- Evolving Investment Opportunities
- ACA Inc.
Joined Dentsu Inc. in 1997. Joined Strategy Group, Accenture Japan Ltd. in 2003. Promoted to group manager of Communications, High technology, and Media Division in 2005. After joining Nikko Antfactory K.K. (now Ant Capital Partners Co., Ltd.) in 2006, transferred to ACA Inc. from October 2008. As the managing partner of the Small Buyout Team, took charge of fund management of ACA Synergy No. 1 to ACA Synergy No.3 and performed investments in several tens of companies. Takashi serves as the external director at the companies in which investments are made to provide management support.
Master of Business Administration (MBA), HEC Paris (France).
For companies to achieve long-term growth, they must take small steady steps to continually bolster their management base, in areas such as personnel, ideas, and funding. Compared to large companies, small and medium-sized companies have limited management resources. This actually allows for a larger business growth potential when they receive support from an investment fund like us that possesses a range of management knowledge and skills, and a network of experts and operating companies.
It would be difficult for Japanese industry to achieve medium- and long-term growth without bolstering small and medium-sized companies, which are the bedrock of domestic industry. We come face to face with the companies in which investments are made as leaders in the field with expert knowledge of business philosophies unique to small and medium-sized companies and the issues they confront. In doing so, we take appropriate action to boost company value and hand it over to future shareholders who possess ample funds and resources.
Our mission is not only to help such companies to revolutionize themselves and contribute to social development, but also to stabilize Small Buyout fund performance in ways that satisfy our clients who are making the investments.
Once we meet with the managers of candidate enterprises who are facing problems related to capital or lack of successors, we start conducting our unique due diligence. Together with business, legal, and accounting experts, we assess what ought to be done to make management improvements and to reduce financial and legal risks inherent to the company. Assessment items cover a wide range of topics such as marketability and management capacity. By coming to understand the company from a wide range of perspectives, we are able to clarify problems that candidate enterprises are facing, in addition to shareholder needs. This also makes it possible to offer solutions to problems and propose these solutions to owners (sellers) of candidate companies.
It is exhausting to develop a balanced proposal that both offers profit to the fund and convinces the seller. For example, losing financial balance by too much leveraging would stall healthy company growth. Moreover, lacking sufficient initiative to motivate the manager of a candidate enterprise after the investment may make it difficult to achieve the projected company growth.
We decide whether to proceed with investments by holding multiple meetings, such as investment committee meetings, that are attended by all team members. At these meetings, due diligence results and negotiations with the seller based on the proposal are thoroughly discussed.
Our small buyout funds mainly target small and medium-sized (small cap) companies with annual sales ranging from 500 million to 5 billion yen.
According to a study by Japanese government, the Small and Medium Enterprise Agency, in 2016, due to the aging demographics of company owners, currently 1 million or more small and medium-sized companies are facing the problem of an absence of a successor. Moreover, there are more cases of CEOs in their 40s and 50s who are seeking an exit through an M&A instead of an IPO, the latter of which is cumbersome and time consuming. Throughout Japan, seminars that deal with successor issues are becoming frequent. Against this backdrop, an abundant number of deals in the small buyout field is expected to continue emerging.
Many of these small and medium-sized companies have an owner who ran the company in a personal fashion. This makes it possible to improve performance over the short term even with such rudimentary steps as implementing IT or sales initiatives. Moreover, because the number of deals is large, the entry price does not tend to increase.
Attractiveness of Investment Strategy
However, many small and medium-sized companies operate on their own business philosophy. Unless measures are taken to fully account for this during the hands-on phase and the exit phase after the investment, the project risks the high chance that the blueprint drawn before the investment will end up being pie in the sky. Since launching its first fund in 2007, the Small Buyout Team has made investments in 20 or more small and medium-sized companies. Through this initiative, the team has developed a range of knowledge of various industries, company owners, and management situations. Moreover, the team has fostered a close relationship with M&A brokers who specialize in small and medium-sized companies. Leveraging extensive experience in investments, hands-on knowledge and skills, and networks with M&A brokers, our strength is in our ability to organize a stable portfolio and proceed with exits.
After I graduated from university, I began my career as a marketer at an advertising agency Dentsu Inc. Then after working in a strategy consulting firm, I switched to an investment fund, where I supported companies in making business improvements from the standpoint of marketing and management strategy.
