What Happened at Carval Investors Japan?

Following on from questions raised about governance issues at Carval Tokyo by Alchemy Japan in relation to the Cargill yakuza love hotel scandal - see: alchemy japan asks questions to cargill - we have been looking into some of the issues raised.

In true vulture fund style, in June 2011, Carval Investors announced that it was raising a US$500million Japan fund, to which its parent Cargill had already committed US$200m, to take advantage of "opportunities" and "distress" created by the Great Tohoku Earthquake and Tsunami of March 2011.

From Reuters

U.S. investment firm CarVal Investors is planning to launch its first Japan real estate fund in a few months to raise about $500 million as it sees growing distressed opportunities in property assets and non-performing loans, a company executive said.
Its parent company, agribusiness giant Cargill Inc CARG.UL, has already committed $200 million of seed money and the fund will have a life of total five years including two years of investment period, said Yojiro Koizumi, representative in Japan for CarVal Investors.
"I think there are opportunities in non-performing loans such as CMBS (commercial mortgage-backed securities) or non-recourse loans or those performing loans that cannot be refinanced," Koizumi told the Reuters Real Estate and Infrastructure Summit in Singapore on Tuesday.
"Distressed cases are increasing," said Koizumi, who is a senior partner at CarVal Investors.
He also said B-class or C-class assets might come onto the market while prime quality assets will likely be tightly held by local players.
The number of bankruptcies in Japan rose in May for the first time since July 2009, largely due to the massive quake in March, according to research firm Tokyo Shoko Research.
The Japanese property market also faces some debt refinancing issues. Property research firm DTZ estimates debt that cannot be funded in Japan is more than $80 billion.
CarVal Investors targets opportunistic property investments. It has invested nearly $10 billion globally, about 10 percent of which has been allocated in real estate, Koizumi said.
Koizumi said the fund will aim for a 15 percent internal rate of return (IRR) with a short investment period to boost returns.
"We usually buy assets which are at distressed prices for whatever the reason is and repair it and exit it in two years," Koizumi said.
Last year, CarVal Investors was one of the bidders to buy failed Japanese apartment developer Anabuki Construction Inc, according to sources.
Koizumi said despite some concerns about the economic prospects, Japan remains one of the world's largest creditors and should be able to bankroll the cost to rebuild after the quake.
"Not many people understand about Japan's net credit position," he said.
"The best time and interesting time to invest is when no one buys."

http://www.startribune.com/business/124391644.html

Cargill's Minnetonka investment subsidiary, CarVal Investors, is planning a $500 million Japanese real estate fund to buy distressed properties and underperforming loans in the wake of Japan's March earthquake.
Corporate bankruptcies in Japan increased last month, and many attribute it to the financial aftermath of the earthquake and tsunami. But even before the earthquake, Tokyo property values had been declining sharply for two years, leading to expectations that distressed property assets would become available at fire-sale prices.
Cargill has committed $200 million to the fund, which would focus on commercial mortgage-backed securities and loans that can't be refinanced, CarVal representatives said. The Japanese real estate market is ripe for this type of investment, CarVal said.
"The level of distress that hit Japan post-2008 in the real estate sector was as severe -- if not more so -- than what hit the U.S.," said Tim Clark, CarVal's CIO of Real Estate. "Since 2008, the Japanese property market has faced debt refinancing issues and there have been persistent capital vacuums."
Following the March earthquake, the real estate market was essentially frozen for six to eight weeks, but that problem has abated somewhat, Clark said. "Today, there are still volumes of assets which financial institutions need to purge from their balance sheets."
CarVal Investors has been investing in Tokyo since the mid-1990s, said spokeswoman Anna Lovely.
CarVal Investors, founded by Cargill in 1987, manages commercial credit and real estate investments and has 275 employees worldwide. It currently has $11 billion in assets under management. 

