PE ASIA • july/august 2012 • Issue 62

in focus

a n t ca p i ta l pa rt n e r sTime toadapt

Japan’s small-cap buyout market
has been good to Ant CapitalPartners. But Japanese SMEs
increasingly need to expand
offshore and Ant has respondedby taking on more complex crossborder work, managing partner
Ryosuke Iinuma tells Drew Wilson
Photography by: AFP Photo/Toshifumi Kitamura
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PE ASIA • july/august 2012 • Issue 62

Atiny ant can carry up to 50 times its own weight and doesn’t rest much.
Tokyo-based Ant Capital Partners would like to draw a parallel. Being asmall, hard-working private equity firm in Japan has been a pretty good
adaptive strategy in the country’s zero growth environment, according to Ryosuke
Iinuma, managing partner of Ant’s private equity group.
Ant’s private equity operation (apart from its venture capital and secondaries units) does strictly small-cap buyouts of mature companies usually in the $50
million to $150 million range. “This is the most active space in Japan in terms ofbuyouts,” he says, adding that his firm buys full control and focuses on operational
work to improve EBITDA.
Japan oddly has a reputation for large LBOs, but the country has not beena market for large-cap buyouts, according to data from Brightrust PE Japan.
Since 1998, 78 percent of buyout deals have been less than $125 million. Only
3 percent were over $1.2 billion.
Iinuma adds that Japan has 3500 publicly-listed companies and more thanhalf have a market cap of less than $100 million. “Japan is an SME country,” hesays. “Small-cap companies can still grow in a zero growth macro-environment.”
Ant has performed relatively well in this environment. Since its founding in
2000, the firm has raised three funds, two of them purely for buyouts. The firm
has invested in 21 companies and exited 16 of them. On average, multiples acrossall its buyouts have been between 2x and 2.5x, Iinuma says, adding that Ant’s
average gross internal rate of return ranges from 20 to 25 percent.
Those returns don’t match the higher figures some firms have scored in Chinafor example. But for Japan, they stand on their own.
“Fund multiples of 2x – 2.5x are considered good in the context of Japan,” says Niklas
Amundsson, a partner at MVision Private Equity Advisers in Hong Kong. He adds that
he is speaking in general terms and is not familiar with Ant’s specific buyout figures.
Hands-on, carefully

Much has been written about Japan’s ageing population that results in a diminishing workforce and thus slowing GDP growth. Twenty-five percent of thepopulation is over 65, the highest percentage in the world, according to datafrom BlackRock iShares. Low fertility rates, almost no immigration and rising
longevity compound the problem.
This macro story has another outcome in the business sector. Japan’s demographics amplify the need for modern management in small firms run by older
owners. According to Iinuma, half of Japan’s SME owners are over 60 years oldand 30 percent are over 70 years old, creating succession issues.
Older owners would hesitate to sell the company directly to competitors. “Theowner is attached to the small businesses and its employees and doesn’t want to be
seen selling it all off just for money,” Iinuma says.
“[Therefore] selling to private equity is good reason for them to keep the samecompany culture while private equity improves inefficiencies. Most SMEs arefamily owned businesses. They have a good brand and niche business, but lack
modern KPI-based management. This has brought us a huge opportunity towork on EBITDA improvement.”
One example is CAA, a used car auction company Ant bought in 2002 for$60 million. Ant cut waste by analysing the company’s financials.The operationalteam found that management was providing car dealers with a huge volume
discount to join the auction, a discount exceeding operating profit per car. Ant
also returned a $25 million loan the company had taken out because it wasdetermined the money was simply not needed.
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PE ASIA • july/august 2012 • Issue 62

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A three-year holding period improved EBITDA by 2.5 times,
Iinuma says. The company was sold for $220 million in 2005
to Toyota Motors, the auto giant’s first private equity purchase.
While Ant cuts inefficiencies, Iinuma says it strenuously
tries to avoid cutting staff and salaries.
“Japanese small business owners are interested in private
equity firms that can help improve on inefficiencies but don’t
cut staff or take extreme measures.”
Ant’s operational work is, in a sense, taken personally: It
impacts on further deal sourcing. Dealflow in this sector hinges
on recommendations, he explains.The SME community is smalland close; everyone talks and shares experiences. Operational
work done on one SME becomes well known to others. A
private equity firm’s work must be non-intrusive and transformational, as defined by the small business owners.
“The Japanese SME is low profile and off the radar. Because
they are cash rich and don’t plan to go public, they don’t haverelationships with banks or securities firms. So word of mouthby owner or through a tax advisor is very significant in finding
deals with no competition. Many SMEs we’ve worked withintroduced us to another owner who is thinking about selling
his share to someone else.”
Last year Ant looked at 40 deals, he says, and in the firstquarter this year the firm had 10 deals in the pipeline. Twodeals are expected to be completed in the second quarter, headds. “We keep a very good deal flow and are very conservative[in acquisitions].We keep EBITDA multiples less than six.” In
an auction, the purchase price as an EBITDA multiple would
be more than 10, he says.
Factory-madeAnt Capital emerged as the product of an internet
incubator and a financial house

Ant Capital Partners’ origin goes back to 2000, when UKbased internet incubator Ant Factory formed a joint venturewith Nikko Principal Investments. Ant Factory wanted tobring the incubator model to Japan, but the new joint venture, headed by Kazunori Ozaki (who is now chairman andCEO of Ant Capital) convinced them that the incubatormodel wouldn’t work in Japan due to stark differences in
its business culture.
Ant Capital instead turned into a buyout firm.
An arm of Nikko Securities (owned by Citigroup Japan)bought out Ant Factory’s share of Ant Capital. Eventually, in2008, Ant Capital became independent through a management buyout.
Ant has multiple strategies, with units focused on private
equity, venture capital and secondaries. But the core businesshas always been the small transaction.