In a short time, I met with various large company managers. Although it was enjoyable to share a period of changes which companies rarely experience, I gradually became more interested in contributing to improving company value by taking over the same ship as the board members. This meant improving not just the profit and loss statements but also the balance sheets.
Moreover, because marketing and management strategies are impacted by multiple medium-term factors, it was hard to clarify the cause and effect of the initiatives I designed. I jumped into the investment industry because I wanted to challenge in exciting environment where the impact of the decisions I made is reflected in the investment results, which are clearly expressed in numbers.
Principles I stick to
I try not to be misled by stereotypes.
In following through with investment activities and the hands-on phase at the investment destination, I sometimes hear stereotypical comments such as, "This industry has no future because of this" or "If we are making this type of investment, we must do this." If such comments are based on carefully collected qualitative and quantitative information, then they are understandable. However, there are many cases in which people say such things from a narrow personal standpoint. Stereotypes are causes and effects that anyone can think up easily. I frequently find investment opportunities by questioning such thinking and reaching my own conclusions by taking thorough steps to reach a solution. I also always try not to be easily misled by stereotypes.
What I steer clear from
I steer clear from making investments other than those that create value in small and medium-sized companies, the area of the team's expertise. The team is presented with many projects every day from financial institutions and advisories. I think the winning strategy differs depending on the issue at hand, even if the project appears to be the same type of private equity investment as others, such as when the deal calls for investment in companies that have posted large sales, or engage in venture deals or restructuring. At our team meetings (where we decide whether to proceed with particular projects), sometimes proposals are made to proceed with such deals. However, I cannot agree with investments in fields that are not our stronghold.
Medium and large M&As can be influenced by the stock market in evaluating the stock price for a target company. However, for smaller ones, this is much less important. Because the market risk is limited, in terms of protecting assets, it is imperative as a fund manager to reduce the risks presented by the company's own business and the industry to which it belongs.
By taking thorough steps in value investment and shortening the period of ownership through implementing more effective hands-on measures, we reduce the business risk of small and medium-sized companies, who rely heavily on particular businesses. Moreover, by spreading investments among many businesses with differing economic cycles, we reduce the risk of relying on particular industries.
Howard Marks, The Most Important Thing
The book discusses the thinking methodology that takes place in managing assets and making investments. Many of the ideas that the author presents echo what I have experienced but have only vaguely acknowledged thus far: "Don't remain in your primary thinking, but instead delve further and emphasize secondary thinking," or "Market inefficiency is required to beat competition from other investors." I enthusiastically read this book straight to the end. Moreover, because this thinking methodology is not geared towards handling particular assets such as listed stocks or bonds, the book was enlightening in many ways even for someone like me who specializes in private equities.
Mainly speaking, on the Internet, I read Nikkei and Bloomberg every day. I also regularly check the website of the three listed M&A brokers. They feature case reports on M&As involving small and medium-sized companies, and discuss seller and buyer needs among companies. These help me gauge which industry is keen to sell.
This article originally appeared on Dec 1, 2017. 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.
ACA Group is an investment company, 30.93% of whose shares are owned by Sumitomo Corporation, that has a record of many capital tie-ups with small and medium-sized companies. The group comprises multiple teams inside and outside of Japan.
ACA Small Buyout is a team of experts that specialize in investments in small and medium-sized companies in Japan with annual sales ranging from 500 million to 5 billion yen. The team has a large amount of investment experience and a wide range of knowledge and skills. As a leader in small-cap investments in Japan, ACA Small Buyout strives to develop these types of companies and maximize investor assets.
ACA Small Buyout manages small buyout funds that seek to offer short-term paybacks to the investor by investing in small domestic companies at an undervalued price.
Strategy #1: Build strength in the small-cap field
The target small and medium-sized companies are those that post sales ranging from 500 million to 5 billion yen. The team does not consider deals with a total market value of between 5 to 10 billion yen, which many middle-range buyout funders target.
Strategy #2: Undervalued investments
The team does not participate in auctions and considers only deals in which negotiation is possible with the seller.
The team successfully performs investments at low entry prices. (The goal is between 2.5 to 4.5 EBIDTA. The same applies for the actual figures.)
Strategy #3: Short-term ownership
Instead of focusing on transforming company management thoroughly, the team seeks to create early hands-on effects by leveraging the existing management. Generally speaking, the team will find a new shareholder in couple of years.
December 1, 2017
by Investment in Japan