other factors.
Be creative and patient. Japan does not have a well-defined deal flow and taking an idea from conception to maturity can take two years û or more.
One factor which is true anywhere in the world and Japan is no exception - you have to get lucky.
There is a perception that being local is a pre-requisite for success in private equity investing in Japan. Is that fair?
We have always believed that being local is a great advantage. But we also believe being an integrated international firm is an advantage as it helps us maintain the sector focus which is critical to our approach. IÆd say the winning strategy for us is a combination of the two and thatÆs what we are working towards.
What sectors are you focused on in Japan?
Retail and luxury goods are sectors we have traditionally focused on and which are well-developed in Japan and will yield opportunities. Japan is a global leader in technology and telecommunications and these are currently benign markets. We foresee this sector yielding opportunities.
What is your view on other opportunities in the Asia-Pacific region?
We are enhancing focus on Greater China with the opening of our Hong Kong office in 2008 but we recognise the opportunities may still be small for our target ticket size.
The high level of activity in Australia has come as something of a surprise. While that markets presents attractive opportunities today, we need to be convinced this is sustainable before we make a strong push there.
We see India as a future opportunity because currently it does not provide the size of deals we target.
Why did you take a minority stake in the Galaxy Entertainment deal?
Historically, we have preferred control situations but we have taken minority stakes in situations where we believe we can add value and have the ability to influence direction and decisions. PermiraÆs investment of $840 million for a 20% stake in Galaxy, which operates the StarWorld hotel and casino in Macau and is planning a Cotai mega-resort, falls in this space. We are very familiar with the gaming sector and like the asset. We will work with the management to enhance value for all stakeholders.
You emerged winner in the auction for Arysta, which included strategic buyers and other financial sponsors. To what do you attribute your success?
I think deliverability made the key difference to the vendor. In a short period of time we came up with a deal we could deliver. We could do this because we had been looking at this asset as an attractive opportunity, even before Olympus initiated an auction, as part of our chemicals focus.
Our ability to raise competitive financing no doubt helped. Some synergies may have been higher for strategics but our experience has been when leverage is available private equity can be more competitive then trade buyers.
The willingness and ability of Japanese banks to lend balance sheet to support the deal has been a factor enabling us to bid aggressively. We will raise debt from a combination of international and Japanese banks.
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