AIMA Japan hosted a pre-Goldman Sachs prime brokerage conference event
AIMA Japan hosted a pre-Goldman Sachs prime brokerage conference event
on Monday Nov 14, 2005. It was invitation only and had a high profile speaker panel
Shuhei Abe, Founder of SPARX ex Soros SPARX currently run more than
US$11BN in AUM and have 164 staff as of Oct 2005. They have 4 offices in
Tokyo, Honolulu, London and New York. Hong Kong is expected.
Shuhei gave an impressive broad stroke speech in English on how Japan
was finally changing (slowly but progressively) towards a more share
holder driven model of capitalism with free markets. The rebuilding
values of post war Japan have run their course and a new evolution needs
to be pursued in order to continue the vitality of local Japanese
markets. They will no longer be export led exclusively but additionally
boosted by local consumer consumption. The politicians being ignorant
and historically in fear of the Japanese farmer that supports the LDP,
has yet to change. The farmer and his succession will die off, breaking
the chain of fear that has grown over the last 60 years. The retail
consumer and investor will finally be more respected in the future of
Japan in the years to come.
2006 will be a slow start to this change which is built upon a real
paradigm shift away from the past. Shareholders will be respected, and
TOBs both hostile and friendly will be normal going forward. This merger
activity will encourage more M&A action which will encourage
consolidation within Japan. Pharmaceutical firms are a big target. No
Roche, Glaxo or Merck size Japan drug firm currently exists. This makes
no market sense given the appetite for drugs locally by Japanese
consumers. Other sectors will follow similar patterns. There do exit
inefficient gaps for talented managers both value and growth, but the
timing is never sure. In the same way that you can “win the battle but
loose the war” managers may pick the right target position for a
portfolio but still loose P/L due to timing.
The overseas investor is used to a faster pace of change and those hedge
fund investors who think that now is the time to poor money into Japan’s
new hedge fund managers and make a killing will be disappointed. Many
new managers will not be able to withstand the corrections in the market
when they come. They are overdo and will arrive, the only question is
when. Those overseas investor who expect a quick Japan profit may find
liquidity dry up. The highest historical liquidity for small and mid
caps is currently taking place within Japanese markets. It is unlikely
to continue indefinitely. If managers want to exit quickly from
positions, they may not be able to next year. Many managers may be
forced to liquidate illiquid positions forced by hot money investor
concerns. Longer term lock ups more common with endowments and family
offices are still rare. Hot money has dominated the investor trend so
far to date. Easy in, easy out. The Fund of fund redemptions could
increase instantly like a light switch.
What will the trigger be? Nobody knows, but most likely a new dynamic
that has yet to be recognized previously. Perhaps it will be Avian Bird
Flu, perhaps something else, but surely it will be without a clear
history and without a defined length of time in which the impact will be
known. Could it be a major Tokyo or Kanto earthquake? The real estate
market is already in a mini bubble in central Tokyo so perhaps this
could be a trigger. The cross border trade with China has never before
been so key compared to European or US trade. The political impact is
unknown and we are on a new adventure into the unknown. If all goes
well, we will have a good bull run and the new hedge fund managers of
today will have at least 1-2 years in which to learn on the job how to
be cautious. Many will fail should a downturn come, but all markets have
that mechanism. The more time it takes, the more robust these new
managers will be.
Pensions funds do have realistic ambitions for the hedge fund space.
Most are only in the 3-7% or 5-7% return camp as far as expectations.
These modest single digit returns are within the realm of reality, and
can be achieved. The billion dollar question though, is what pace of
change will influence the alternative investment allocations within
Japan after April 1st 2006? Noboru Terada is deeply influenced by
CALPERS and wants to take Japan forward into the next phase. This may be
a revolution of change because the typical pension fund managers does
not want this change but may be forced into it due to the pressure from
the huge growth flow of retirees in Japan starting in 2007. Within a
high allocation percentage of alternative within pension fund
portfolios, Senior citizens will go hungry as the system currently will
run dry as it stands now. Despite a current reluctance and inability to
really deeply understand more complicated strategies, pension funds are
now forced to invest in them. Time has run out, a run on the assets will
start soon in 2007 and they have to be funded.
