You’re reading Value Add’s weekly briefing, the leading newsletter for the operating side of private equity. Here’s what you need to know this week, from insights for PE-backed executives and portco news to recent buyouts and investment trends. 

Insights

Chart of the Week: Japan has been a rare bright spot for private equity activity over the past two years. Buyout firms invested nearly $40 billion in Japan in 2023, up 48% year-over-year. A recent interest rate hike by the Bank of Japan could now dampen buyout activity in the country; although, as we discuss in today’s Spotlight, some firms such as KKR see no reason to stray from their buyout strategy in the region. (Read)

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• Operations Are at the Core of Edison Partners’ Energy AI Deal (Read)

Spotlight

Full steam ahead. Last week raised alarm bells for most investors with exposure to Japan as the Bank of Japan raised interest rates for the first time since the Global Financial Crisis. Down went the Nikkei 225, and with it, the Yen carry trade, signaling the beginning of an economic slowdown in the country.

Private equity was bullish on Japan pre-rate hike. In 2023, Japan’s share of global buyouts was 12%, the highest in its history, leading to firms investing big in Japan-focused strategies, such as Carlyle’s $2.8 billion Japanese buyout fund it raised in May of this year. 

In the face of volatility, many investors pulled back from the region. But not KKR. 

The firm announced a deal to take Fuji Soft, a software provider for both IT and operational technology, private for ¥600 billion ($4.1 billion), or ¥8,800 per share. That represents a 110.3% premium over the average closing price over the 12 months preceding October 2023, when discussions became public, and approximately 20x EBITDA on the firm’s projected 2025 earnings. The median EBITDA for its peers is just over 8x, though KKR reportedly sees additional value in Fuji’s real estate portfolio.

The possibility of a take-private was unearthed when majority shareholder 3D, a Singaporean investment firm currently holding a 21% stake in the company, started looking into the option in the fall of 2023. Its offer was a mere ¥75 billion. 

KKR’s offer is higher than the stock has ever traded. Value Add understands that recent macroeconomic shocks in Japan did not cause KKR to revise its offer, given that the firm will enter into long-term hedges for the deal and KKR does not base investment decisions on entry-level FX rates. 

A source close to the deal divulged that KKR’s offer is high because it is attracted by the strong growth potential of Japan’s IT services, especially as the government encourages digital transformation in the economy. Also, KKR sees significant value in Fuji Soft’s real estate portfolio.

KKR expects the deal to close in the coming months.

The asset manager has long been bullish on Japan, its largest exposure in APAC, entering the market in 2006 and deploying over $8 billion to accumulate $18 billion in assets under management in the region. According to KKR’s 2024 Investor Day presentation, those assets have performed well, producing a 40% gross IRR for traditional Japanese PE investments. Scott Nuttall, KKR’s CEO, labeled it the “most interesting” market for buyouts. Its stellar run with chip maker Kokusai Electric is one recent example of this.

Headwinds or Tailwinds? KKR is not the only financial institution to remain optimistic about Japanese buyouts. 

• PWC foresees strong growth in the sector, given there is ample room for penetration – the ratio of private equity investment to GDP in the US is 2%, for example, while in Japan it is only 0.2%. 
• Capital Group says that Japanese companies have a lot of cash on their balance sheets, and are finally ready to allocate that cash to shareholders. It also pinpoints software as one sector poised to grow once volatility subsides. 
• HSBC’s outlook on Japanese equities is positive, given reasonable P/E ratios and the ability of the rebounded Yen to spur domestic economic growth.
• M&G Investments thinks that strong earnings and structural improvements in corporate reporting are headwinds for Japanese companies. 

Still, to create the most value during economically troubled times, KKR would be prudent to reduce selling costs, improve budget transparency, and shift to a variable spending model when it comes to Fuji Soft, as outlined in our March 2023 Survival Guide for Tech Firms in an Economic Downturn. 

KKR declined to comment. 

Buyout News 

Neuberger Berman is aiming to buy a minority stake in Nord Anglia Education, an international private school operator, from EQT. The deal will value the operator at $15 billion, including debt. The massive transaction is a huge win for EQT, which inherited Nord Anglia via its acquisition of PE firm and then-owner, Baring Private Equity Asia, for $7.5 billion in 2022. 

Meanwhile, EQT plans to buy a majority stake in Acronis, a Swiss cybersecurity and backup provider, from Springcoast, BlackRock, and CVC. The latter two firms raised $250 million for Acronis’ last round of funding, valuing the firm at $3.5 billion. All three firms will remain minority investors. EQT has only disclosed that its valuation is above $3.5 billion.

Cinven is buying a majority stake in Vitamin Well, a Swedish beverage producer, from Bridgepoint for an undisclosed amount. Bridgepoint bought Vitamin Well in 2016 in a deal valuing the firm at €100 million including debt. This current transaction will value the firm at €3 billion ($3.3 billion) including debt and is expected to close in the coming months.

Apax is taking IT consultancy Thoughtworks private – just three years post-IPO – for $1.75 billion total at $4.40 a share, a 30% premium on its 2 August closing. Apax has held the asset since 2017 and says the take-private is to “re-focus on growth.” The stock has dropped 87% since January 2022 and Q2 2024 saw a 12.4% drop in the firm’s revenue year-over-year.

Finally, Bansk Group is taking pet health provider PetIQ private for $1.5 billion total at $31 a share, or a 51% premium. The transaction will be an all-cash transaction and is expected to close in Q4 of this year.