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Fund focus: Japan’s Integral Corp doubles fund size, plans to double deal count

The Japanese private equity firm, which listed last year, sees rich pickings for its JPY 250bn fifth fund in founder-succession deals, carve-outs, take-privates, and sponsor-to-sponsor transactions

Integral Corporation launched its fifth Japan middle market fund in early 2024 having reached 70% deployment on the previous vintage in less than three years. Seven deals have been completed – most recently the acquisition of information systems provider TCS Group – and there is sufficient dry powder for two more, according to Tsuyoshi Yamazaki, a partner at the firm.

This faster-than-expected pace of investment prompted Integral to scale up its ambitions for Fund V, which closed on JPY 250bn (USD 1.58bn) last month, comfortably exceeding the JPY 200bn target and the JPY 123.8bn raised for Fund IV. This followed a first close of JPY 180bn in March.

“We will do more deals in Fund V, maybe 13-14. Our sweet spot remains companies with JPY 10bn-JPY 50bn in enterprise value. Some deals will be larger, and we might compete with global players that are coming down in size, but those will not be the majority,” said Yamazaki.

Fund V is the fourth-largest Japan-focused vehicle raised by an independent private equity manager, according to AVCJ Research. The top two, launched by The Carlyle Group and Japan Industrial Partners, respectively, achieved final closes of JPY 430bn and JPY 314bn within the last six months. Carlyle scaled up in a similar vein to Integral, having raised JPY 258bn for its prior Japan fund.

Integral is no stranger to increases in corpus size: Fund IV came in 1.7x larger than Fund III (JPY 73bn, 2017) and was deployed in three years and eight months; Fund III exceeded Fund II (JPY 44.2bn, 2014) by the same magnitude and the investment period lasted three years and five months. Funds II and III each backed nine companies, according to an Integral presentation.

Wider appeal

The most recent step-up in size was significant for opening the door to investors that previously faced minimum cheque size constraints. US pension funds now appear in the LP base, Yamazaki noted. They are not alone in targeting Japan. Despite the larger target, Fund V was oversubscribed and Integral had to cut back allocations to some international LPs.

“For many US and European investors that find it hard to commit capital to China, if they want to allocate to Asia, it is mainly developed markets, and especially Japan,” Yamazaki added. “The middle market return profile appears to be comparatively better than in other regions.”

The international investor contribution to Integral’s funds has increased with each vintage: from zero in Fund I to 10%, 25%, and then 50%. Fund V is about the same, even though currency depreciation means a USD 20m commitment from an offshore LP is 50% larger in yen terms compared to Fund IV.

“We expected the international share to be larger, maybe 60%-65%, but more Japanese LPs are starting to make commitments to alternatives, or they are committing larger sums. Almost all our existing local LPs re-upped and we had some new investors as well,” said Yamazaki.

Integral also launched Fund V as a listed entity, having completed a Tokyo IPO in September 2023. The same presentation envisages asset class expansion, including the addition of a target fund to participate in deals that are too large for the flagship vehicle to handle on its own and funds for real estate, infrastructure, growth capital, and credit. No new launches have been formally announced.

A separate source of funding at the GP level also supplements what Integral sees as distinguishing features: DII, or deal-inducing investment, whereby the firm puts balance sheet capital into deals alongside fund commitments; and i-engine, its in-house corporate value enhancement team.

Principal investment is described as one of Integral’s three revenue pillars, alongside management fees and carried interest. As of March, the JPY 7.1bn put to work had a fair value of JPY 34.7bn.

In addition, across Funds I, II, and III, the firm had generated a gross multiple of 2.5x and a gross IRR of 25.8%. The individual multiples for Funds II and III – 86% realised and 50% realised as of March – were 2.1x and 2.9x. Fund IV was marked at 1.9x.

Throughout 2023, Integral completed full exits from IT consulting business BTC and fertilizer supplier Nitto FC (both Fund III), and partial exits from conveyor belt components manufacturer JRC (Fund III) and airline operator Skymark (Fund II). In the first quarter of 2024, the firm reached agreements to sell the remainder of its shares in JRC and Skymark, both of which are listed.

Addressable market

More deal flow is expected to come from traditional sources – founder-succession situations and corporate carve-outs – with Yamazaki noting that a proliferation in boutique M&A advisors has led to a commensurate uptick in inbound proposals. Integral is also interested in take-private opportunities and potential sales by other private equity firms that need to pare their portfolios.

“There has been growth in deal flow pretty much every year since 2014, and the pace of exits hasn’t always matched the pace of investment,” he added. “We see the accumulation of companies within GPs, and that is an opportunity for us. Often, these are small-cap deals that have grown to mid-cap level. We can also sell on assets to larger sponsors.”

Headcount has also grown with each vintage and Integral now claims its 80-plus team – including over 50 investment professionals – is among the largest in Japan, with a presence in Tokyo and Osaka. The firm had about 60 employees on closing Fund IV.

“There are just more opportunities in the market,” said Yamazaki. “If we had a bigger team – we are actively hiring right now – we could do an even larger number of deals. Recruitment takes a lot of effort, but we can train people internally. We don’t just look for investment bankers and consultants; we will hire from the Japanese trading companies as well.”