A little over 3 months after these announcements, according to publicly available corporate documents, on 30 September 2011, Mr Joe Koizumi was removed from his post as representative of Cargill and Carval group companies and made a "special advisor". According to sources close to Carval's Tokyo office; the fund was never funded by Cargill nor was any third party money raised due to serious issues with corporate governance and compliance in Carval's Tokyo office which led to a wholesale termination of Carval Japanese staff in September 2011 and liquidation of all Carval's Japanese assets. The Japanese office was originally established by Peter Vorbrich in 1998, and Peter Vorbrich went on to head Carval's real estate activities globally. Indeed, Peter Vorbrich and Yojiro Koizumi were the originators of Cargill's investment into Love Hotels while Peter Vorbrich is the only survivor of this investment decision.

Mr Joe Koizumi was replaced as representative of Carval Tokyo by Mr Takashi Nishiki a former partner of colorful Singaporean businessman, Mr Adrian Chua, in Round Hill Capital.

Mr Takashi Nishiki was, 11 months later, on 31 August 2012, removed as representative of Carval Tokyo and also joined Mr Joe Koizumi as a "special advisor". UPDATE Jan 15 2013 - Yojiro Koizumi and Takashi Nishiki no longer appear on Carval's website as "Special Advisors"

Mr Takashi Nishiki was replaced by 2 representatives - which in itself is unusual in Japan - Mr Michio Izawa and Ms Nozomi Kaneko.

UPDATE - 9th September 2012 - very soon as after his removal as Carval Tokyo Managing Director, Takashi Nishiki and Adrian Chua registered a branch office of APAC CAPITAL PARTNERS PTE LTD in Tokyo with Takashi Nishiki as the head. Adrian Chua and Takashi Nishiki are offering investors 5-6% yields with no acquisition or disposal fees and minimal ongoing asset management fees and raising money based on their previous record. Although this may be a tough sell after Takashi Nishiki sold Carval's Love Hotel assets, acquired for a total equity investment of overJPY6billion (US$60m) for an amount of JPY500m (US$5m), after repayment of debt, leaving Carval Investors facing massive claims from its asset manager for breach of contract and other allegations of misconduct covered in the New York Times  New York Times Article  Japanese - NYT Article - Japanese Translation

More recently, Takashi Nishiki joined  GMCM, founded in 2009 by Gabriel Moey, GMCM as a Registered Fund Management Company, as defined by the Securities & Futures Act issued by the Monetary Authority of Singapore (MAS). Takashi Nishiki also is involved in real estate through West Wood Capital KK.
 GMCM - Our Team 

So, Peter Vorbrich, Joe Koizumi and Takashi Nishiki overtake Seth FIscher as setting a record for the worst investment decision in this asset class and certainly set the record for the biggest single loss of equity:- Japan Leisure Hotels Investment  Minority Investor Appalled at Seth Fischer Investment Decision - this all despite, in the case of Cargill's love hotels, the fact that Alchemy Japan had achieved rising revenues and cash flow and so had successfully turned around Cargill's love hotels after taking over from Cargill's original manager:- Alchemy Japan Q1 2012 Revenue and Earning Growth Alchemy Japan 2011 Revenue and Earnings Growth

UPDATE Jan 30 2013 - some interesting posts by whistleblower with documents which cover the dispute between Alchemy Japan and Carval Investors in detail. We also understand that Alchemy Japan and Carval Investors are now involved in litigation resulting from this dispute; we shall attempt to obtain further documents and post those when available- 
Carval Japan Report on Cargill Japanese Love Hotel Investment
Alchemy Japan Letter to Carval Investors Attempting to Avoid Dispute
アルケミージャパンからのカーバルインベスターズ宛て書簡 – カーバルのレジャーホテル投資

UPDATE Jan 10 2014 - Alchemy Japan commenced legal proceedings in the Tokyo District Court against Carval Investors, and its shell companies, seeking to recover almost JPY300 million (US$3million) in damages resulting from Carval's sale of Cargill's Love Hotels to entities and persons suspected by Kroll Advisory Solutions of ties to Japanese organized crime, the yakuza.

