Homegrown; The Japanese are getting into the buyout business--and earning high marks for their dealmaking and management savvy.(Cover Story)

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CORRECTION: Correction: In "Homegrown" (Nov. 28, 2005), NEWSWEEK used a photograph showing shoppers inside a Seibu department store in Japan, implying the store was owned by the railway conglomerate Seibu referenced in the story. It is not; the department store was part of the same company 40 years ago, but split off to a separate company owned by members of the same family.

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Byline: Christian Caryl

You get the feeling that Nobuo Matsuki never expected to find himself in the sock business. He started his career as a corporate planner at Toyota, went on to get an American business-school degree, then found himself, in the 1980s, a member of that rare breed known as the Japanese venture capitalist. When the asset-price bubble popped at the beginning of the 1990s, though, Matsuki began to see big opportunities on another front--companies that had fallen on hard times.

That's how he found himself snooping around Fukusuke Corp., a 123-year-old apparel maker on the verge of bankruptcy. At first the idea seemed like a nonstarter: how could a Japanese clothing manufacturer possibly hold its own against low-wage China? Still, something about the company caught Matsuki's interest. Socks and underwear, he learned, are the biggest-selling clothing items in Japan, and Fukusuke manufactured high-quality socks and underwear. "You can make mass-market products in China," Matsuki, 57, argues, "but when it comes to high-margin, low-volume production, you want to be close to the market." In 2003 Matsuki's investment fund, MKS Consulting, acquired the notoriously ill-managed Fukusuke and immediately installed a new team of experienced retail executives who completely overhauled the way the company does business. The move has started to pay off: according to Teikoku Databank, Fukusuke earned a $7 million profit in the year ending in January 2005 after losing $43 million the two years before.

Not that long ago only foreign buyout firms made headlines in Japan. During the recession, overseas players such as Ripplewood and Goldman Sachs roamed the corporate landscape, snapping up everything from banks to golf courses. The Japanese press fretted about "vulture funds" and worried about assets falling into the hands of Anglo-Saxon "invaders." Small wonder: domestic buyout companies were virtually nonexistent. Under the traditional postwar-business sys-tem in Japan, the banks--intimately allied with the companies whose shares they held--tended to sort out management messes, not outside investment funds. "In the so-called good old days the megabanks not only lent money but took care of corporate governance on behalf of stable shareholders," says Motoya Kitamura, an analyst at Alternative Investment Capital. All that changed fundamentally, he says, when a series of 1997 banking reforms undercut the traditional system of cross-shareholdings. "And that's when people began to recognize the importance of direct financing--such as buyout funds."