A flash in the pan?
By Paul Mackintosh - 21/01/13
Cerberus Capital Management’s final exit from its over decade-old investment in Japan’s Aozora Bank last week, earning some US$1.7 billion for a 55% stake sale, came as something of a blast from the past for Asian private equity (PE). It recalled, at an unexpectedly late date, the early glory days of post-Asian financial crisis distressed investing, when the seeds were laid amid the ashes of the pre-crisis Asian PE industry for the eventual flowering into the luxuriant growth that we see today. For the deals done in that period by Cerberus and its peers – and the returns they achieved – were what attracted serious Western general partner (GP) interest from the mid-2000s onwards, and built Asia into the third pillar of global PE.
Cerberus came into the initial privatisation of the defunct Nippon Credit Bank (NCB) after that struggling lender’s sale by the Japanese government in 2000, picking up 12% of the bank. It bought a further 49% of Aozora from Softbank Corporation in July 2003 for $844 million. NCB’s close peer was the Long-Term Credit Bank of Japan, the future Shinsei Bank, invested by Ripplewood Holdings and JC Flowers in what Carlyle founder David Rubenstein described as “possibly the most profitable private equity deal of all time” on its listing in 2004. Plaudits like that naturally caught investors’ attention, not least as they were looking for new trends and momentum to bet on post the last escape of hot air from the dotcom bubble.
How times have changed. Aozora stayed profitable under Cerberus control, but also ended as one of the biggest creditors to Lehman Brothers in the 2008 collapse. Cerberus’s final exit came after a protracted post-crisis struggle, but was not all that ignominious. For one thing, the firm had had ample chance to recover its initial investment through dividends and other payouts, besides the proceeds from Aozora’s 2006 IPO, and the final sale price, even though at a 3.3% discount to the day’s closing share price according to Reuters, does not look so shabby set against the original investment size. Indeed, Cerberus has kept roughly a 7.75% stake in the business, according to Bloomberg. Patient investors could have expected better, but the overall returns story probably does not look all that bad.
Alas, prospects to apply the same thesis, and achieve the same results, appear dim – barring some inconceivable 1997-style collapse in China. Above all, Japan, with its stubbornly guarded, deteriorating reservoirs of value, remains resistant to revitalisation. The new LDP administration preaches old-guard state-planning/state-aid mantras as retrogressive as its ageing MPs, while former Nippon Inc. icons like Japan Airlines or Sony are run into the ground or downgraded to junk. In retrospect, those turnaround glory days appear all too brief.