The Program on Alternative Investments, under the aegis of the Center on

Japanese Economy and Business and in cooperation with the student-run

Japan Business Association and Private Equity Club

of Columbia Business School, hosted its fifth

seminar on February 5, 2003. The event

featured Mr. Timothy Collins, CEO,

Ripplewood Holdings, LLC, and was

moderated by Dr. Mark Mason, Director

of the Program. Mr. Collin’s presentation

focused on Ripplewood’s experiences as

a major private equity player in both the

United States and Japan, including his

firm’s acquisition of the former Long-Term

Credit Bank of Japan, now Shinsei, as well

as Ripplewood’s broader set of transactions of

various size and industry. Following are excerpts from Mr. Collins’

presentation together with selections from the subsequent question and

answer period.

Program on Alternative Investments

The Program on Alternative Investments analyzes several major alternative asset classes —including privateequity, hedge funds, distressed investments, and commercial real estate —in Japan and elsewhere in East Asia.The Program meets its substantive goals through a combination of research projects and seminar presentations,the latter led by leading practitioners in each alternative asset classes. Throughout the year, the Program also conducts cutting-edge research on these topics under the direction of Dr. Mason and with the assistance of highlyqualified research assistants. For a schedule of upcoming seminar presentations, consult the Center’s web site athttp://www.gsb.columbia.edu/japan. Dr. Mason can be contacted at mm412@columbia.edu.

Timothy Collins

Co-sponsors: HVB Group; Takata Corporation

Ripplewood was establishedin 1995 to pursue industry-

focused investments that are a hybrid between traditional corporate and private equityapproaches. Since 1995, we have invested $2.1 billion of equity,half in the United States and halfin Japan. This includes over $800million (including co-investment)in 8 platform companies in theU.S., including 40 total acquisitions;$1.2 billion of equity invested to acquire The Long-Term CreditBank (LTCB) of Japan; and $120million invested in four platformcompanies in Japan through RHJIndustrial Partners. We have thesame amount to invest over thenext 2-3 years. Ripplewood isreally defined by its industrialpartnership strategy, which isconceptually simple. We targetindustries we believe offer excep-tional potential for value creation,and we back world-class execu-tives. For example, in Automotiveretailing, we support Thomas

Gibson, President of Subaru ofAmerica; in automotive parts,Richard Donnelly, CEO of GMEurope; in Chemicals, JohnGeorges, Chairman of the Boardand CEO of International Paper;and in branded services, HarshaAgadi, President of Little CeasarsEnterprises.

The two defining elements of our strategy are choosing theright industries and choosing theright people to search for, acquire,and subsequently enhance busi-nesses in attractive industries.

Our investment approach is to focus on a small number ofopportunities with very low down-side risk, without sacrificing thepotential for extraordinary returns.This is very easy to describe, butextremely difficult to execute. We have developed a systematicapproach to accomplishing thisgoal. First, we undertake a veryrigorous analysis of the underly-ing elements in the industry.Second, we look at operational

improvements, and always havea crisp plan in mind at the opera-tional level. Third, given ourdiscipline about values, our phi-losophy is that we are preparedto buy a business based on whatit is worth, but the majority of theupside from the changes in thestrategic nature of the businessor the operational improvementsare really the ways we enhanceour returns. In retrospect, ourreturns have been relativelyattractive.

Ultimately, our goal has lessto do with our financial returnsthan it is to create industry lead-ers in the segments in which weinvest where those enterprisescan create sustainable competi-tive advantage. Our philosophyhas always been that if we createvalue in the underlying business,the financial results will take careof themselves. Sometimes, focus-ing on the financial results is amirage as many learned in the90’s and the hangover that fol-lowed. We have created fromscratch a $4.5 billion automotiveretail business (Asbury Automotive),which is the 4th largest retailer inthe U.S.; Shinsei Bank, acquiredwith assets in excess of $100 bil-lion; WRC Media, which is thelargest supplementary educationalpublisher that reaches over 10million students, teachers andparents; and Proxim, which is the leader in the wireless modemand wireless networking arena.

Ripplewood has a team inNew York and a team in Tokyo.In each case we leverage ourdeal expertise with deep industryknowledge of our industrial partners. Ripplewood has been

2 Center on Japanese Economy and Business

Dr. Mark Mason, Director, Program on Alternative Investments

exploring opportunities in Japansince 1996. We have had the ben-efit of a very close relationshipwith Mitsubishi Corporation, whichhas been a significant investor inRipplewood funds. The Chairmansits on Ripplewood’s Board ofDirectors, Mitsubishi profession-als work full-time at Ripplewood,and Mitsubishi provides access todeal flow, global distribution andexpertise for portfolio companies.