20Yet the fine tuning and pruning of small firms that Ant engages
in requires time and resources and tends to deliver correspondingly small returns, says one local industry source. Many firms
figure an operational strategy is best applied to mid- and largecap companies because the higher revenues and earnings of alarger company would on average generate higher returns.
“[Ant’s strategy] is not necessarily a strategy everyone wants
to go after when you have limited resources in Japan. That’s
why the space is not crowded.”Going outside

The future of Japanese companies arguably lies outside thehome market. With the demographic situation expected tokeep GDP growth near zero for years to come, Japanese companies have found that survival means expanding offshore
The big corporations are out hunting for acquisitions in Asia,
the US and Europe. In 2011, Japanese corporations’ outbounddeal value nearly tripled to $85 billion from the previous year
and was 23 percent higher than the 2008 pre-crisis peak of$69 billion, according to a report by McKinsey & Co.
SMEs are now eager to follow, a sentiment that has increased
since the March 2011 earthquake, which made clear the risksof depending on the home market, Iinuma says.
“Small businesses have one major customer like Toyota, Sharp
or Panasonic, but now there’s a renewed sense of urgency todecrease dependency on them. The small-cap company still
has an opportunity to grow in Asia.They want to look outside

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PE ASIA • july/august 2012 • Issue 62

in f o cusof Japan for partnerships and growth opportunities but don’t
The cross-border strategy has prompted Ant to reach outside
have the skill set or network.”
Japan in another area – fundraising. Previously it had exclusively
Ant has already moved on the opportunity by completing
Japanese LPs invested in three funds raised since 2003. For thetwo cross-border exits in China in 2010.
first time, it’s trying to raise foreign money. The fourth fund,
The first, Honma Golf, a luxury golf equipment manufacturer
targeting small-cap buyouts, is expected to close on $150 mil(its high-end clubs sell for $100,000), had brand recognition inlion in domestic fundraising this year.The firm hopes to raise anKorea and China but no network or expertise to help it expand. additional $60 million to $100 million overseas.
“The main reason we want outside investors is to develop
Ant found partners in those markets and helped Honma establish
a presence in Korea. It was then sold to a Chinese conglomerate. our network with Asian LPs and GPs. There are hundreds orthousands of GPs in China, making itAnother cross-border expansion was
hard to find an appropriate GP to supTri-wall, a maker of robust corrugatedboxes for shipping heavy items such as
port our portfolio and expand the busiautomotive parts.Ant saw an opportunity
ness. But if we have a good relationshipFoundedto help management expand the businesswith Asian LPs through our fundraising,in China due to the large presence of US,
we can develop a network to help us
select GPs.”
European and Japanese auto manufacturOthers say many Japanese GPs areers. Before Ant boughtTri-wall, it had 30
under pressure to raise foreign capipercent of revenues outside of Japan; now
Private equity employees
tal for the first time because domestic
it has 70 percent, he says. Ant eventually
LPs have for various reasons curtailed
sold a majority stake inTri-wall to China’s
domestic investments. To attract forCitic Capital Partners for $65 million,
according to media reports.
eign capital, Japanese firms will need toIinuma sees cross-border work
generate higher returns than they have
Assets under management traditionally been expected to deliver.
becoming an integral part of Ant’sstrategy. To facilitate more outbound
Returns for Japanese GPs didn’t needwork, in 2010 Ant opened a Hong Kong
to be what outsiders would consider
high, explains one industry source. Aoffice headed by managing partner
John Cheuck, who has experience withJapanese institutional investor required
Offices, in Tokyo and in Hong Kongcross-border expansion and investment
a 3.5 percent annual return on its private equity investments. “If a GP delivin previous roles at GEMS in Hong
Kong and Apax Partners in Tokyo.
ered 10 percent – 12 percent IRR, thatThis year, the Hong Kong office will
was fine for LPs.”
Now the situation has changed andassist in the planned sale of an undisJapanese
GPs trying to attract outsideclosed Japanese company to a Chinese
Target size of latest fundmoney are finding it difficult. “For forbuyer.
eigners, those [traditional] returns are
Cross-border expansion is somenot attractive.”thing all Japanese private equity firms
are talking about, says Cheuck. “It’sForeign sentiment toward Japan has
seen as a glimmer of hope in the cloudbeen
low for a while, adds a Japan-based
Invested companies/exits fromover Japan’s private equity industry. But
industry
source. In 2006, fund managflagship fundin terms of walking the walk, in theers raised multibillion dollar funds withSME space the only private equity exitthe expectation of large transactions.
related transactions have been Ant.”Six years later, the performance of thoseFirms in the mid and large-cap space have tried offshore
funds is mixed. “Overseas money has been disappointed andexpansions but for various reasons they haven’t worked out
a big headwind is facing all managers in Japan who never hadas well as expected, he says.
a need to go outside Japan to raise money.”
Iinuma admits foreign LPs’ first impression of Japan is theCulture, language and regulatory differences can be obstacles,and due to history, Japanese businesses have a general uneasi- disappointing zero growth story. After all, Japan is not Indonesia
ness about being taken over by a Chinese company. Ant hopes
or China and fundraising will be a struggle.
to smooth the transition through measures such as keeping its
Time will tell if Ant Capital can also draw another parallel withexecutives on board for up to a year after the sale, Cheuck says. the tiny ant – the ability to deftly maneuver around obstacles. n

2000
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2$250m
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