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Deal focus: Japan’s tsunami scars underpin rooftop solar buyout opportunity

The Longreach Group aims to build out Japan’s largest rooftop solar company with Shin Nihon Jusetsu. Market fragmentation and a unique consumer demand motivator are key to the upside

When the Tohoku earthquake and tsunami hit Japan in March 2011, more than 5m households lost power. The blackout was exacerbated by government concerns that battered but still functioning nuclear power plants should be powered down as a safety precaution. The planned power cuts lasted weeks. Household solar started taking off.

Meanwhile, the financial incentive to install rooftop solar has vanished. The price paid for home-generated electricity under the government’s feed-in tariff scheme, introduced in 2012, has gradually declined. It has now become harder to make financial sense of the decision to install rooftop solar. But no one has forgotten 2011, and so rooftop panel orders keep coming.

This peculiarity of the Japan solar market means that while industrial use-cases have become harder to underwrite, the residential market has flourished. The Longreach Group seized an opportunity in this set-up with the acquisition last week of an 80% interest in Shin Nihon Jusetsu (SNJ), touted as Japan’s leading rooftop solar installation company.

“The enterprise segment is impacted due to reliance on government support, but the consumer segment doesn’t rely on government support – it’s a standalone market now,” said Yizhe Chen, an executive director at Longreach who led the deal.

“We have some upside if the government decides to promote it, but there’s no reliance on subsidies because there’s no financial reliance by consumers on selling to the grid. Consumer demand is growing, driven by energy security and long-term payback, and it has nothing to do with recouping money in a short-term power generation arbitrage.”

Longreach is investing via its fourth middle-market fund, which was launched last year with a target of USD 800m. The deal represents the small end of the firm’s range in terms of cheque size, with the commitment said to be less than JPY 5bn (USD 32m). But going under the radar was core to the opportunity discovery.

“There are so many of these mid-sized companies in Japan, and it’s almost impossible for GPs to find them from desktop research,” Chen said.

“Given consumer, technology and demographic trends, household-related businesses are an interesting and growing sector, so we have utilized our networks to identify home installation and sales platform-type businesses. When this approach brought us SNJ, this sector looked very interesting. Yet I’m sure most GPs didn’t know about this company.”

Crucially, SNJ takes a no-capex approach to solar. The company, which is among the largest buyers of panel and battery equipment in the country, adds value via contracting, installation, and maintenance services. This represents about 90% of annual sales, which are currently JPY 13bn. That number is expected to double during the holding period.

A typical rooftop unit costs JPY 4m and generates an approximately 50% gross profit margin. About 30% of sales are generated through client-sharing arrangements with home construction or utility companies, an approach that has a higher contract success rate versus cold-calling and knocking on doors. It is hoped this will grow to 50% of sales under Longreach.

Other business lines include an insurance offering and a range of smart-home electronics, including electric vehicle charging equipment. These are all considered growth areas. Diversification is regarded as a key selling point when the time comes to exit, with existing counterparties in the construction and utilities industries expected to be among the potential buyers.

Inorganic growth is also core to the plan. Despite being the largest player in a JPY 400bn industry with around 200 sales reps and 100 electricians nationwide, SNJ claims only 7% market share. The team has already been professionalised in anticipation of an M&A spree, with Longreach helping source a new CFO and chief strategy officer.

Still, Chen emphasises that the quality of existing management and a positive working relationship with founder Akihide Kaneda are important to the deal. By engaging Kaneda, Longreach secured early exclusivity and an attractive entry valuation. The founder initially wanted to sell 100% but decided to retain 20% after learning about the growth plan, ensuring alignment of interest.

Kaneda’s co-founder, who does not own any equity in the company, took over as CEO four years ago and will remain at that post, at least provisionally. Kaneda will continue as chairman.

Perhaps most significantly, it could be argued that the deal was only possible because SNJ is a young company, founded in 2013, and Kaneda is just 38 years old. Chen observed that succession deals in this vein are beginning to take a bigger slice of overall deal flow in Japan.

“When you talk about founder-succession deals, everyone imagines people in their 60s, 70s, and older. But often we find it’s hard for them to accept change and make the final decision to sell. The younger founders, in their 30s, 40s, and early 50s, are more flexible,” Chen said.

“We’re still looking at older founder deals, but this younger generation is becoming a sweet spot for us in terms of founder-succession deals.”