Small but steady: Advantage Partners cofounder Richard Folsom talks with J@pan Inc's Sumie Kawakami about the buyout business in Japan - Buyouts

Japan, Inc., April, 2003

Part 2

WHO SAYS THERE AREN'T enough buyout deals in Japan? It may all be a matter of perspective. Richard Folsom says his firm, Advantage Partners, sees at least 150 opportunities a year. "Our view is that there is actually very steady growth in deal flow, both in terms of quantity and quality. And we are seeing that growth continue steadily," says Folsom, a cofounder and representing partner of the firm.

Because of the dramatic entry of big-name foreign funds in Japan after the Asian financial crisis in 1998, many investors expected an explosion of activity on the buyout front. "That hasn't happened," Folsom admits. "People who had expectations that hundreds and hundreds of deals would be coming out have been disappointed to a certain degree."

But Advantage Partners likes what it sees. The firm has so far closed 11 deals since it raised its first buyout fund - the very first of its kind in Japan - back in 1997. An average of two a year is a pretty good record, considering that there were only a couple of dozen buyout deals during the last year in Japan, and that some players have withdrawn from the scene without closing a single deal. What's even more unusual is that Advantage Partners has already exited three of its 11 deals.

A middle-market player

But Advantage Partners is no Ripplewood. Its deals are smaller, averaging somewhere between [yen]3 billion and [yen]10 billion (Ripplewood Holdings (US) paid over [yen]100 billion for the former Long Term Credit Bank, now called Shinsei Bank). "We are not looking to do mega-deals," Folsom explains. "Equity from our fund in any given deal is between [yen]1 billion and [yen]4.5 billion."

Being an independent domestic firm, Advantage Partners doesn't have the same degree of access to global institutional investors as some of the mega-players. Its first fund, MBI I, was [yen]3 billion1 its second, MBI II, was [yen]18 billion. The company is currently raising a third fund worth [yen]50 billion, which is big compared with other domestic buyout funds, but still much smaller than those of the biggest players. Apart from the Shinsei deal, Ripplewood Japan raised [yen]110 billion specifically for Japan and Cerberus raised [yen]200 billion.

Advantage Partners isn't a distressed-assets player like Lonestar, which has bought troubled golf courses and resorts and made huge profits in the early years of Japan's buyout history. Nor is it looking at bankruptcies that loom on the horizon. Out of 11 deals that Advantage has closed, only one - with Fuji Machinery Manufacturing and Electronics - involved companies that actually filed for bankruptcy protection.

Instead, the core strategy of the firm has always been to focus on what it calls "the middle-market companies," with sales of several billion to several tens of billions of yen. "I think that middle-sized companies are relatively easy to grow profits from, either by growing sales or increasing cost-performance," Folsom says. "in terms of performance, it's the size that's easiest to work with. But the most important of all is the volume of deal flow. Yes, there will be some mega-deals sometimes, but not all the time. We want to do deals year in, year out."

Consulting background

Just recently, the firm bought 100 percent of Intuit Japan, a vendor of popular Japanese accounting software, from its US parent company for [yen]95 billion. As featured in J@pan Inc's March issue, page 10, some say the bid was a bit too high for a company with [yen]6 billion annual sales, but Intuit Japan CEO Kozo Hiramatsu says the decision to partner with Advantage Partners wasn't all about money. He says the firm looked at more than 10 candidates and decided Advantage Partners had the longest performance record. "It also has solid experience and a record of successful exits," Hiramatsu says. "Plus, many of its staff originally came from consulting firms."

The two founders and representatives of Advantage Partners, Folsom and Taisuke Sasanuma, are former consultants at Boston-based management consulting firm Bain & Co. They worked mostly in the Japanese market, but they were also able to watch the activities of Bain Capital (the private-equity arm of Bain) in the US during the late 1980s. "That was where we got the initial ideas for private-equity investing as seen in the Bain Capital model," Folsom recalls. "To take consulting capability and to apply it into private-equity investing: Bain Capital has proven that that model works quite successfully. We thought this was something we would try to do in Japan."

In 1992, they formed Advantage Partners. But the time wasn't ripe for buyouts in Japan. Back then, there were a lot of restrictions and regulations, and the environment wasn't ready for the buyout funds they envisioned. In the company's first five years, it concentrated more on venture-capital investing.

Then came the Big Bang financial reforms in Japan at the end of 1996. One of the changes was a revision of the anti-trust law, which allowed a fund or a holding company to own the majority of a company and be on the board of directors. "Those were two very basic elements of our investment philosophy: for a fund to have a majority control, and to be able to have an active participation in management," Folsom recalls.