European investment firm Aurelius is willing to pursue investments in overseas carve-outs and underperforming businesses of Japanese companies that many private equity firms would shy away from, Eiji Shibata, managing director and head of Japan said.

”We are a specialist for complex international carve-outs,” said Shibata in an interview with Mergermarket. 

Shibata, former executive officer at Japan Post Investment Corp and ex-director at Permira, joined Aurelius in June as the firm opened its first office in Tokyo, marking its entry into the Asia Pacific region. Describing Aurelius’ investment approach, he said the Munich-headquartered firm sits between traditional buyout funds and distressed investors.

“Aurelius is somewhere between ordinary PE firms and distressed PE firms,” he noted.

Most PE firms usually prefer a financially robust targets with rich cash flow, such as those with an EBITDA margin of 15% to 20%. Aurelius, however, tends to look at those with an EBITDA margin of 10% or less, according to Shibata.

For now, Aurelius focuses on overseas carve-outs of Japanese companies, which he said will involve complex processes. Main target geography should be in Europe or America, where Aurelius’ operational team is stationed, he said.

As a sector-agnostic investor, Aurelius targets business in mid-market space with an annual revenue of EUR 100m (USD 115m) or more. Globally, Aurelius has invested in many companies in the industrial and chemical sectors, he said.

When asked, then, how Aurelius generates attractive returns from businesses that other players would consider challenging, Shibata noted its core strength lies in its 200-member operations team called ‘Aurelius WaterRise,’ which he said is probably the largest operations team among PE firms in the world. Aurelius has more than 400 professionals globally.

Returns are driven by operational reforms to make a portfolio company more efficient and profitable, Shibata noted. Measures include improving manufacturing operations and equipment, introduction of IT technologies, and price renegotiation with clients.

Some of the operation team start working full-time from Day 1 at a portfolio company. They support the management teams of Aurelius portfolio companies in designing and executing management improvement plans, Shibata said.

Why strategy fits in Japan

Aurelius therefore sees ample opportunities in Japan as local companies are increasingly considering carve-out divestiture of their overseas businesses particularly those in Europe and America.

Many of these units, especially in the manufacturing sector, are facing intensifying competition from Chinese and Indian rivals in their local markets, he said.

At the same time, activist shareholders in Japan have kept putting strong pressure on listed companies to divest non-core businesses and thereby increase financial returns for shareholders. This also has prompted many Japanese companies to review their business portfolio, offering overseas carve-out opportunities, Shibata said.

Founded in 2005, Aurelius has EUR 2bn of global firepower, comprising its latest EUR 830m Opportunities V fund, co-investment capital and its own balance sheet, as earlier reported by this news service. It operates 10 offices globally, including Tokyo.

[Editor’s note: The tenth paragraph has been amended to show the operation team’s role in greater detail.]