TOKYO Japan's aging population may be bad for the economy but it is giving dealmakers a break. As more owners of small and medium-sized businesses reach their golden years without grooming a successor, some are turning to private equity firms for capital and management expertise.
The number of older owners has been rising, and a low birth rate means that there are often precious few heirs to take over from them. Even when the owners have children, they often reject the idea of taking over from their parents, while some just don't have the mojo for business, according to private equity investors and a government official who have studied the question.
And with private equity firms increasingly scouring for value among small and medium-sized companies that may have great products but haven't had access to the capital needed to fulfill their potential, there are an increasing number of matches being made. Sometimes the firms are sold outright, on other occasions the private equity firm will initially take a partial stake with a view to controlling the entire company at a later date.
Katsukiyo Mizumoto, the president of bean sprouts producer GGC Group, is an example of an owner who responded positively when a major private equity firm – in this case the Washington, D.C.-based Carlyle Group (CG.O) - came knocking on his door.
The 65-year-old said he had been unable to groom a successor from within his family or from inside the company, which has annual sales of about 8 billion yen ($79.3 million). He says he had become such a dominant figure that his managers had not risen to prominence.
"I am losing my strength each year. But because I had adopted a top down management style, my staff only wait for my decisions," said Mizumoto, who took over the company from a long-term business acquaintance more than a decade ago.
Carlyle said it invested an undisclosed sum in GGC in March. And, according to Mizumoto, it is now helping him to find new executives and to expand the company’s sales area from western Japan to Southeast Asia and other parts of the region.
FEWER BIG DEALS
Deals that revitalize such firms could be important in a nation in which small and medium-sized companies account for 99.7 percent of Japan's 3.8 million companies and employ about 70 percent of the nation's workforce, government data show.
Last year 23.3 percent of company presidents in Japan were over 70 years old, compared with 18.4 percent in 2010, according to research firm Tokyo Shoko Research. The average age of retirement of the heads of small firms was 70.5 years, a government survey showed.
"Succession issues have become very urgent," said Shinichiro Kawata, an official at Japan's Small and Medium Enterprise Agency, adding that when there are children they are often deterred from getting involved because of weak corporate performance.
The private equity world’s focus on small and medium-sized businesses is partly the result of a dearth of larger private equity opportunities in Japan as major businesses are often resistant to radical change.
The average size for private equity deals in Japan in 2015 was about $80 million, less than half of the $175 million recorded between 2010 and 2014, according to Jim Verbeeten, partner at Bain & Co.
Jun Tsusaka, a former head of U.S. buyout giant TPG Capital's [TPG.UL] Japan business, sees the succession problem as an opportunity.
He set up his own firm, Nippon Sangyo Suishin Kiko, in 2014 to invest in small regional firms. So far, his firm has invested in an indoor amusement park operator and in an company that manages an aquarium, both in Ise city in central Japan.
"We are seeing a significant number of potential investment targets among small regional companies because of the difficulties in finding successors," said Tsusaka.
Koichi Sakurada, previously with a state-backed fund which bailed out Japan Airlines Corp (9201.T) in a 350 billion yen deal, is raising as much as 10 billion yen for his new firm, Nihon Kyoso Toshi, to invest in small regional companies. He is looking for stakes costing up to 1 billion yen in firms where there is no one lined up to replace the owner, Sakurada said.
There are many other examples.
In February, Advantage Partners bought Sakai city-based Ichiboshi, a 142-year-old snow crab distributor, with annual sales of 3 billion yen, from the grandson of the founder who did not have a successor, according to Yusuke Ichikawa, principal at the Japanese buyout firm.
And Ant Capital Partners Co's four investments since 2014 are all related to business successions, said its president Ryosuke Iinuma.
Most recently Ant invested in Marusaya Co, a Tokyo-based supplier of bonito flakes – made from dried bonito fish and often used to make broth in Japan.
"Business succession is the main theme of our investment strategy," Iinuma said. "Those companies are typically run only by owner’s intuition so there is a lot of room for growth once the systematic management is introduced."
(Reporting by Junko Fujita; Editing by Martin Howell)