In 1997-98, we undertook a project with a leading globalconsulting firm on private equityopportunities in Japan. This wasa hallmark of our early strategy,and it really laid the groundworkfor our understanding of the situ-ation with the LTCB. We havealso received extraordinary sup-port from Japanese and othergovernmental leaders.

Japan is the second largesteconomy in the world. It wasclear to us from the beginningthat Japan has the benefit ofmany first-of-class products andprocesses, and Japan is in direneed of both risk capital andcatalyctic management. Japan is and was the most over lever-aged economy in the world. Theaccess to cheap money during thebubble period led to high relativelevels of capital expenditures,which, in turn, led to very lowcapacity utilization and low levelsof profitability. The low returnsare a function of high SG&A costsand low levels of asset utilization.

Despite these conditions, Japanremains a leader in many indus-tries in terms of process andproduct technology. We believeJapan will restructure successfullyto return to significantly higher

levels of profitability. Already weare witnessing a dramatic changein the rules of business in Japan,including increased acceptance(albeit sporadic) of foreign own-ership, accounting consolidation,deregulation of industries, account-ing for pensions, significantincreases in M&A activity, stockoptions, holding companies, andcapital injections in the bankingsystem. There has also been a

recognition of the extraordinarymagnitude of the non-performingloan problem and its impact onthe overall economy. I think thisrecognition is the beginning of ahopeful time for Japan.

After our initial studies, weformed the largest private equityfund in Japan, originally calledRHJ Industrial Partners. It wasdesigned to duplicate what wedid in the U.S. We had a veryfocused strategy, reflecting the

needs of the Japanese market.Investors included leadingJapanese and global institutions.Very importantly, about 40 per-cent of the capital came fromlarge blue chip Japanese institu-tions. We focus on investmentswith an enterprise value of $250million to $2 billion, which includebasic industry, manufacturing,hotels, distribution, financials andservices. We only invest wherewe can add considerable strate-gic value. We have made fiveinvestments to date and have,today, a strong pipeline of newinvestment opportunities, whichwe are studying carefully.

Among Ripplewood’s invest-ments in Japan are Denon andMarantz, which are now combinedin D&M Holdings; Nippon/Columbia, renamed ColumbiaMusic Entertainment, The ShinseiBank, the Phoenix Resort, andNiles Parts, one of the leaders inautomotive sensors and switches.

Ripplewood took effectivecontrol of Columbia MusicEntertainment in October 2001—the seller, Hitachi, retained aminority stake. Its focus was his-torically on traditional Japanesemusic. It had a very muddledstrategy and management focusand resources were spread acrossboth the Denon hardware busi-ness and the music entertainmentbusiness. They also had a varietyof non-core activities, includingmusic retail, information systems,real estate, a dramatically under-utilized CD pressing business, andthey made successive records oflosses for the last 11 years. Afterwe bought the company, we spunoff Denon, retained its listing on

Alternative Investments Report 3

... having a deep

industry knowledge

developed over a

long period of time,

a robust industry

thesis and a talented

executive from that

industry is the best

immunization against

major mistakes in

industry evaluation.

the Tokyo Stock Exchange, andwe rebuilt from the ground upthe artists and repertoire activitywith an increasing focus onJapanese pop and rock. We under-went a complete restructuring ofthe organization, installed newfinancial, marketing and publicrelations functions, re-brandedthe company as a global andcontemporary leader in the musicentertainment business, strength-ened the balance sheet, cleanedup the negative net worth andpositioned the company for profitand growth.

Ripplewood acquired DenonLtd. in October 2001 and mergedthe company with Nihon Marantzin May 2002, creating a new pub-licly-traded company called D&MHoldings. Prior to this acquisition,the company lacked strategicleadership, vision or direction, therewas no defined product market-ing or branding strategy, littleinvestment in expanding productrange or in new technologies,

the distribution channel was indisarray, there was low moraleamong the engineers and otheremployees, and a lack of com-munication within the organization.Our goal was to transform thisbusiness from a stodgy, old musicbusiness with a declining cus-tomer base into a diversified,global music powerhouse. Weare currently mid-stream with that.After we bought the company,we installed a new chairman, aworld-class board and mergedDenon with Marantz, anotherhigh-end branded consumerelectronics company. Both com-panies are really benefiting fromthe merger in terms of integra-tion of sales, marketing, R&D,manufacturing and purchasingefforts. Denon and Marantz were beneficiaries of a very talented executive named MerleGilmore, who was the numbertwo person at Motorola beforejoining Ripplewood.

