Japanese activist fund woos the wealthy

By Alison Tudor and Michael Flaherty

TOKYO (Reuters) - Junichiro Sano's mission as the head of Japanese operations for Dalton Investments is to shake up poorly managed companies, a goal supported by affluent investors in the world's second-biggest economy.

In September, Los Angeles-headquartered Dalton launched a new activist fund in Japan with plans to make 15 to 20 investments over a three-to-five-year period, and a substantial amount of its funding is coming from domestic investors.

Sano said the activist fund plans to be a friendly shareholder in recognition of the more consensual style of doing business in Japan. It will take a few years to establish credibility and get familiar with the company and management before suggesting changes.

The fund's prime targets will be family-owned businesses with market values of around 30 billion yen ($255 million), he said.

If Dalton takes a 10 percent or greater stake and the company refuses to act in accordance with Dalton's plans, then the firm will cash out of its stake or push for a management-led buyout.

"We have billions of dollars in U.S. money backing up our fund," Sano said at Reuters Wealth Management Summit, referring to its likely source of financing for any potential management buyout in Japan.

The friendly approach differs starkly from the strategy of U.S. activists, who typically barrel into companies, agitate for immediate changes and in some cases launch proxy contests.

Sano said the U.S. investor model focuses on shareholders "owning the company" and controlling its fate.

"When you ask Japanese people who is the owner of a company, they say it is the employees," he said at the summit held at Reuters offices in Tokyo.

CULTURAL ARBITRAGE

But Dalton hopes its brand of "cultural arbitrage" will bring the two perspectives closer together.

The activist model in Japan lurched into the spotlight in June when high-profile Japanese fund manager Yoshiaki Murakami was arrested on insider trading charges, which jolted markets and policy-makers.

"There was a little panic that all activist funds were viewed the same as the Murakami fund at the time of his arrest ... then there was a flight to quality", Sano said.

Dalton aims to triple its $800 million in assets under management in Japan over the next three years, partly by tapping the country's wealthy savers for the first time.

About 55 percent of Japan's household wealth is currently held in cash or bank deposits, providing plenty of opportunity for money flows into hedge funds, which have begun recently.