An English translation of the Japanese Statement of Claim can be found at -
Alchemy Japan vs Carval Investors - English Translation of Japanese Law Suit

UPDATE May 2015 - Kato Pleasure Group (KPG) is leaving the Love Hotel industry having placed all of its love hotels on the market. The portfolio includes the Cargill Love Hotels which KPG acquired from Cargill for ¥1.5bn; which now KPG is selling for ¥4bn; or looking to almost triple the money he paid to Cargill.

Alchemy Japan asks questions to Cargill, Carval and ORIX over Love Hotel Scandal

On Alchemy Japan's FB page - they have raised a number of questions to Cargill and Carval regarding the conduct of their senior management around the love hotel scandal with Orix and Kato Pleasure

Peter Vorbich
Joe Koizumi
Takashi Nishiki

We set out the questions in full below.

This story looks like it will continue to give and give


In open court and under oath, Alchemy Japan will be looking to ask Mr Peter Vorbrich, Mr Joe Koizumi and Mr Takashi Nishiki and the rest of Carval Tokyo's staff the following questions (amongst many others) -

1. What was the real reason for the firing of most of Carval Tokyo's front office staff in September 2011?

2. Is the market rumour true that Carval Tokyo senior management and front office

staff were receiving kickbacks from asset managers; especially on sale and purchase of real estate?

3. Is it true that Carval Tokyo refused all direct communications with Alchemy Japan from April 2012 because Alchemy Japan refused to pay kickbacks to Carval Tokyo management?

4. What are the real reasons for the reduction by Kato Pleasure of their original bid of JPY2bn for the Carval Love Hotel portfolio to the eventual price of JPY1.55bn?

5. Why did Carval Tokyo accept a price of JPY1.55bn from Kato Pleasure when there had been previous offers in excess of this final price?

6. Where there any arrangements in place between senior management of Carval Tokyo and Kato Pleasure?

7. Why was Takashi Nishiki removed from his post as Representative of Carval Tokyo in August 2012?

8. Is it the corporate position of Cargill and Carval; as reflected by the then head of Carval Japan, Mr Takashi Nishiki comments to Alchemy Japan, that is it "ridiculous" and "counterproductive to business" to make background checks on contractual counterparties?

9. Does Cargill and Carval Japan have any internal policies or rules regarding compliance with Japanese laws prohibiting contractual relations and monetary transactions with Japanese organised crime entities?

10. Why was ORIX introduced into this transaction as a "broker" some time in July 2012; when Carval Tokyo had already selected Kato Pleasure as their preferred buyer in April 2012?

11. What are the relationships between Mr Joe Koizumi and senior ORIX management? Did these relationships influence the payments made to ORIX for their role in this transaction?

Alchemy Japan FB Page

Cargill and ORIX in Yakuza Love Hotel Scandal

日本語訳 - 

NYT記事日本語訳 カーギル, カーバルの「ラブホテル」の売却を巡る対立

There's a youtube account which has some dramatic footage of what went down - 
http://www.youtube.com/user/katotomoyasuorix/videos?view=0

Further videos recording the interaction between Kato and ORIX staff, the Police and operational staff at the hotels -

http://i.youku.com/u/id_UNTMwNTc3NDgw

Not the first time Cargill has had relations with the yakuza.
http://www.usnews.com/usnews/biztech/articles/980413/archive_003691_2.htm

Cargill has had problems with Asian real estate investment in the past as well it seems-
Lawsuit Accuses Cargill of Bribery In Thai Venture
For those without access past the paywall -
www.citizenstrade.org/ctc/wp-content/uploads/2011/05/wsj_cargillbribery_may2004.pdf

 

Some background (Japanese) on the arrest of Kato's employees in 2008 for breaching laws regarding the sex business -   http://tokumei10.blogspot.com.au/2008/04/blog-post_15.html

KAWAGOE, Japan — Several years ago, an investment subsidiary of the agricultural giant Cargill bought a group of so-called love hotels, which typically rent rooms by the hour, including the neon-lit Hotel Shine in this sprawling Tokyo suburb.

