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‘Big Bang’ revisited

Japan's buyout market has developed as a byproduct of regulatory change.

Before wishing happy birthday to Japan's ten-year-old leveraged buyout market, it is worth noting that the conception of this market was something of an unplanned pregnancy.

Prior to 1996, a regulatory structure for conducting buyouts did not exist in Japan. As corporate veterans of Japan remember, many financial structures taken for granted in the West were absent from the country. Following explosive growth from the 1950s through the 1980s, however, Japan found itself in economic doldrums and many blamed an inflexible regulatory regime. In 1996, prime minister Ryutaro Hashimoto and the Ministry of Finance spearheaded what came to be called a ?Big Bang? in financial markets deregulation.

Among the changes were rules governing holding companies, aka financial investors. These were not allowed to own a majority of a company nor to nominate board members. But Japanese regulators saw fit to change this structure for a couple of key reasons. First, allowing the formation of holding companies was seen as giving corporations greater flexibility in structure existing, and launching new, lines of business. Second, and significantly, holding companies were seen as a way for the beleaguered banking industry to restructure itself, by the creation of separate ?asset management? entities into which problem loans could be transferred.

A byproduct of this regulatory change was, of course, the creation of a clutch of new buyout firms that sprang up to take advantage of this new structure for buying and selling companies as a financial investor. This development was not the intention of the holding company rule changes.

Today, Western private equity firms like Kohlberg Kravis Roberts, Permira and Bain Capital are flocking to Japan in search of corporate spinouts. A number of local buyout firms, such as Unison Capital, Advantage Partners and MKS Partners, are expecting to seek as much or more than $1 billion for their next buyout funds.

Japan's troubled banking sector turned out to be a blessing for buyout-minded investors, especially Ripplewood Holdings, which invested in Shinsei Bank, the formerly underwater Long Term Credit Bank of Japan, in 2000. That investment has returned roughly $6 billion in profits to Ripplewood. That said, Ripplewood's success has led to a backlash from the public and from regulators, who are now studying new tax laws aimed at ensuring that financial investors in Japan do not again profit as handsomely