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Longreach eyes corporate carve-outs

Asian Venture Capital Journal
Longreach eyes corporate carve-outs

After more than 800 days in the market, Longreach Capital Partners 2 reached a final close on September 30. It has been a challenging process that required the target corpus to be scaled back from $750 million to $400 million – but the fund is also largest independent Japan-focused private equity vehicle raised since the global financial crisis. 

While Unison Capital Partners III, which closed in August 2009, managed to accumulate A$1.8 billion, the bulk of its commitments came prior to the fallout from the Lehman Brothers bankruptcy. It also predates the full effects of the hangover that followed Japan's 2006-2007 leveraged buyout boom.

"We did face some collateral damage from things that went on in Japan that had nothing to do with our portfolio," Mark Chiba (pictured), group chairman and partner at The Longreach Group, tells AVCJ.

"We have strong conviction that our particular niche in Japan is exciting and differentiated, but general market sentiment has been poor. While it has turned a bit in the last few months, it's still a challenge to attract capital for a Japan strategy."

A number of North American institutions that backed Longreach Capital Partners 1 - a $1 billion vehicle that closed in 2006 - have since retreated from the asset class. According to market sources in the LP community, several US endowments and foundations did re-up, while new entrants include several sovereign wealth funds, including Korea Investment Corporation (KIC), Japan's Pension Fund Association and Pavilion Capital, the North Asia arm of Temasek Holdings.

Though unable to comment on the specifics of his investor roster, Chiba admits that there is a strong appetite for co-investment among some of the LPs. "We realistically have around $700 million in capital to deploy in total, with LPs co-investing on top of the fund size."

Noting that the tough fundraising environment has sucked a lot of the buy-side capital out of the market, Chiba expects to see relatively less competition for assets. Longreach's perceived sweet spot remains corporate carve-outs along the lines of Sanyo Electric Logistics, which was purchased from Sanyo for about $200 million in 2010 and sold to Mitsui-Soko for $300 million earlier this year. Longreach generated a 2.3x return.

Typical targets fall in the category below struggling giants like Renesas, the semiconductor manufacturer that was subject to a takeover bid from KKR - typically non-core assets with an enterprise valuation of $200-400 million, which translates into an equity check of $80-200 million, depending on leverage.

"As industrial Japan reconfigures, attractive businesses become available, but these are not easily accessible deals," Chiba says. "They come through long-term relationships and advisory-type origination. You have to be tied to a multi-year strategy to understand what is there and execute it. Sanyo Electric Logistics was a good example of that approach."

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