Brian Doyle, Managing Partner for CITIC Provident have 10 staff in Osaka
and 10 in Tokyo all focused on LBO opportunities in Japan. Corporate PEs
are now 8-10 times EBITDAs are near a maximum of PE valuation that will
decline. There is a window for private equity firms to close deals but
the prices have risen and it will soon no longer make sense to close at
these levels. There is always a time delay between an event and an
opportunity and the pressure from overseas PE&VC funds is too great to
be waiting for the right opportunity. There is no direct correlation or
“rule of thumb ” to go by in Japan.
Is the appetite still strong for LBO?MBO style deals in Japan?
Absolutely! In fact, it is the management team in their late 50s and
early 60s that are the most motivated. By doing a MBO/LBO they can as
directors suspend themselves from restrictions on any corporate
mandatory retirement age that usually applies ONLY to employees. This is
further driven by succession issues with a founding generation of
managers that want to find a foreign merger partner to ensure the longer
term welfare of their employees in Japan. Not only US or European M&A
but Asian suppliers within China or Korea and also possible pools for
M&A despite the political hurdles that exit on more personal levels. The
media have not really caught on to this view or fact. China may be the
perfect merger partner for Japan future. A regional revival may then
take place that will erase all memories of any Asia crisis in 1997.
Curtis Freeze, founder of Prospect Japan, has 20 staff in both Tokyo and
Honolulu. He sees another trend. ” The farther away the investor is
based, the more excited they seem to be about change in Japan” I was net
long this year and considered perceptive of the recent Q3 bull run, but
I now feel that a net short position may be the best way forward. A
correction of 10-15% is now due. We have over run the numbers and the
fundamentals need to catch up to reality. Payout ratios are just 17% for
Japanese corporates, lower than the more typical 30-40%, so I do not see
any direct payout impact due to LiveDoor’s TOB with NBS or other recent
events. I see my role as an arbitrage manager that finds value between
the perception of change, and the reality of change within Japanese
markets. The REIT market in Japan is still small at only US$50MM to
date. The Australian market is already worth US$75MM and the US far
more. We can see huge growth still ahead with US$400-500M as possible in
the future for Japanese REITs. There may be no contraction or correction
until we get to the US$100MM level or more, double where we are now.
Tsuyoshi Maruki, Partner with Murakami at M&A Consulting see a reduced
need to worry about payout ratios. Too often the valuation of break ups
within the Japanese corporation is about non-fundamental numbers. They
are an employer that needs to be respected, not a provider of income for
shareholders. This revolution in mentality needs to be further pushed
ahead. Power unused is power lost, and MAC find lots of opportunities
that need to be fought for on behalf of the shareholders. We pursue a
friendly or hostile action as needed and can give a Bear hug or Panda
hug as needed. The goal remains the same only the execution needs to
differ. The market has responded to our demands and we have been
successful so far. We hope to continue this in the future.
James Fiorillo, Founder of Ottoman Capital, is a long/short fund that
specializes in troubled Japanese companies. They are an equity play and
are not distressed debt players. They are basically the other side of
the high-yield coin. Troubled companies are those that face major
restructuring in their future, not imminent bankruptcy. Sony is a good
case to keep in mind. Nobody thinks that Sony will go bankrupt soon, but
few deny that they will have to be a different company and have to
restructure and change in the future. Only after such changes are in
place will they be able to be competitive once again. The small and mid
cap space is full of opportunities for this kind of strategy. Many kinds
of firms have either stretched themselves too thinly across too many
marginal product lines to survive as they are. These are typical shorts.
Longs have already passed this recognition and have taken action, as
they have put these changes in place, they would only then become a long
position.
