New Japan activist fund to join 'friendly' camp, seek higher ROE

TOKYO Mon May 26, 2014 5:47am EDT

TOKYO May 26 (Reuters) - A new Japanese investment fund is set to join a small but growing band of "friendly" activists, shunning hostile tactics that have previously failed to generate change and instead working with management to improve shareholder returns.

Yasunori Nakagami, chief executive and co-founder of newly established Misaki Capital, said he plans to launch an open-ended fund in July with a brief to invest in around 15 Japanese companies where he sees capacity for growth - with advice from shareholders such as himself.

"There are companies that have good CEOs but aren't too good with marketing. They might have a good CEO but also a weak chief financial officer," Nakagami told Reuters in an interview. "We'd rather go for companies that are good but could be much, much better."

Nakagami formerly led Japan's Asuka Value Up Fund, which at its peak held nearly 50 billion yen ($491 million) under management. He didn't disclose how much Misaki plans to raise for the open-ended fund.

The launch makes Nakagami the latest money manager in Japan to seek better return on equity (ROE) through cooperation rather than confrontation. He didn't specify sectors of the economy in which Misaki would invest, but said the fund will only seek shares in companies that are responsive to its "constructivist" approach.

In Japan hostile tactics by funds such as Steel Partners and the Children's Investment Fund, urging higher dividends and strategy changes, have rarely succeeded. Steel Partners did manage to dismantle management at Japanese wig maker Aderans Co in 2008, but it tried and failed to replace directors at brewer Sapporo Holdings Ltd in 2010.

U.S. private equity company Cerberus was locked in a dispute last year with railway and property conglomerate Seibu Holdings last year, when Cerberus tried and failed to take control of the company's board.

Nakagami said that while hostile activists had a role to play in shaking up poorly managed companies, a background in corporate consulting led him to focus on companies willing to work with him on improving operations.

He noted the average ROE among Japanese companies was around 5 percent, due to thin operating margins, compared to over 15 in the United States and other developed markets. Low ROE has been cited as one reason many foreign investors find Japan's equity market relatively unattractive.

Taiyo Pacific Partners, a "friendly" activist fund based in the United States but focused on Japan, recently participated in a joint 42.6 billion yen management buyout of musical instruments maker Roland Corp. Taiyo was also chosen last month as one of the asset managers for Japan's giant Government Pension Investment Fund in an apparent endorsement of its approach.

Sparx Group Co, another "friendly" fund, said it would invest in companies it saw as undervalued and open for engagement with investors.

The rise of such funds coincides with Prime Minister Shinzo Abe's push to improve engagement between investors and Japanese companies in a bid to double inbound foreign direct investment by 2020.

The government recently launched a stewardship code aimed at holding institutional investors more accountable and has been promoting a new index called JPX400 which takes ROE into account.

($1 = 101.8250 Japanese Yen) (Reporting by Ritsuko Ando and Emi Emoto; Editing by Kenneth Maxwell)

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