 Though many industry analysts say love hotels in Japan are a good cash flow business — catering to young married couples living with family, as well as to philanderers, prostitutes and even penny-pinching tourists — the Cargill subsidiary was disappointed with its results. The unit, CarVal Investors, sold the 10 properties last week for about $20 million, far less than the $60 million it paid for them in 2004 and 2005.

It might have been just another fire sale. After all, many American funds invested in distressed properties at the height of Japan’s economic woes without success.

But CarVal is now under fire from former employees and business partners in part because of the tough tactics of the new owner: an affiliate of a Japanese developer, the Kato Pleasure Group. Immediately after closing the sale on Thursday, the buyer dispatched groups of black-suited men to force out hotel workers and even hotel guests, barricading the entrances with wooden fences.

About 300 hotel workers have been left in the lurch. They are planning a rally outside Cargill’s Tokyo offices this week to protest their treatment. Two executives who managed the hotels under contract during CarVal’s ownership have refused to leave and remain inside Hotel Shine — a standoff that has drawn the attention of the local police.

The most vocal opponent of the sale, however, is CarVal’s former partner, Alchemy, which had a contract to manage the hotels. In registered letters, filed in court, Alchemy contends that CarVal violated business agreements by selling the properties before their contract was up in October 2014.

In submissions to both the local Tokyo and Saitama Metropolitan Police, Alchemy also contends that Kato Pleasure has ties to Japan’s criminal underground and that CarVal ignored repeated warnings — backed up by outside research — not to go through with the sale.

“Our complaint to CarVal is that they ignored credible advice that they were dealing with a suspected organized crime entity,” said Miro Mijatovic, Alchemy’s chief executive.

CarVal says Alchemy’s accusations are baseless. Kato Pleasure also denies that it has criminal links, but it provided little response to questions posed to a spokesman at its Tokyo headquarters and to company representatives at Hotel Shine. The new owner of the hotels is Plus Ten Mind, a company affiliated with Kato Pleasure that shares the same chief executive.

Ann Folkman, a managing director at CarVal, said there were sound reasons to do business in the hotels. “While leisure hotels may sound salacious, they are a legitimate and longstanding industry that caters to the privacy needs of young Japanese adults, who frequently live with their parents or in company-provided housing,” Ms. Folkman wrote in an e-mail. “As with many of the hotels we have invested in across the world, the investment strategy was to run a compliant business, create sufficient scale and operational regularity and then exit to a buyer who could see the value of the business.”

CarVal’s exit came shortly after 3 p.m. on Thursday, when groups of men who said they were affiliated with Kato Pleasure made a coordinated sweep of the hotels, forcing out the staff, emptying hotel rooms of frightened guests, putting up makeshift fences and changing the locks in preparation to install Kato’s own management and workers.

Takashi Hayashi, the chief executive of Urban Resorts, a unit of Alchemy contracted to run the hotels’ daily operations, who has refused to leave Hotel Shine, seemed shaken as he spoke to a reporter through a tall fence on Saturday. He was flanked by two men who he said worked for Kato Pleasure, who refused to speak to a reporter. Around the compound, six workers were putting the finishing touches on barricades at the hotel’s entrances.

“I’m fine,” Mr. Hayashi said. “I have no intention of leaving.”  

Ms. Folkman said CarVal had no involvement in the hotel sweeps. She suggested that Alchemy, which was hired in 2008 to manage the hotels, had encouraged the employees to remain to attract publicity. “We believe Alchemy’s dissatisfaction with the sale is motivating their behavior,” she said, “and we believe many of the claims they are making to The New York Times and others are wholly without merit.” She said that Alchemy was trying to protect its own business and that it had demanded 300 million yen ($3.9 million) to leave the hotels. The demand, she said, was “without any legal basis.” Alchemy, she said, has tried to disrupt the sale because it would like to buy the hotels.

