JPH Co. Ltd.

Interview with CEO, Hideo Aomatsu

Q1What makes this newly established JPH different and unique compared with conventional private equity (PE) funds which DRC Capital has managed?

A1

Conventional PE funds have to on-sell their portfolio companies in several years after their acquisition within fund periods for sooner rather than later capital gains. In contrast, JPH intends to keep its portfolio companies perpetually in principle. JPH can do so, as JPH is a going concern corporation with no time limitation for its duration, while funds are time limited for their legal status, i.e. a fund needs to have a specific term and cannot continue beyond the end of the term, typically set for 10～12 years.

Thus, owners who transfer ownership of their companies to JPH do not have to worry about whether their companies would be on-sold to other business companies they do not know, competitor or foreign, who might distort corporate philosophies nourished and cherished by owners for a long period of time, whether the treatment of employees could be adversely affected, e.g. compensation reduced.

JPH will live perpetually with companies it undertakes by supporting their long-term stable growth and not seeking any short-term returns. JPH aspires to follow the investment principle adopted by Berkshire Hathaway led by Mr Warren Buffett, i.e. to keep excellent companies almost perpetually as ‘perpetual holding stock’.

Q2What caused you to start JPH?

A2

Personally, I always wished that I could stay much longer with my past investee companies even when they were being sold to other companies or funds after their intrinsic values had been sufficiently enhanced for decent returns to our funds’ investors. I felt very sorry for the management people of investee companies which were to be on-sold to new buyers, as they were so concerned with their future under new ownership of buyers. More importantly, I came to realize that most owners of companies think that funds are the last place to sell their companies to, because every fund is bound to on-sell their companies to other parties whom owners do not know in advance. Thus, I devised this JPH scheme of ‘buy & hold’, which is the first concept of its kind introduced and executed in Japanese corporate history.

Q3If JPH would not on-sell investee companies, how can JPH’s investors collect their investment?

A3

JPH’s investors who are long term investors such as university endowments, who collect their investment and obtain returns (capital gains) when JPH is listed on the Tokyo Stock Exchange in an IPO. Some of them may even opt to keep JPH shares even after IPO. As a consequence, JPH’s investee companies remain as JPH’s subsidiaries without being on-sold even after JPH becomes a public company.

Q4What is your investment philosophy?

A4

When I was featured in Nikkei Newspaper Evening Version column ‘Ningen Hakken’ (People Discovered) in a five-day series from 25th to 29th May, 2009, the title of the article was ‘Guchokuni-Tsuranuku-Tositetsugaku’ (Investment Principles Stubbornly Kept). In it, three investment principles were referred to, and I still keep a hold of them stubbornly. Firstly, invest only in underrated companies with great potentials. Secondly, no use of leverage (external debt) for investment, as it is burdensome for investee companies which eventually bear the cost of debt, which debt will constrain their internal investing in facilities, R&D, etc. Third, fully support existing management team first, rather than immediately bringing in new, external human resources, which may be called on only later as necessary and appropriate; thereby building mutual trust between existing management and shareholder from the beginning.

Q5In your lectures at Kyoto University Graduate School of Management and in your writings in Nikkei Newspaper Evening Version column ‘Jujiro’ (Crossroad), what are your basic messages conveyed to students and readers for enlightening purposes?

A5

In short, it is ‘Renaissance of Shareholder Capitalism’, which is not a popular concept these days in Japan, but so essential, I argue, for sound development of any company. Without delivering proper returns to shareholders, you can never pursue any corporate philosophy nor ascertain sufficient employees’ compensation in long term. In order to ascertain such necessary returns to shareholders, a company has to build a solid business model by which sufficient free cash flow can be generated. Such economic and financial aspect is called ‘Basis’ of a company.

I am also preaching that every excellent company without an exception has built a solid ‘Superstructure’, by which I mean corporate ideology/philosophy and ontological rootedness to be felt and shared by all members of the company. Actually, in excellent companies, Basis and Superstructure are enhancing each other and are co-dependent. JPH intends to bring in and keep such excellent companies perpetually with full support to encourage and stimulate never ending dynamic interactions between Basis and Superstructure of the companies.

Q6While ‘P’ of ‘JPH’ comes from ‘Perpetual’, you are not perpetual as human being. How long are you going to work for JPH as CEO?

A6

Mr Warren Buffett says that investors in their 60s are just beginners. The more experience you accumulate, the better and more prudent investor you are. I take JPH as my life work, i.e. I intend to continue work for another 30 years as far as I remain physically and mentally healthy. However, it is still far from perpetual, and you never know how long one can remain healthy. Thus, JPH will have a proper succession plan of its own(!) by which appropriate successor candidates are always pooled from within JPH Group and outside JPH.