KKR With One Eye on Japan Makes Sense

(Bloomberg Gadfly) -- KKR & Co. is stepping up investments in Japan. That's a wise geographical choice.

The U.S. private-equity firm, which said Friday it's raised a record $9.3 billion Asia fund, has made considerable strides in a country once hostile toward corporate takeovers. Of its top five deals in the region, three have been in Japan.

Toshiba Corp.'s chip unit would be a great candidate to sop up some of the money. A group led by KKR that includes state-sponsored Innovation Network Corporation of Japan plans to offer about 1.8 trillion yen ($16 billion), and Western Digital Corp. may come on board with a minority interest.

In China, deals are smaller and the returns tell a different story.

The firm's $1 billion China Growth Fund, raised in 2010, generated an internal rate of return of 7.8 percent. That's peanuts in the world of private equity, and well below the 20 percent garnered by KKR's second Asia-focused fund of $6 billion that was closed in 2013.

A weak IPO market in Hong Kong hasn't helped. KKR last month exited China Rundong Auto Group Ltd. via a sale of its stake to founder and chairman Yang Peng. KKR first invested $100 million in 2010, prior to the automobile dealer's August 2014 initial share sale that raised $124 million, down from an original target of $300 million.

KKR also lost two of its most senior China executives last year. David Liu, who was head of China and co-head of Asia private equity, and Julian Wolhardt, a partner, quit

But China, along with the region's other large emerging-market economy India, is an important hunting ground for KKR. Japan doesn't even make the top 10 in terms of number of investments for the group.

Regardless, things look promising. Panasonic Healthcare Co., for example, was taken private in a deal with KKR in March 2014. KKR paid 165 billion yen for an 80 percent interest and sold 22 percent of the shares for 54.1 billion yen last November. That's an increase in value of about 19 percent in three years.

KKR, an early pioneer of leveraged buyouts, has managed to overcome significant anti-private-equity sentiment in Japan to get where it is today. Now it just has to figure out how to ensure the Land of the Rising Sun remains a bright spot.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.