The founders of KKR have declared Japan their “highest priority” in the world outside the US as conglomerates like Hitachi, Toshiba and Panasonic jettison noncore subsidiaries and create potential gold mines for private equity.
In an interview with the FT in Tokyo, George Roberts said that he currently felt “more comfortable investing in Japan than I do in China” — remarks that come despite the significant investments and resources KKR has channelled into Hong Kong and the mainland over the past decade.
But after many years of disappointment, corporate Japan is now in a phase of fundamental change, said the KKR founders as the company held its annual partners’ meeting in Tokyo for the first time. Mr Roberts said the push for improved governance and transparency initiated by the administration of Shinzo Abe now had the momentum to survive beyond his time as prime minister.
“This [Japan] is our highest priority right now other than the US . . . this is the best value today. If you look at value to price of stock and cost of capital, it’s here,” said Henry Kravis.
Of the six deals that KRR has done in Japan since establishing its office in Tokyo 13 years ago, four have involved carve-outs from Japanese conglomerates that have finally admitted a distinction between core and non-core assets. KKR, he said, was approaching Japan in 2019 with the playbook the firm used in the 1970s and 80s as US conglomerates like GE went through similar realisations. Around a decade ago, said Mr Kravis, he met a chief executive at a Japanese company who proudly told him it had 2,000 subsidiaries.
“I asked him how many of those were core to your business and he said ‘2,000’ — that is where we were eight years ago. Today it is totally different.”
KRR is hardly alone in identifying potentially huge deals in Japan: Bain Capital’s $18bn purchase of Toshiba’s memory chip unit last year was a landmark of scale, but the steadily increasing flow of carve-outs, say bankers, is behind a spate of recent arrivals by US and European PE firms.
Outside Japan, Mr Kravis and Mr Roberts acknowledged that between both the pair of them and between others at KKR there were differences of opinion over Brexit and the investment outlook for the UK. Mr Roberts said that while the UK could expect a recession in the event of a hard Brexit, the adjustments in its wake — particularly if sterling weakened — would create opportunity.
“If that were to happen, I think values would go down and it would be a great time to buy. When everybody has written it off and everybody thinks it’s terrible I think that’s probably a good time to go invest,” said Mr Roberts, adding that he was more optimistic on the UK than Mr Kravis and KKR’s “much more negative” European team.
Both Mr Kravis and Mr Roberts dismissed suggestions, widely made in recent months, that private equity was in a bubble.
“You can’t make those kind of statements. The question is: are you making money in what you’re doing or not? Prices are only going one way since we started and that is upwards and to the right,” said Mr Roberts.