Sep 23, 2024 · 1h 0m · capital-allocators
Toby Rodes - Unlocking Value in Japan (EP.407)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Toby Rodes, co-founder of Kaname Capital, joins host Ted Seides to discuss the transformative corporate governance reforms, structural market dynamics, and deep value engagement strategies driving opportunities in small- and mid-cap Japanese equities.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 19.6% of the talking time here. How this is scored →
Ted as informed peer 2.8 Guest teaching 5.1 Guest disagreement 1.2 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 39:00 The porcupine company dismissal
Toby describes the stark resistance of entrenched owner-managers who explicitly warn outside investors away by acting like porcupines to protect inheritance tax valuations.
Hardest push from Ted ▶ 11:51 Questioning outsider investment in an insider marketTed presses Toby on how understanding Japanese capitalism as a closed insider system could possibly justify an outsider's investment strategy.
Biggest teaching moment ▶ 27:25 Explaining the reality of takeovers to METIToby recounts educating Japanese regulators and METI officials that friendly takeovers do not exist and that unsolicited bids are necessary for market efficiency.
Ted holds their own ▶ 19:19 Ted framing past governance failures against current claimsTed demonstrates keen industry knowledge by challenging the recurring 20-year narrative of Japanese corporate governance reform and asking why this cycle is genuinely different.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Family Roots and Early Interest in Japan | 2 | 4 | 1 | 0 | Ted opens with a simple biographical prompt asking Toby to trace his initial interest in Japan. Toby details his grandfather's trips to Japan in the late 1960s, learning Japanese over Russian, and working at Brookings in the early 1990s. | |
| Discovering Insider Capitalism via Kodak-Fujifilm | 2 | 5 | 1 | 0 | Ted asks about cultural impressions on capitalism, prompting Toby to explain the Kodak vs. Fujifilm trade dispute. Toby breaks down how insider developmental capitalism and government-corporate coordination kept foreign competitors out. | |
| Pioneering DCF Modeling as a Sell-Side Analyst | 3 | 5 | 1 | 1 | Ted probes why an outsider would invest in an insider-dominated market. Toby explains that market structures picked winners and recounts introducing the first discounted cash flow model to Japanese investors for NTT Docomo. | |
| Cultural Immersion and Transitioning from Sell Side to Buy Side | 2 | 4 | 1 | 0 | Ted asks about other insights from the sell side and the move to GMO. Toby shares that Japanese research was purely cheerleading, which led him to the buy side after trying to publish sell recommendations. | |
| Founding Kaname Capital and Sensing Corporate Governance Tailwinds | 3 | 5 | 1 | 0 | Ted asks about the founding of Kaname Capital and the modern case for Japan. Toby compares Japan's current mid-market landscape to early US private equity opportunities. | |
| Historical Governance Cycles and the First Wave of Activism | 3 | 6 | 2 | 0 | Ted notes that corporate governance reform has had several false starts over 20 years. Toby educates on the 2005 cycle, explaining how forced pension sales caused an asset fire sale and led Japanese firms to implement poison pills to prevent perceived looting by early foreign activists. | |
| Institutional Support for Reform: GPIF and Trust Banks | 3 | 6 | 1 | 0 | Ted asks how Toby knows insiders have recognized the status quo is broken. Toby explains how trust bank officials monitored his corporate meetings and later led governance shifts at GPIF, ultimately encouraging his independent launch. | |
| Introducing the Market for Control and Unsolicited Bids | 3 | 6 | 2 | 0 | Ted asks about recent catalysts driving structural change. Toby details advising METI and Harvard Law School sessions, establishing that a functioning market requires unsolicited takeover bids to enforce capital discipline. | |
| Listing Dynamics: Japanese vs. US Equity Market Structure | 3 | 5 | 1 | 0 | Ted inquires about cultural changes and regulatory enforcement mechanisms behind the Stewardship Code. Toby explains peer pressure, name-and-shame lists from the TSE, and voting disclosures. | |
| Kaname Capital's Name and Core Philosophy | 2 | 4 | 1 | 0 | Ted transitions into Kaname Capital's strategy and philosophy. Toby explains the meaning of 'Kaname' (the linchpin of a folding fan) and recounts an early pivotal turnaround investment in Hitachi. | |
| Filtering Value Traps Through Kaname's Three-Factor Quality Screen | 3 | 5 | 1 | 0 | Ted asks how Kaname avoids value traps given widespread sub-book valuations. Toby lays out his three-factor quantitative screen: gross margin consistency, management rate of return (muscle vs. fat ROA), and incremental returns on CapEx. | |