Ripplewood invested in NilesParts Co. in April 2001, a family-controlled automotive componentmanufacturer. The investmentrepresented the first private equityinvestment in a manufacturingcompany in Japan. This was areally troubled company withunsuccessful investments in non-automotive businesses, therewere no cost control or reportingsystems in place, there was lowmorale among employees, andthe company was largely depend-ent on Nissan in terms of sales(60 percent). They had greatproducts and processes, but verybad business systems. We hadtwo industrial partners with thisdeal, both of whom were largelyresponsible for making Niles veryprofitable.

Ripplewood acquired thePhoenix resort as part of a civilhabilitation process in September2001. Future capital investmentswere contemplated for the devel-opment of the property into aworld-class destination resort. TheResort is a very beautiful facilitythat was over built in every waywithout any thought to market-ing. We are now in the processof upgrading some of the attrac-tions and meshing what themarket wants with what we areproviding in the way of amuse-ment, entertainment, retail, andfacilities. The Resort is a muchlonger-term turnaround becauseit needs to rebuild its place in themarket. This may very well turnout to be the best investment thatwe have made in Japan in termsof return on investment.

The story of the Long-TermCredit Bank is breathtaking. The

4 Center on Japanese Economy and Business

Seminar in session. Mark Mason (left), Timothy Collins

Bank had an enormous group of talented people and good customers. We were able torecruit Masamoto Yashiro, whohas done a remarkable job ofinstalling good basic businessand organizational practices andinformation systems. Shinsei hasbeen growing very rapidly. It isthe 5th largest Japanese bankwith the strongest capital ratio.The Bank has become a diversi-fied provider of capital, advice,and other financial services andproducts that add value to retailand corporate customers.

Japan is becoming an attractiveenvironment for investment forat least three reasons. First, macro-economic forces continue to drivechange. Second, the governmentis recognizing the importance ofnew forms of capital and foreigninvestment. Third, Shinsei Bankis an indicator—for Ripplewoodand others—that Japanese busi-ness is ready to change. However,change will not take placeovernight. Many Japanese institu-tions are not yet familiar withprivate equity investing, and asignificant effort will be requiredto restructure business organiza-tions. At Ripplewood, we believe,most importantly, that a strategythat focuses on the underlyingindustry structure and corporatestrategy rather than financialengineering has the greatestpotential to prevail. We intend tostick to that strategy. We are strongbelievers in a very simple strate-gy and organizational structure.Ripplewood is structured aroundindustry lines, supporting greattalented executives. We think thereis enormous potential for valuecreation, particularly in Japan.

Question and Answer:

Q: What has been your experiencewith labor issues in Japan?

Collins: I was a member of theUnited Auto Workers when I wasyoung, so I am sympathetic toorganized labor. We have foundthat having an organized workforce can be very positive. Thenyou have someone that can speakfor the best interests of the most

people. So far, we have had support and cooperation alongwith some painful discussions.The leaders of the labor unionhave been incredibly constructive.

Q: How do you finance anindustrial buyout in Japan rela-tive to a buyout in the U.S.?

Collins: We do not have anysimple rules of thumb. In Japan,many of the businesses can toler-ate more leverage because theinterest rates are so low. They areable to pay. It really is situation

specific. We want to have enoughleverage so that we can safelyand securely amplify our equityreturns, but not too much lever-age that it impedes the ability ofthe management to manage thecompany or invest in the busi-ness for growth. In Japan, weused debt to buy the PhoenixResort and Denon while in othercases we provided equity to de-leverage.

Q: Are your investment timehorizons in Japan any longerthan ones in the U.S. and howwill you exit these investments?

Collins: The way we make decisions about our portfolio is very simple, and it does notreally matter where it is. We buythe business and make everydecision as if we are going toown it forever. One of our sim-ple criticisms about the waymany people have applied theprivate equity trade in the U.S. is that they become overly pre-cise about exit strategies. Thereare many new casualties of thatmethodology and a weak econ-omy that a bad stock market startto illuminate. We run each busi-ness as if we will always own it,but the day after we close, weare also open to ways to maxi-mize the investment and thereturns to our investors. In Japan,given the nature of the businessthat we are investing in, like thePhoenix Resort, the time horizonto put it in shape and get a sig-nificant portion of the strategicvalue is probably a little bitlonger than some of the busi-nesses in the U.S. However, thereis no simple rule of thumb.

Alternative Investments Report 5

The two defining

elements of our

strategy are choosing

the right industries

and choosing the right

people to search

for, acquire, and

subsequently enhance

businesses in

attractive industries.

Q: Has the Japanese governmentpresented any impediments for you?

Colliins: The Japanese govern-ment, just like the U.S. government,is not monolithic. Party politicsare complicated, politics withinthe parties are complicated, andpolitics across and within min-istries are complicated. In themain, we have had reasonablesupport form the Japanese gov-ernment and, in some cases,extraordinary support.

