‘We had no idea what private equity was about’: Japanese chipmaker CEO on buyout bosses

In October 2023, Fumiyuki Kanai led the semiconductor company where he is chief executive through Japan’s biggest initial public offering since SoftBank’s five years earlier.

The IPO valued Kokusai Electric at $3.6bn and triggered a $720mn payout for its private equity backers, KKR, which had bought the business from Hitachi in 2017 in a deal that valued it at ¥257bn, or roughly $1.7bn.

KKR’s exit marked a rare success for the private equity sector in Japan — good publicity that was much needed as the hunt for deals becomes more complicated and banks are more stringent about funding them.

But for a long time the 67-year-old boss of the chip equipment maker was at a loss to explain what the private equity industry actually did.

“We had no idea exactly what private equity was about to begin with,” admits Kanai. “We had a vague idea that whereas we are manufacturers . . . all they do is just move something from right to left and make money.”

Kanai’s knowledge of the mechanics of private equity had to increase rapidly after KKR’s buyout ended decades of ownership by Japan’s Hitachi conglomerate.

He had reason to be cautious about the new ownership structure. Even the well established private equity firms have suffered some high profile mis-steps in Japan, including KKR’s purchase of Marelli, a car parts company it bought and rebranded from Nissan. Marelli was forced into a debt restructuring after the pandemic. 

But after a crash course in how private equity worked by the KKR banker assigned to help the business and support the CEO, Kanai says he became increasingly comfortable with his buyout bosses, not least because they actually knew how to run an IPO and could be a useful tool for change.

Kanai, who has been Kokusai’s chief executive since 2018, after he moved over from Hitachi, says he is now an advocate for private equity in a country that has become attractive to the world’s biggest buyout funds for its low borrowing costs and pressure on companies to improve their valuations. 

“I feel that maybe investors really do not appreciate having private equity as sort of like the supporting backbone for a business for a longer time, in the shadows,” says Kanai.

“But if you want to really change your corporate structure in a very meaningful way, then there’s a limitation to what you can do yourselves and therefore private equity has a diversity of experience in this space . . . maybe it’s better that you think you can leverage or utilise [that] to really instigate that change,” he adds.

Kokusai produces high-tech machines that specialise in atomic-layer deposition — allowing ultra-thin films of a few nanometres to be layered with great precision — to make circuits on wafers (slices of semiconductor material) in large batches.

In the group’s headquarters in Toyama, in north-western Japan, the large machines are customised before being shipped to clients around the world.

The semiconductor industry has been buoyed by increasing demand for chips across industries as varied as gaming, automaking and artificial intelligence. It has also become a geopolitical issue, with countries vying for plants and technology while imposing restrictions on rivals — something Kokusai has had to navigate due to the roughly 40 per cent of sales it generates in China.

Greater demand for the machines Kokusai makes helped drive up the company’s valuation before the IPO and has contributed to its share price more than doubling since. 

It has also given the company enough confidence to forge ahead with plans to double the production capacity at Toyama and build a research and development factory at Yokohama, to the south of Tokyo.

Kanai says KKR helped to make changes to Kokusai before the IPO, including reshaping the group’s foreign network of managers and moving the company towards less complex products, where demand is not subject to as much volatility.

But the private equity firm also benefited from luck. Its purchase from Hitachi was initially a simple bet that Kokusai would be more highly valued outside the conglomerate, rather than any foresight about how the semiconductor industry would boom.

“It was a conglomerate discount play . . . nobody expected semiconductors to be this strong a sector,” says one person who was directly involved in the buyout.

The renewed optimism that demand for semiconductors would remain high led at least two strategic buyers to make offers for Kokusai before the IPO, according to one person with direct knowledge of the matter.

KKR had also tried to sell the chipmaking equipment business to US-based Applied Materials in 2019. The $3.5bn deal fell apart in 2021 after it failed to gain approval from Chinese regulators. Applied Materials still has a 15 per cent position in the company.

Kanai joined Hitachi straight out of school in Japan, before relocating to Singapore and moving between the development and production sides of the business. His instinctive management style was tough and autocratic but as his career progressed, he says he learnt some very simple lessons, including the fact that simply shouting at subordinates was not an efficient way to communicate.

The fast moving nature of the chip industry meant it was crucial he kept employees on side or he would easily have lost touch with what was happening.

“When I actually switched to the mass production factory, there were so many things that I did not know. So I had to rely on the knowledge of my subordinates. Then I started reconsidering exactly how I should be engaging with them . . . It would be called power harassment now . . . I could be arrested if it were now,” he says laughing.

Kanai has mellowed, both professionally and privately. 

He used to unwind after a long day at work by engaging in some hard drinking — and says he would “fall into a ditch, damaging his suit” so could not keep it a secret from his wife. But now he relaxes by walking his toy poodle every morning. He has given up drinking and smoking and has three children and grandchildren to fill his free time.

But his focus on work remains sharp as he prepares for another period of growth.

Japan is pushing to build up its own semiconductor sector, which has languished since a period of dominance in the 1980s, both through investments and by forging close connections with South Korea, Taiwan and the US. 

Kanai says Kokusai’s IPO took place after a reasonably short and difficult period for semiconductor companies, which he predicts is coming to an end.

The company reported net income of ¥22.3bn in the year to the end of March 2024, down sharply from ¥40.3bn the year before.

“This fiscal year was . . . very poor. And therefore, for [the] next fiscal year, we believe the market should be recovering [and] growing by 20 per cent levels,” Kanai says, even as he predicts that more complicated Nand chips will not recover until “fiscal year 2025”.

Kokusai has previously shown it can bounce back quickly from challenges. At the start of the year a devastating earthquake hit the Toyama region where its main production plant is based, yet it was up and running again within one week.

On a recent visit to the factory, the executives conducting a tour noted that after the earthquake, KKR was the first to call to check in on everyone at Kokusai.

This story has been updated to clarify that Marelli was forced into a debt restructuring rather than bankruptcy