Analysis

K E Y N O T E

I N T E R V I E W

Why we decided
to go it alone

Koji Sasaki, president and managing partner of T Capital Partners, maps the roadahead for the firm now that it has separated from Tokio Marine Insurance GroupThe management buyout of Tokio Marine Capital by a group of five senior
partners marked something of a milestone in the evolution of the Japanese
private equity market where spin-outs
are few and far between. Established in1991 and one of the oldest private equity firms in Japan, the GP, which wasa captive entity of blue-chip Tokio Marine Insurance Group, formally agreed
to the separation in August last year. It
was a bold step for the buyout team,which has since rebranded as T CapitalPartners.
Koji Sasaki, president and managing
partner, who now owns the businessalong with Eisuke Shigemura and threeother investment partners, describes

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SPONSORT CAPITAL PARTNERS
how it happened and what it means forthe firm, its investors and its businesses.

QTalk us through thedecision to separate.

We had been talking about changing
our capital structure for a while. In the
midst of a stagnant market after theLehman shock in 2011, we raised ourfourth fund with only ¥23 billion ($210million; €190 million), and it became
clear that we needed to diversify our investor base because banks on which wehad heavily relied had been impacted• April 2020

by the Volcker Rule which restricted
their commitments to PE funds. Although we successfully raised the next
fifth fund in 2016, at ¥52 billion, wehad concerns for the future and started serious talks with our shareholder
about a management buyout. We realised this was our final chance.
Twenty years ago, around the time
we launched the first fund under theTokio Marine brand, there were very
few established independent private
equity firms in Japan and being a captive was very useful for both fundraising and deal sourcing because, backthen, we had no track record or performance metrics and the Tokio Marine
brand was very familiar to investors.

Analysis
The company had a 150-year history
and was one of the largest institutional investors in Japan. It’s a respected
name. Now the PE market has grownand domestic investors have come tomake investment decisions based on
the firm’s performance and team, notthe brand. And we have a good trackrecord – we’ve never made a loss.
Also, for some time now, we’ve
wanted to diversify our investor baseto include international investors. Japanese banks and pensions are important but overseas investors are important too. Although international LPs
were impressed by our track record,
they were hesitant to commit becauseof our captive status. We shared carried interest with our shareholder,which international LPs thoughtshould go only to the team. It presented a governance issue as they felt that
we, the GP, served two masters – ourshareholders and our LPs – and that
could create a conflict of interest theyfelt put them at risk. The managementbuyout eliminates this issue.

Q

What difference has theseparation made to yourinvestment approach?
No difference. Although we were legally under the umbrella of Tokio Marine
Group, they were a very passive shareholder because they also understoodthe negative implication of captive
funds. Therefore, we used the parent’s
brand but we have been successfullyoperating quite independently of theparent for 21 years, building own teammembers, sourcing our own deals anddriving growth at portfolio companies
by establishing our own investment
philosophy, ‘to make good companies
better through mutual trust’. Our goal
is to retain that culture, supported byour history and track record. These areimportant assets that determine how
our LPs and portfolio companies see
us. We will continue our establishedinvestment philosophy and approach ofbeing true partners with our portfolio
companies. It’s in our DNA.

Q

How important are environmental, social andgovernance factors in your decision to invest?

In Japan, the concept of ESG is widely recognised these days, especiallyamong businesses. We signed up to the Principles for Responsible
Investment in 2013. For us it was a natural step. ESG accords with ourinvestment philosophy to identify good companies that we can makebetter or the best, so we had no hesitation. Being a PRI signatory sends aclear signal to our investee companies. By being socially responsible ourcompanies have a role in building a sustainable society. For us to invest,
the company already needs to operate at a good level of ESG. During
deal sourcing, when we talk with companies, we apply an ESG checklist.
Some companies we see at the due diligence stage are quite excellent, whileothers fall short on some of our ESG criteria. In these cases we will seek
to address these internal issues once we’ve invested by communicating ourconcerns to the board and through meetings with top management.

QYou took a big step. How
has the buyout been
received?
First, our team members were reallyenthusiastic about the decision because
we were no longer regarded as being
captive. Neutrality is one of the important benefits of the MBO. In the past,
the association of our parent company
with Mitsubishi Group gave us positiveeffects but sometimes had negative implications when we did business withcompanies outside the Group. Thatbarrier has been lifted.
Second, while I was a little about
concerned about the response from
portfolio company management, thiswas soon dispelled post announcement.
I found that they weren’t concerned
about the change because they hadtaken the decision to invest with us as apartner after extensive communication
with us at pre-acquisition. It wasn’t because of our parent.
Last, for all our stakeholders, ourLPs, current and past, are the mostimportant people to consider. We havelots of Japanese banks and pensions invested in our funds, all of which we met
with individually to explain our decision. Some of them might have raised
concerns and some invested because of
Tokio Marine’s name. However, nearly
all of the LPs gave us warm appreciation. They understood our successful
track record was produced by the team.