| Fundamental Meetings: Identifying Aligned Partners vs. Inactive Porcupines | 3 | 6 | 2 | 0 | Ted asks how Toby translates quantitative results into qualitative validation during management meetings. Toby illustrates two contrasting archetypes: collaborative partners seeking advice versus hostile 'porcupine' founders using low valuations to minimize inheritance taxes. | |
| Portfolio Selection, Balance Sheet Constraints, and Japanese Disclosures | 3 | 5 | 1 | 0 | Ted asks about portfolio construction and balancing valuation against operational engagement. Toby discusses reading comprehensive Japanese-language regulatory filings and learning to concentrate capital from an equal-weight model into 15 high-conviction names. | |
| Portfolio Valuation Metrics, Long Holding Periods, and Privatization Prospects | 3 | 5 | 1 | 0 | Ted asks for specific portfolio valuation metrics and expected holding periods. Toby outlines a sub-4x EBITDA profile and explains why holding periods can extend indefinitely if privatization deals are pursued. | |
| Potential Pitfalls: Pushback Against Takeovers and National Champions | 3 | 5 | 2 | 0 | Ted asks Toby to run a pre-mortem on potential risks to the thesis. Toby references high-profile transactions like Seven & i Holdings and Nippon Steel, arguing pushback exists for national champions but middle-market targets remain accessible. | |
| Responding to Macro Shifts: Yen Fluctuations and Rate Normalization | 3 | 5 | 1 | 0 | Ted asks about macro variables including interest rates, the yen, and carry trades. Toby notes that normalized interest rates finally assign a cost to capital, which benefits disciplined allocators. | |
| The Tipping Point for Takeover Infrastructure in Japan | 3 | 5 | 1 | 0 | Ted asks when the excitement around Japanese corporate transformation becomes fully normalized. Toby emphasizes that the institutional backing for unsolicited takeover bids marks the first time investors can act directly without begging management. |
Statements from this episode (32)
Japan's 1989-1990 Bubble Was the First Emerging Market Bubble
“Japan and its. 1989, 1990 equity bubble was really the first emerging market bubble. That was our argument. You had a mispriced currency and poorly sterilized forex reserves pouring into that economy and no one wanted to hear it.”
Japanese Capitalism Is Fundamentally Designed for Insiders
“Japanese capitalism is fundamentally different. It is designed for insiders. It is designed to benchmark domestic products against foreign products, figure out how to keep foreign products out, how to keep foreign capital out, How to keep things uniquely Japan…”
Sell-Side Research in Japan Functions Solely as a Cheerleader
“I tried to write sell notes, and that's when I learned that the role of research in Japan Is to be a cheerleader, nothing more, nothing less. That people didn't want your opinion, they wanted stocks to go up.”
Japan's Market Slumber Created Arbitrage Opportunities in Corporate Governance
“I saw on the horizon that Japan was finally waking up from a thirty-year slumber, that a governance breeze was blowing, and that true to form, what Japan didn't understand, and that I could arbitrage into this market, was accountability and governance.”
Japan's Middle Market Is the Largest Pool of Cheap, High-Quality Businesses
“Well, I submit to you today that that biggest pool of high quality businesses on low multiples, great entry points, exists in Japan in the middle markets. It's basically a US private equity playbook that exists for weird quirks of how the Japanese financial sy…”
Japan Routed 20% of GDP Through Banks in 1997-2003 Cleanup
“20% of Japan's GDP was run through the Japanese banking system between 1997 and 2003.”
Japan Adopted Poison Pills to Block Mid-2000s Activist Asset Stripping
“So out of this came a spade of poison pills, and Japan circled the wagons and shut down governance reform to basically prevent the looting and the asset stripping of a Japan that was finding itself undervalued at a very weak point in its recovery from the prev…”
Trust Bank Stewards at GPIF Drove Japan's Corporate Governance Upgrades
“A lot of these stewards of the companies, primarily from Sumitomo Mitsui Trust Bank, ended up becoming the insiders in the GPIF, the Government Pension Investment Fund in Japan. These guys were the drivers of the governance upgrade in Japan.”
GPIF Relied on Foreign Investors to Break Domestic Financial Conflicts
“It's GPIF that needs equities to perform to deliver on their pension obligations. So they realized that all of these complex relationships and conflicts in the Japanese financial services market meant that only outsiders could come and constructively cut some …”
Corporate Governance Fails Without the Threat of Unsolicited Bids
“Without a market for control, everything is fine words without fine deeds. Until a management team suffers an unsolicited bid from someone who will run the assets better, you won't get the type of change you're looking for.”
