Idiosyncrasies of Dealmaking in Japan

Japan often gets a bad rap when it comes to foreign private equity firms being able to close transactions in the country. Richard Folsom, who has been getting private equity deals done in the Land of the Rising Sun for more than 20 years, says the barriers for entry to outsiders are the same faced by insiders.

“The idiosyncrasies of dealmaking in Japan do not discriminate between domestic and foreign players,” the co-founder of Tokyo-based Advantage Partners explains. “Private equity buyers have to solve the same concerns of sellers, regardless of where the firm is from.”

Folsom says the free market of Japan has not yet evolved as much as the American market, requiring longer lead times to do deals. For sellers, there is probably more importance attached to having a local presence and showing commitment to the long-term success of portfolio companies in Japan than in the United States. Still, Folsom says the notion of the Japanese market being closed to outsiders is debatable.

Folsom typically sees two types of private equity opportunities. One is where founder/owners of companies nearing retirement do not have succession plans in place and seek solutions from outside buyers in the form of sales. The other situation is when a large corporation initiates a divestiture of part of its company. Sellers in both situations have similar concerns about ensuring the ongoing success of the business as well as the long-term security of its employees.

If managers of private equity firms—based either inside or outside the country—think they can simply swoop into a company that’s a potential acquisition, execute a turnaround, and exit the investment for a quick profit, they are mistaken. That is not how the marketplace completes transactions. Patience in establishing a relationship with sellers is key to successfully closing deals, Folsom says. Firms need to establish credibility with the market.

Folsom has been involved in the Japanese dealmaking business for 30 years total, 10 of those as a consultant. Prior to founding Advantage Partners in 1996, he was a management consultant with Bain & Co. for eight years, working with both foreign and domestic corporations in the Japanese market. Folsom points to his experience and expertise in bolstering operations of portfolio companies as qualities that resonate strongly with Japanese sellers. These sellers take solace in knowing that their businesses will continue as ongoing entities while employees will continue in their jobs.

Folsom has the street cred to back up what he is talking about. He says Advantage Partners raised the first buyout fund in Japan in 1997. Since then, the firm has established a track record as one of the few top bidders of choice in Japan, Folsom says. The firm has raised four private equity funds and has more than $3B in assets under management.

Focused primarily on the Japanese market, Advantage Partners’ managers have developed expertise in a handful of sectors, including consumer (retail and food services), business outsourcing, software, and parts of telecommunications, technology, and healthcare-related companies.

“We have demonstrated our desire to support, strengthen, and improve the businesses,” Folsom says. “This resonates with sellers.”