 Mr. Mijatovic countered that Alchemy’s agreement with CarVal had two years remaining and that his company had sought the money to make up for fees lost because of the early termination.

CarVal, which became a wholly owned subsidiary of Cargill in 2006 and now has $9 billion under management, was one of the first American companies to buy portfolios of bad loans and distressed properties after Japan’s real estate collapse in 1990. Since then, investors ranging from Goldman Sachs to smaller vulture funds have paid fire-sale prices for properties.

Love hotels, while tricky to manage, are attractive to investors because of their stable, strong cash flow and high yields. At Hotel Shine, about 3,000 yen, or $38, buys 90 minutes in a bland room dominated by a king-size bed. According to Leisure hotel, a trade publication, the industry has sales of 2 trillion to 3 trillion yen, or $38 billion, a year.

But in recent years, the hotels have attracted the Japanese mafia, big players in the real estate market.

Mr. Mijatovic, Alchemy’s chief executive, said he had passed along a report that Kato had links to organized crime to CarVal and to law enforcement authorities. CarVal said the report, commissioned by Alchemy and prepared by Kroll Advisory Solutions, a global corporate investigations and risk consulting company, lacked credibility.

The report suggests that the Yamaguchi-gumi, Japan’s largest crime syndicate, has made a direct investment of 30 million yen in Kato Pleasure.

Mr. Mijatovic said his lawyers met Monday with the Tokyo Metropolitan Police to discuss information about Kato. Police officials declined to comment on whether they had held such a meeting.

Japan has recently strengthened its laws against doing business with organized crime. The United States Treasury has banned transactions between Americans and Yamaguchi-gumi.

The Kroll report also says Kato, a big company in the love hotel industry, is known for poor working conditions, including overtime work without pay. Takeshi Okubo, a 57-year-old cleaner at a hotel operated by Kato Pleasure in Osaka and a member of a local union, said labor violations were rampant, including unpaid overtime.

Ms. Folkman said the Kroll report and Alchemy had misrepresented Kato Pleasure’s business. CarVal’s legal team found the Kroll memo “vague and filled with innuendo,” she wrote.

She noted that Orix, a major financial services company in Japan, had brokered the sale. CarVal conducted its own research on Kato, she added, and concluded that it was a large, respected hospitality provider in Japan. Kroll declined to comment.

A separate, independent report by Teikoku Databank, a well-known credit research firm, previously cast doubt on Kato Pleasure’s business. The report, dated October 2011, said Kato Pleasure had an account with one small credit union in Osaka but appeared to have none at a major Japanese financial organization. That is generally a rarity for an established business in Japan and can be one sign of mafia ties, according to Hitoshi Suzuki, a lawyer who heads the anti-organized crime committee of the Daiichi Tokyo Bar Association. He cautioned that he was not familiar with the specifics of Kato Pleasure’s operations.

The report said Kato Pleasure had booked an operating loss of 9.2 million yen, or $118,000 in the early months of 2011. As a credit rating, the firm gave Kato Pleasure a failing grade of 39 points out of a possible 100.

An official at Kato Pleasure’s headquarters in Tokyo, who identified himself only as Kawamoto, said on Monday that the company had “absolutely no links” with the Japanese mafia. He called the sale of the hotels “entirely valid” and said it intended to proceed “without a fuss.” When a reporter tried to ask more questions, he hung up. Further calls to the company’s main number went unanswered on Monday evening.

Katsuyuki Suezumi, an official in Osaka at the leisure hotels department of Orix, which brokered the sale, said he was not authorized to comment on the deal. A list of questions sent to Orix headquarters in Tokyo was not answered on Monday. 

http://www.nytimes.com/2012/10/02/business/global/conflict-in-cargill-sale-of-love-hotel-in-japan.html?ref=business