QHow do you go aboutsourcing deals?

That is changing. Two decades ago,April 2020

• Japan21

Analysissourcing was very difficult. Private equity as an industry did not exist. Big
conglomerates and founder-owners
were reluctant to talk to private equity
managers. In those days, we took advantage of our parent company’s nameto facilitate access to bigger businesses and family-owned companies. Thatwas our starting point.
Over time, private equity has gradually become widely recognised among
not only the big companies but alsofamilies. We no longer need to talkabout our former parent company. We
can rely on our 21-year investment
track record. Banks, security houses
and boutiques that can connect us toprospective companies know us now.
That is a significant change, particularly in relation to sourcing investments
in family-owned business, which is anarea where the presence of boutiques
has grown rapidly.

Q

the approach we took in the past andwe continue to take in the future.

QWe do not limit ourselves to specificindustries, but we do have some that wereally like. Manufacturing with strong
niche products is one. Healthcare is anindustry where we have an edge. Bushu
Pharmaceuticals was a successful example of a carve-out transaction and wecontinue being very active in the sector.

“Althoughinternational LPs
were impressed by ourtrack record, they were
hesitant to commit

Has your investment
philosophy changed?

No. Our number one criteria is toinvest in small to medium-sized companies with sound cashflows and sustainable earnings. “Sound” means thateven if the company generates strong
cashflow, it needs to meet our environmental, social and governance criteria
and management needs to be of goodcharacter. If the company is linked toanti-social issues or poor corporate
governance, or employees are badly treated, then we would not invest.
The personality and sincerity of management determines the quality of ourcommunication. Trust is a fundamental
value for us and with that, whatever
happens, we can work together. This is
our definition of soundness.
Everyone wants strong cashflow,
but stability is also important to us– will current cashflow levels be sustainable in the future? This, and thesoundness of cashflow, are elements weinvestigate during due diligence. Then
we can discuss with management about
the future upside scenario or actions to
be taken after the investment. This is

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Do you target particularsectors?

because of our captivestatus”
Retail and distribution is also an interesting industry. For example, we invested in Miki Shoko Company, which
is a children’s apparel brand for aspiring parents. Though Japan’s birth rate
has been decreasing, purchasing power
per baby for high brand gifts has been
increasing. Thanks to this, Miki hasgrown even in the deflationary economy. The third is service industries, likeoutsourcing, or B2B services. Asahi
House Industry Company is one example. It leases temporary portable toilets
to well-diversified construction sites andevents and maintains steady cashflows.
We will continue to focus on industries
where market demand doesn’t fluctuate.

QOf your investments,
what proportion weresuccession deals and what
were carve-outs?
We have completed 26 buyouts. Today,• April 2020

about 70 percent of our investment portfolio is comprised of family businesses
and 30 percent are carve-outs. This wasquite different in the past; it was theother way around. For carve-outs, there
are a limited number of big companies
making decisions to divest and growthin the volume of these opportunities has
been slow. For now, family businesses
succession transactions drive dealflow.
Japan’s aging population is one of thekey reasons behind this.
In the family business succession
category there are two types of sellers: an aging owner with no successor
who wishes to cash out, and second,
founders who have passed on the business to a successor. In the latter case,the successor retains a stake, or, morecommonly, sells the business to us andreinvests through the leveraged buyout. These second generation owners
look at their peers to see what otherbusinesses are doing and they want togrow, modernise and run the businessin a more sophisticated way than theirparents. Private equity can be a solution for them. And they are researching
and comparing different GPs.

QHow do you approachthese family-ownedbusinesses?
Word of mouth among family owned
companies really delivers truth. We liketo talk to the founder or second generation owner and negotiate exclusively
to come to a deal. He likes us; we likehim. It’s about having a successful trackrecord and whether, as personalities,
you can work together in the future.
Money is important but non-monetary considerations are key to selecting
each other. This route makes executing a transaction easier and facilitatesa cheaper entry multiple. Corporate carve outs are price-driven – thehighest bidder wins the deal. We are
currently inclined toward successiondeals. That said, we have done carveouts and if an opportunity pops up, wecan quickly pick up contact with thosecompanies again. n