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KKR is looking to catch Japanese M&A global wave

KKR cautious of new rules for foreign investors in Japan

While businesses confronting a declining domestic economy pursue markets abroad, U.S. investment firm KKR is planning for more foreign purchases by Japanese companies.

“Japanese companies now need to not only sell their products overseas but also acquire companies to strengthen overseas management and platforms,” said Hirofumi Hirano, CEO of KKR Japan and co-head of KKR’s Asian private equity sector. “Helping the smooth integration and management using our global network is a key theme for us.” Famous for purchasing “carve-outs” or selling business parts, KKR has sometimes increased its activities in Japan by merging them with other foreign company carve-outs.

In one such case, Calsonic Kansei, the car component maker that KKR purchased from Nissan Motor in 2017, earlier this year acquired Fiat Chrysler Automobiles ‘ Italian peer Magneti Marelli for 5.8 billion euros ($6.4 billion). KKR’s staff in Italy have been consulting on the move alongside their FCA counterpart.

The transaction was part of a strategy to diversify Calsonic Kansei, now called Marelli, beyond its main Nissan customer, plagued by problems of governance and low profits. Hirano said that Marelli is winning orders from Honda Motor and Ford Motor and that Nissan’s sales had fallen from 85% of the total when it was still a subsidiary to about 40%.

Hirano said KKR is receptive to co-investing with a Japanese business it has not bought overseas.

KKR is riding on two trends which reshape the corporate sector in Japan. The first is a push by Prime Minister Shinzo Abe’s government for better governance, forcing large conglomerates such as Hitachi and Toshiba to streamline their holdings. The second is an attempt of spreading internationally to address a shrinking market at home. According to research firm Recof, Japanese companies made a record 802 deals overseas as of Dec. 20, up from 777 in 2018.

As an indication of Japan’s rising importance for the group, Hirano, head of KKR Japan since 2013, was designated co-head of private equity in Asia in September. Japan accounted for only about 5 percent of its first Asian fund but almost 30 per cent of its third-party pool, Hirano said, partially because of the increasing valuations of its portfolio companies.

It is planning to raise a fourth Asia fund with a goal of $12.5 billion for its first exit, which, according to reports, would likely come in the first half of next year. Once completed it will be the region’s largest private equity fund. Hirano and the company also refused to comment on the fundraising operation.

With under its belt a string of acquisitions of over $1 billion in Japan, KKR’s growth could give Japanese firms more room for big acquisitions. In 2014, KKR purchased a 165 billion yen ($1.67 billion) offer from Panasonic’s medical equipment company, Panasonic Healthcare.

Panasonic Healthcare continued to purchase divisions from the US’s German Bayer and Thermo Fisher Scientific. In the current fiscal year, the merged company’s earnings before debt, royalties, depreciation and amortization could hit 60 billion yen ($548 million) compared to 17 billion yen for 2014, Hirano stated.

Whether the favourable investment climate will continue recently came into question after the government promptly passed a revision to a law requiring foreign investors to seek government approval to invest in national security-related companies. The move came in the face of an increasing presence of activist investors requesting that management raise shareholder value.

Hirano said that Japan is not limited to efforts to protect national security. At the same moment, he said, “I think Japan wants to bring in foreign direct investment,” “Significantly restricting the scope of investment for foreign investors and companies is something that should be avoided.” KKR awaits specifics of how the new rules, which are expected to take effect next year, would affect the company.

Investors are waiting to see whether the new rules represent a broader pause in Abe’s push to change governance. Hirano said reform is “midway” and measures have helped companies meet formal benchmarks, such as having two independent managers on their board. However, companies still have fewer professional managers than the U.S. and Europe have.

Hirano said KKR will continue to invest in companies in China and Southeast Asia that are proliferating due to a rising middle class elsewhere in Asia. The portfolio includes the Indonesian ride-hailing device Gojek and the Philippines telecommunications company PLDT’s fintech subsidiary, Voyager.

Startups are part of the approximately 20 per cent of Asia’s assets allocated to “new growth” including real estate.

The recent turmoil at the Vision Fund of SoftBank Group— the world’s largest tech-focused fund that has suffered a blow from its investment in U.S. office-sharing company WeWork— will not influence its investment decision-making, he said but could lead to a decline in industry valuations.

“When there is a large gap between the capital needed and the capital being deployed, valuations tend to become high,” said Hirano. “It may be good[ for the Vision Fund] to wait and see to maintain order.”

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