Longreach expects to close deals in 2007

By Alison Tudor, Asia Private Equity Correspondent

HONG KONG (Reuters) - Private equity firm The Longreach Group Ltd. said it expects to close several deals this year, including one enabling a Japanese company to expand beyond its mature home base into growing Asian markets.

Longreach, which raised a $750 million fund last year, is known for its 2005 purchase of 25 percent of McDonald's Holding Co. (Japan) Ltd (2702.Q: Quote, Profile, Research, Stock Buzz), which is nearly half-owned by U.S. fast food giant McDonald's Corp. (MCD.N: Quote, Profile, Research, Stock Buzz).

The market value of the stake at the time was about 75 billion yen ($631 million).

Since then, the firm has made just one other major investment, although 2007 is shaping up to be a busy year, Mark Chiba, chairman and partner at Longreach, said in an interview for the Reuters Hedge Funds and Private Equity Summit.

"Longreach expects several significant transactions to close in 2007, including one cross-border investment that will be executed with a Japanese partner," he said.

Since raising its new fund a year ago, Longreach has been searching for deals worth potentially more than $1 billion in the financial services, industrial and technology sectors.

In September 2006, it bought out communications cable maker OCC Corp. for an undisclosed sum.

It can take two to three years to close deals in Japan, much longer than is typical in the West.

Market conditions are also becoming tougher in Japan -- as they are globally -- with more funds competing over the same number of deals, which has led to higher valuations and less favorable terms and conditions for buyers.

BRIDGE TO CHINA

Private equity buyers are attracted to Japanese companies that have gradually lost their competitive edge against Asian rivals, partly because they were late to globalization in many industries as they relied instead on their local market.

"Many companies in Japan that should be global leaders in their core businesses are in fact over-diversified and excessively domestic, (and are) especially threatened by rising competitors in Asia," said Chiba, an Australian who was previously the chief executive of UBS Securities Japan (UBSN.VX: Quote, Profile, Research, Stock Buzz).

Chiba believes this state of affairs also came about because of the availability of cheap debt in Japan.

"It's a dangerous drug for companies who think that they can sustain sub-optimal operating performance," he said.

Chiba pointed to electronics makers as an example. The average operating margin for Japanese electronic machinery makers is 7.7 percent, compared with 20 percent for companies in the Philadelphia Semiconductor Index , according to Reuters data.  Continued...