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KKR: Japan ‘fertile territory’ for private equity April 27, 2007

Posted by fukumimi in Economy & Business, Japan.
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The FT article.

I wholeheartedly agree that Japan will be ripe with opportunities for private equity players. There are lots of PE firms expanding their presence in Japan as we speak.

Whilst traditional business interests seem to have been successful in manipulating the media to sensationalize the activities of PE funds and tarred them all with the same brush as money obsessed vultures willing to do anything to make a quick buck, I personally think that PE firms can be a force for good in the current Japanese business climate, and it may be necessary for outside influence to kick start the process of introducing change into the system.  It would seem much easier for foreign firms with no ties or associations to attempt audacious deals than for natives.

That is not to say that I am a fan of the overly aggressive and/or short-sighted practices employed by some firms/funds, but maybe having such players in the game is a price the local business ecosystem has to pay to allow firms with more balanced strategies to operate.

I hope PE firms become an agent for change for the better in Japan, there are lots of companies and departments within companies with substantial unrealized value, and if the potential can be unlocked, it will strengthen the Japanese economy as a whole.

I hope the PE firms learn from the mistakes made by their VC cousins who attempted to break into Japan and then retreated back in the early 2000s. The biggest challenge may be to find the right resources to staff their local offices.

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1. Ian Wilson - April 27, 2007

I think there are many ways to look at this, first I would like to know if there is really any substance to this, are PE firms substantially going to push into this market or is this just some off hand discussion with a journalist?

You mention about VCs retreating after 2000 but I wonder if PE firms might already be thinking twice after recent problems in South Korea with foreign owned (“vulture”) PE firms becoming a political hot potato/football? Its not Japan but many of the same issues could arise, such as protectionism, Ishihara type “blame the foreigner” smoke and mirrors to hide domestic problems etc.

It could be a great boost of energy for the Japanese economy if this did happen however. The mere presence of PE firms would/could embolden Japanese managers to make painful, necessary but profitable restructuring changes. Whether the PE firm was involved directly or not it could, on a personal level, allow a Japanese manager to be able to undertake these reforms without effectively reneging on their social responsibilities as the pressure to reform would be laid at the feet of the PE firm (who probably would neither understand nor care about Japanese social responsibility anyway).

There are potentially many winners in this scenario. Not least of which is a more dynamic economy with greater opportunity.

The potential negative effect might be to drive big companies to adopt poison pill type strategies (ala Livedoor v Fuji) or to further engage in cross shareholding with other susceptible companies for the sake of mutual support. This simply serves to keep executives in golf memberships and does nothing for the Japanese economy or people (now thats an abdication of social responsibility).

The other potential negative effect is that the very people who would be threatened by this type of dynamic input into the system tend to be politically very well connected. The PE firms can be made an easy target for Japans political-journalistic complex to feast on, “KKR CEO steals old lady’s life savings scandal!”. Stir up (conjure up?) an outcry and then change the rules to favor the incumbents, again.

Having seen Japanese managements many positive aspects I am not enamored by wholesale, dog eat dog, capitalism but any system that lacks some form of dynamic input will eventually wither and die, so I think this could only be a good thing, in moderation of course.


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