Prior to forming Topaz in 2012, Mr. Niimura was Managing Director of Merrill Lynch Japan where he held various senior roles, including Head of Debt Capital Markets and Head of Restructuring Group. He joined Merrill Lynch in 2000 and was responsible for originating debt transactions including credit portfolio management with Japanese major banks. Prior to joining Merrill Lynch, he was the Head of Structured Finance of The Industrial Bank of Japan where he was responsible for originating and structuring securitization product. Mr. Niimura holds an MBA from Cornell University and a B.A. in Law from Waseda University

Q1. Please describe your investment philosophy, your firm history and how you invest.

Topaz manages Japan’s first private debt fund which aims to generate current income by lending directly to performing middle market companies who face difficulty in funding from traditional bank loans, and to provide these companies fund acquisitions, turnaround, growth and refinancings/recapitalizations.

 

The portfolio generally consists of senior secured first lien loans and senior secured second lien loans, however, we provide flexible financing solutions at any of the capital structure. Our investment philosophy is to emphasize on principal protection by rigorous investment process and active investment monitoring. We conduct borrowers meeting monthly to review their business and check that borrowers’ financial performance meets covenants.

 

Topaz makes loans directly in Japan based mid-cap companies through privately negotiated transactions. We leverage our long-term and proprietary relationship with commercial banks, financial sponsors, investment banks, restructuring professionals including attorneys and other market participants to source unique private transactions that generate attractive risk-adjusted income gain.

 

Once transactions are identified, our acquisition team will conduct initial credit, pricing, collateral and industry analysis and decides whether to proceed further detailed analysis. If proceeded to the next stage, compliance check is required and credit team will be involved to do further detailed analysis such as financial review and get independent valuation of collateral.

 

After reviewed by credit team, acquisition team will prepare investment committee memorandum and hold investment committee. In order to approve the investment, sign off by all committee members is required. Since the first closing in 2014, approximately over 350 transactions were initially reviewed and 20 deals have been closed to date.

Q2. Please let us know where you find investment opportunities today. What is virtue of the strategy?

Currently, we see opportunities primarily in two areas. The first is direct originations of senior secured loans to mid-cap companies who are in the stage of turnaround of business but still hard to access to conventional capital sources. Due to introduction of negative interest rate policy by Bank of Japan, commercial banks are under pressure of making profit and have become aggressive in making loans to lower credit mid-cap companies. However, because of more restrictive regulatory environment, banks often cannot meet such companies’ financing needs and look for alternative lender who can partnership with them and complement their role for a certain period to help borrowers’ funding. In fact, we have been getting more and more such inquiries from commercial banks if we can help them and expect such trends will continue.

 

Second is growth financing to mid-cap companies who are in expansion stage. From borrowers point of view, debt funding is attractive solutions in the expansion stage because it does not involve issues such as company ownership and stock dilution. Today, commercial banks are also active in pursuing lending opportunities to early stage venture companies. We provide “bridge-financing” to these venture companies ,with principal protection by creative approach such as asset based lending, until they are able to get refinance form banks.

 

In Japan, bank lending dominates credit market and the investors cannot earn yields from bond investment. We believe private debt is an attractive investment strategy which provides Japanese investors unique Yen-denominated current income opportunity in credit space.

Q3. Please explain why you have decided to be a portfolio manager.

We strongly believe asset management industry will play a major role in primary mid-cap lending market in Japan and we wanted to be the front runner in the business. Due to introduction of more restrictive regulatory balance sheet rule, in US and Europe, we see large banks have exited from riskier mid-cap lending and private debt players have taken over the banks role. In Japan, we expect commercial banks will continue to be major lender for mid-cap companies but given that global regulatory environment also affects Japanese banks, we are convinced that there will be great opportunity for private debt which complement banks’ lending function by utilizing Japanese investors’ mid-long term stable money.

Q4. What is your belief as a portfolio manager?　 What do you try to achieve and what would you never do?

As portfolio manager, we hold belief in the importance of having discipline, ethics, transparency and accountability in our business. Topaz is still in the early stage of expansion and it is very important for us that we gain trust from investors, clients and other market participants in order to build sustainable business model. We must be disciplined to select right transactions which meet our strategy and expertise while be fully accountable for delivering attractive return to investors.

Q5. How best would you protect clients assets?

We protect investors’ investments through rigorous investment selection process and active borrower monitoring. Because we emphasize principal protection, at the selection process, we conduct thorough financial analysis and appraisals of collateral.

 

Once loan is made, we focus on getting any negative news about borrowers’ business as soon as possible so that we will be able to maximize recovery from enforcement of security when necessary. For example, we contact borrowers regularly, either calls or onsite visits, to check whether there is no sign of negative event such as infringement of covenants.

Q6. Please recommend any media source (newspaper, journals and website) you check on a regular basis.

Nikkei, Nikkei Real Estate Market Data, Teikoku Data Bank, Debt Investor

Notes:
This article originally appeared on September 1, 2016. Any views presented in this article are as of such date and are subject to change.
This article and the information provided therein are not a recommendation to purchase or sell any security, nor are they intended to constitute the marketing of, or a solicitation for investment in, any investment product.

 

Topaz Capital, Inc. (“Topaz”) was established in 2012, with start up support from Unison Capital, the pioneer of Japanese private equity industry, as an independent private debt investment management company based in Tokyo. The founding partners of Topaz, Ken Niimura (ex-Head of Restructuring at Merrill Lynch), Kiyoto Matsuda (Partner at Unison Capital), Makio Yamada (ex-Head of Credit Sales), Takashi Nakazono (ex-Senior Manager of Principal Investment at Goldman Sachs) and Koji Shigemitsu (ex-Director at Unison Capital), have deep experience in complex credit investment sourcing, execution, analysis and management. Topaz entered into a strategic partnership with Gordon Brothers Japan, the leading asset-based lender operating business globally, in order to provide creative finance solutions to corporate clients.

Topaz specializes in investment in private debt instruments arising from middle market corporate finance and asset-based lending and provides attractive yen denominated income gain products to Japanese investors seeking alternative investment opportunities in Japan.

Investment strategy of “Topaz Private Debt I” is to create attractive income gain through JPY500-1,000MM senior secured direct lending to mid-cap clients to assist these clients turnaround, grow their businesses, refinance and make acquisitions. Beyond traditional corporate finance, Topaz invests in a broad array of asset based transactions such as specialty finance, project finance, real estate finance, equipment finance and factoring.

In order to generate excess return, Topaz avoids broadly marketed transactions but focuses on “private transactions” which are primarily sourced through members’ direct relationship with commercial banks, financial sponsors, consultants and lawyers with highly selective origination and underwriting process.

Topaz works closely with commercial and regional banks who face increasing regulatory pressure for more stringent capital management while meeting low credit companies’ finance needs. Topaz acts as a contingent lender and complements banks’ role until banks will be able to provide financing these companies.