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June 14, 1999 01:00 AM

NEW AREA: JAPAN PIQUES INVESTOR INTEREST

Bruce Kelly
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    If not the undiscovered country, Japan is a new frontier for many private equity firms and their investors.

    But that might soon change. Several private equity firms, including Ripplewood Holdings LLC and Apax Partners & Co., both based in New York, are raising money for funds dedicated to Japan, sources said.

    Ripplewood is looking to raise $1 billion to invest in management buyouts. Apax has a target of $160 million for a venture capital fund that focuses on a number of high-tech industries, including information technology, computer software and telecommunications.

    Small market

    When compared with the United States and Europe, the current private equity market in Japan is, well, puny. Currently, the amount of "dry powder" or capital available to invest in private equity deals in the United States is $90 billion and, in Europe, close to $30 billion, as estimated by Advent International Corp., a global private equity firm based in Boston. In Japan, the amount of dry powder available to invest in private equity is $1 billion, according to Advent.

    U.S. pension funds so far have had exposure to Japan through private equity funds that are not dedicated to Japan. In Asia, a less risky market for distressed debt and real estate buyouts has started to take off.

    The new funds, however, by focusing on management buyouts and venture capital, also are focusing on higher risk, sources said.

    U.S. pension fund executives, from plans ranging from no exposure to hundreds of millions committed to international private equity, said they knew about the new funds but were not interested now.

    Pension fund investment in Asian funds, some with potential exposure to Japan, is more common. The $150 billion California Public Employees' Retirement System, Sacramento, committed at the start of this month $75 million to Carlyle Asia Partners LP, which will make equity investments in industries ranging from aerospace and defense to consumer products. The fund will invest in Southeast Asian countries including South Korea, Thailand and Taiwan, but not in Japan, said Jim Griffith, a vice president with the Carlyle Group in Washington. He said Japan likely would prove a "viable market eventually" for private equity investors.

    CalPERS officials in March also made a $100 million commitment to Rothschild Inc.'s Asian recovery fund, which will invest in distressed, private Asian securities.

    Government spurs change

    The Japanese government is spurring the change, some observers said.

    "The Japanese government is taking steps in corporate governance and tax laws" that would open up private equity markets to outside investors, said Mario Giannini, president of Hamilton Lane Advisers LLC in Philadelphia.

    "Its the beginning of a move for the kind of environment to make private equity thrive," he said.

    The unknown is whether investors taking the plunge now are in front of the curve or catching the start of a trend, he said.

    Although some venture capital investment has been done in Japan, many firms have not invested directly in Japan because the opportunity wasn't there. Management buyouts "never existed before," said Rita Springett, Japan investment director for London-based Coller Capital, which buys existing positions from original investors in private equity funds. Traditionally, "companies don't get bought and sold" in Japan, she said.

    Times are changing

    But that's about to change. Conglomerates or keiretsu are in the process of spinning off assets, she said, and management buyout funds could potentially buy up these divisions. Stand-alone companies are also up for sale, she added.

    Banks across Asia are selling off packages of bad loans. GE Capital Corp. last month bought $11 billion in bad loans from Long-Term Credit Bank, the Japanese bank that failed last year.

    But private equity firms have yet to make a splash through investing directly.

    Although U.S. pension funds are interested in Japan, "that interest is intellectual," said Nicholas Callinan, a senior vice president for Advent International.

    The key change would be if Japanese companies begin to stress shareholder value. If Japan comes out of its decade-long economic slump, "there will be actual restructuring of the economy," he said.

    That could lead to companies emphasizing shareholder value. He said a "reasonable bet" would be for such changes to happen over the next five years.

    Private equity also has not taken off in Japan because banks and keiretsu have dominated financing companies, he said.

    Investors eventually could exit management buyout deals by turning a company public through an initial public offering or selling to a foreign group in the same industry, he said.

    Rumors of deals

    Reportedly in the works are bids by major private equity players such as J.P.Morgan & Co. Inc. and Ripplewood Holding for Long Term Credit Bank, which failed last year and is being sold by the Japanese government. A spokeswoman at J.P. Morgan said the company would not comment on market rumors.

    Executives at Ripplewood said they could not comment on the firm's reported bid.

    The rumored deal is a sign of the change in Japan. "Ten years ago, no one would have believed LTCB would be ripe for a takeover," Ms. Springett of Coller Capital said.

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