Dalton to raise $950 mln

TOKYO (Reuters) - Activist fund Dalton Investments KK said it could raise up to about $450 million to invest in struggling Japanese real estate investment trusts (REITs) and another $500 million for a management buyout fund.

Junichiro Sano, head of the Japan affiliate of California-based Dalton Investments LLC, said the timing was right to invest, with REITs on average trading at a 35 percent discount to the value of property on their books.

Tokyo's REIT index has lost nearly half its value since a peak last May, hit by the global credit crisis and signs of weakness in the property market. Several REIT listings have been cancelled in recent months due to the slump.

"We really like real estate and at the same time we really need the concept of distress," Sano told the Reuters Japan Investment Summit, adding that overseas investors had already committed $300 million for the distressed REIT fund.

It wants to raise another $150 million in Japan, Sano said.

Dalton will look to buy into mid-sized REITs while steering clear of those affiliated with Mitsui Fudosan Co and Mitsubishi Estate Co as ties with Japan's top two property firms usually ensures they trade at a higher valuation.

It will then look to boost the stock price by improving corporate governance. Steps could include pressuring REITs to hold shareholder meetings, dispatching directors and resolving conflicts of interest between REITs and their parent firms.

In some cases Dalton might push for a rebalancing of the assets, Sano said.

"Corporate governance can make them straight and that can help increase the value. And if it is necessary we will ask somebody to resolve the bulk sale of the REIT assets," Sano said.

TREASURE ISLAND

As of April 1, Dalton had about $900 million in assets under management, about 70 percent of which was invested in Japan.

It launched a management buyout (MBO) fund in 2003 that at one point had $800 million under management, investing in firms such as Nippon Fine Chemical and elevator maker Fujitec with an eye to getting them to launch an MBO.

The fund's size has since been whittled down to about $450 million due to the market downturn and client redemptions. The fund has outperformed Japan's TOPIX index by 11 percent over the last five years, Sano said.

Sano said Dalton would launch a new MBO fund later this year, aiming to raise about $500 million in Japan.

Sano sees no shortage of companies in Japan that are closely held and influenced by founders that would prefer to go private in a management buyout rather than deal with noisy investors.

Only one-tenth of Japan's 6,000 listed companies are covered by an analyst, Sano said. That could leave them undervalued and vulnerable to be scooped up by activist fund.

"The owner would really like to take it back because they don't like activists like us. It's going to be a treasure island," he said.

Sano grabbed headlines last month when he was approved as an outside director of NipponKoa Insurance Co, a non-life insurer being pressured by U.S. fund Southeastern Asset Management to boost returns.

Southeastern has made several proposals to NipponKoa, including the complete separation of its investing and underwriting operations and the consideration of a merger or alliance with another insurance firm.

Sano said NipponKoa needed to lift its return on equity and investment to put it in a solid financial position to capitalize on coming industry consolidation.

"Non-life insurance is really a sector to watch," he said.

(Reporting by Nathan Layne; Editing by Jean Yoon and Clarence Fernandez)