Progress on governance offers investment opportunities akin to Germany in 2000s

TOKYO — Headquartered in a skyscraper on New York’s 57th Street, otherwise known as Billionaires’ Row, alternative investment manager Apollo Global Management has amassed more than $400 billion in assets under management over its three decades.

Despite its status as a global private equity firm on a par with KKR and Carlyle, Apollo is a relatively unfamiliar name in Japan.

But this may be about to change. A year ago, under the leadership of CEO Leon Black, it hired a 39-year-old Tetsuji Okamoto from Bain Capital. And he and his team have been actively visiting companies, scouring the country for potential targets.

Apollo is widely seen to be making its first private equity investment in Japan soon, joining most of the rest of the industry in a market that has recently become a magnet for global money.

The recent interest owes to a wave of corporate reform in Japan, long seen as a laggard in governance.

Hitachi President Toshiaki Higashihara has said the company will “set a direction for restructuring our listed subsidiaries by the end of fiscal 2021.”

The number of publicly traded units owned by the industrial conglomerate has plunged since the global financial crisis, from 22 to just two. Of the three subsidiaries once seen as core units, only Hitachi Metals remains, and Hitachi is eyeing its sale as well.

Two former listed subsidiaries — power tool maker Hitachi Koki, now known as Koki Holdings, and Hitachi Kokusai Electric — were acquired by KKR.

KKR is headquartered just one floor below Apollo in the same Billionaires’ Row building on 9 W. 57th Street.

KKR co-founder Henry Kravis had made extended trips to Japan in recent years, and even in 2020, seeking opportunities to visit prospective companies until the last moment.
Henry Kravis, co-CEO of the firm, calls Japan a top priority, citing “green shoots” of change. Kravis himself has made extended trips to Japan over the past few years — and even this year, with the coronavirus raging, he sought opportunities to visit until the last possible moment.

The green shoots include a shift in attitudes toward corporate governance, particularly when it comes to parent-child listings — long a symbol of Japan’s lack of progress on this front.

Critics argue that such arrangements give the parent company the power to make decisions at the subsidiary that are in its own interest, to the detriment of minority shareholders. The decline in parent-child listings in recent years is evidence that Japanese business is coming around to the idea of focusing on corporate value.

The shift is taking place through not only sales like Hitachi’s, but also through deals to reclaim profits that had been allowed to flow to outside investors. Nippon Telegraph & Telephone’s takeover this year of wireless subsidiary NTT Docomo, the largest acquisition of 2020, is an example of the latter.

Docomo had slumped to last place among Japan’s big three mobile carriers in terms of revenue. With Prime Minister Yoshihide Suga’s government ratcheting up pressure to cut wireless service rates, NTT President Jun Sawada opted for a roughly 4 trillion yen ($38.7 billion) tender offer — a record for a Japanese company — to bring the subsidiary fully under NTT’s umbrella.

“If we focus on minority shareholders, discussion and decision-making will take more time,” he said.

Joseph Baratta, Blackstone Group’s global head of private equity, likens Japan to Germany in the 2000s. Under then-Chancellor Gerhard Schroeder’s administration, German businesses unwound networks of cross-shareholdings and big companies restructured operations. A similar period of reform is just getting underway in Japan.

Source: Nikkei Asia