Japanese Listed Companies Doubled From 2,000 to 4,000 Over 20 Years
“In Japan, we had the same 4000 listed companies, but we got there from 2000. That over the last same 20 years, we've added a lot of people during a period of a negative equity risk premium that were told that they could be a listed company with no strings atta…”
1,000 Japanese Public Companies Will Likely Exit Within 10 Years
“And I would say over the next 10 years, a thousand of the 4000 listed companies are likely to be exited in one way or another.”
Foreign Managers Backed by US Endowments Drove Japan's Stewardship Code
“It was really the emergence of the foreign manager with strong research capabilities, largely backed by U.S. University endowments that led the ultimate upgrade and the transmission of the stewardship code into reality.”
Japanese Domestic Institutions Are Following Activist Leads on Proxy Voting
“And what we found is where a lot of these outside firms have pushed, domestic institutions are following. So this is why this time is different. We're seeing very constructive voting finally coming from the domestic investing complex.”
Tokyo Stock Exchange Publicly Shames Companies Failing Cost-of-Capital Disclosures
“It takes the TSE to literally publish a list of companies that are not publishing a cost of capital and proof that the management team is managing the business with a cost of capital mindset.”
Half of Listed Japanese Companies Still Trade Below Book Value
“By most counts, still half of listed Japan trades at less than one time priced a book.”
Roughly 3,000 Japanese Public Companies Have Zero Analyst Coverage
“By our analysis, still roughly 60, 70% of listed Japan, roughly 3000 companies remain totally uncovered by the street.”
300 High-Quality Japanese Companies Trade Under 5.5x EBITDA
“Then we just ask that we're able to get those stocks on less than five and a half times EBITDA, And lo and behold, there are still 300 of these companies in Japan.”
Japanese Family Firms Suppress Valuations to Reduce Inheritance Taxes
“Being listed and managing it with cash on the balance sheet is our way of handing the company off to the next generation. And if we can do that at .6 price to book, we save 40 cents on the dollar in terms of the inheritance tax.”
Kaname Capital Files Derivative Lawsuits Against Boards Over Insider Self-Dealing
“We exercise all of our rights as shareholders. We bring shareholder proposals. We bring derivative lawsuits against the board in cases of obvious self-dealing.”
Hardline Legal Activism Builds Credibility for Friendly Shareholder Partnerships
“And what we find is that these two strands of our strategy are complementary, that in both instances were principle-based, that we're looking for properly functioning boards to deliver companies composed of the highest return assets with the lowest cost of cap…”
Japanese Corporate Disclosure Is Great if Read in Japanese
“People accuse Japanese companies of having awful disclosure, and it's true. It's awful disclosure in English. It's great disclosure if you read Japanese.”
Japanese Quality-Value Equities Have Historically Compounded at 12%
“Japan has shown that it compounds at about 12%.”
Kaname's Top Holdings Trade at 3.5x EBITDA and 9x Earnings
“We're still with 50% of our weight, sub four times EBITDA, about three and a half times EBITDA, nine times earnings, three percent dividend yield.”
Japan Finally Has a Viable Market for Corporate Control
“One of our main really headlines for why this time is different in Japan is there is a market for control.”
Japan Will Not Retreat From Openness to Corporate Takeovers
“We don't think that Japan is going to run and hide, but watch this. This is where the thesis is playing out and where the friction point is.”
Kaname Targets Companies Avoiding Japanese National Champion Protection Risks
“I would suggest that where we're operating though still offers another path and that the average size of our companies are distinctly middle market and nothing that we're bidding on or areas we're operating on is quote unquote essential and would fall under th…”
Japan Welcomes Takeovers of Chronic Value-Destroying Companies
“Japan isn't going to offer everything up for sale, but the bad capital allocators, the companies that have defaulted on their cost of equity, we're being told that that's game on.”
Rising Japanese Interest Rates Will Enforce Corporate Capital Discipline
“We think it's positive because what it does is it finally puts a price tag On the cost of debt, and it means that what was being offered for free, you're now going to have to pay for. And anytime you put a price tag on decision making, people start to act. So …”
Japanese Companies No Longer Benefit From Yen Weakening Past 140
“When the end went through one 40, Japanese companies started saying, you know, this is not good for us anymore. So they've already been signaling that they don't want the end to go to one 60. So they're prepared for even our round tripping back to the one fort…”