Q: Do you think there is anypublic resentment in Japan againstforeign investors and takeovers?

Collins: First, with respect toShinsei, there will always be jeal-ousy with respect to someonewho has made a very attractivedeal. There will also be a prob-lem when other institutions aresuffering but, for a variety of rea-sons, our institution is strong andhealthy and not in jeopardy. Sothat creates friction whether it isin Japan or Tibet—it’s human

nature. Secondly, it was not thatlong ago when foreign investmentin the U.S. was a new thing, andthere were people angry overMitsubishi buying RockefellerCenter. So I do not think there is much unique in the fears orphobias among the Japanesepublic. We took over this bankand weeks later, for, frankly, no fault of our own, one of thebiggest retailers in the countrywent bankrupt and we wereblamed for it. I would say thatthe negative sentiment is reallydying down. The more time thatpasses the more the Japanesepress and public observe that we are behaving responsibly andmaking a huge commitment tothe country by reviving thesebusinesses that otherwise wouldhave disappeared.

Q: What, if any, surprises didyou have with the Shinsei deal?

Collins: There were two pretty obvious ones. One, we

were pretty surprised that Sogo’saccountants pulled the plug onthem weeks after we took overthis portfolio. We thought wehad a little more time to get ourarms around the situation thanwe were allotted. I think wewere surprised by the magnitudeof the problems in many of theunderlying portfolio companies,how over-leveraged these busi-nesses really were, and howunder-reserved the other banksin the market were, for compa-nies that were that massivelyover-leveraged. Other than that,we expected it to be pretty toughsledding, because we thought thatthe business model was prettybroken. We also did not expectto be brought before the Diet.

Q: Has your pioneering work inJapan brought you to the pointwhere you are going to be ableto deploy significantly greateramounts of capital in the yearsahead?

Collins: Maybe the best thingwe have done over the last threeor four years in the U.S. is beingreally careful about the capitalwe have invested. Every dollarthat we have not invested isworth two today, so we have $1 billion to invest here today,and we have probably investedabout $1 billion here over thepast 5 or 6 years. We are gladthat we invested slowly and care-fully. We are delighted with thepotential returns of our portfolioin Japan, and we are exceedinglyhappy with the deals that are inthe pipeline. We think that weare going to make a lot of moneyin Japan. There comes a pointwhen there are other things than

6 Center on Japanese Economy and Business

Mr. Tasuka Kuwabara, MBA 2004, during the Q&A session.

making money, and it has beenfascinating and fun. We hope toultimately make a contribution to the recovery of the Japaneseeconomy. If we are successful,others will imitate us. But I thinkwe are pretty happy that we didwhat we did in Japan and thereturns, both on the portfolio andon the stuff that we will invest inover the next 3 years, will be trulyextraordinary. We are glad wedid not invest a lot of money in telecomm or internet, or justbasic business that were tradingat 2 or 3 times what they wereworth. I think there will beextraordinary values in the U.S.over the next 2 or 3 years, so wewould expect to invest in the USnow, and at a much greater clip.

Q: What do you look at in termsof mitigating risk?

Collins: Buying a business forwhat it is worth as is, where it is, as it is currently situated in the industry and currently beingoperated is our basic tenet. Welook for the upside through strate-gic and operational improvement.Also buying a business with avery clear view about the poten-tial for dramatic upside, both in changes in the industry andchanges in the strategic positionwithin the industry. That reallygives you a cushion, and it is oneelement of risk mitigation. Theother one is really having a depthof knowledge of the industry. Ifyou look back, the two thingsthat have cost people a greatdeal of money in making invest-ments have been a fundamentalmisunderstanding of the demanddrivers and growth in demandfor products and services. Or a

fundamental misunderstanding ofthe nature of competitive advantageand the ability to translate com-petitive advantage into stable and attractive returns on capital.Therefore, having a deep industryknowledge developed over a longperiod of time, a robust industrythesis and a talented executivefrom that industry is the bestimmunization against major mistakes in industry evaluation.

Alternative Investments Report 7

Timothy Collins (left), Mark Mason

EDITOR

Joshua SafierAssociate DirectorCenter on Japanese Economy and Business

ASSOCIATE EDITOR

Toshihiro Ichida

PHOTOGRAPHY

Columbia Photo Bureau

DESIGN/PRODUCTION

Melanie Conty

CENTER ON JAPANESE ECONOMY AND BUSINESS

Columbia Business School321 Uris HallMail Code 59983022 BroadwayNew York, NY 10027Phone: (212) 854-3976Fax: (212) 678-6958Email: cjeb@columbia.eduhttp://www.gsb.columbia.edu/japan