Activists, growth equity among Japan deal drivers - AVCJ Forum

“MBOs [management buyouts], carve-outs, founder-backed succession-related deals, and secondaries are all growing, so it’s definitely an exciting and challenging task for a GP to try generate good returns,” said Jun Tsusaka, CEO and CIO of local mid-market buyout firm NSSK.

Tsusaka believes the country’s private equity ecosystem is now fully developed and this is laying the foundations for solid growth in investment opportunities.

Global private equity firms entering Japan has been a theme of recent years, while new local groups are emerging on almost a monthly basis. Japan’s megabanks, regional lenders, securities firms, and global investment banks appear to be ramping up their presence in private equity, while interest from foreign and domestic LPs has never been higher, he noted.

Shinichiro Kita, representative director and senior partner at Advantage Partners, echoed this view, although he questioned whether the market is overcrowded.

“There are more players in the market now definitely, compared with 1997 [when Advantage was founded], but it looks like each fund utilizes its expertise and size,” he noted. Rather than overcrowding, the bigger concerns are a shortage of talent and how to build a robust organization.

Ryo Fujii, a partner and head of Japan at Permira, pointed to potential upside in the large-cap growth equity segment specifically. This segment has seen rapid expansion globally and Japan is trailing, he noted. Permira is active in growth equity and expects global themes to be replicated in Japan.

“Young people [entrepreneurs] here appear to be increasingly keen on the segment. [They want to] advance into overseas markets and they need private equity funding to help them achieve this end. I believe large-size private growth equity has the most growth potential over the next three to five years,” Fujii said.

Activist investors have become more prevalent in Japan, targeting perceived inefficiencies in listed companies, which in some cases leads to divestments or privatizations. Yuichi Hiromoto, president and CEO of Japan Industrial Solutions, noted that many institutional investors sympathize with the views of activists, making them “important players to activate Japan’s overall capital markets.”

According to Advantage’s Kita, these investors bring “a certain sense of tension” by driving companies to improve corporate governance and efficiency. “If the markets develop in an effective way, that is also good for us,” he said. While unsure if activists have directly contributed to companies pursuing privatizations, Kita sees a role for private equity in these processes.

Hiromoto of JIS would like to see more interaction between public and private markets in Japan. A restructuring of the Tokyo Stock Exchange – whereby the current four bourses will be consolidated into three in an effort to attract more foreign investors – could play into this.

Many companies are trying to retain their first-tier status by transferring to the new TSE Prime Market, and it is questionable whether those that fail should remain listed. In the US, private equity-backed companies outnumber listed companies by 10,000 to 4,200, but in Japan the situation is reversed. "We hope activists can help push Japanese firms to follow US trends," Hiromoto said.

Meanwhile, in the middle market, the increasing formalization of sale processes, leading to more auctions, has contributed to rising valuations. Industry participants noted they are under pressure to generate proprietary deal flow by emphasizing their value creation capabilities.

This has resulted in private equity firms pursuing specific themes. Kita said that digitalization and ESG are focal points for Advantage, and several other managers made similar observations.

Masamichi Yoshizawa, a representative director at North Asia buyout firm The Longreach Group highlighted opportunities involving mature companies that can benefit from being carbon-free, turning to clean energy sources, and embracing digitalization. CLSA Capital Partners (CLSA CP) is eyeing businesses where growth is driven by digitalization-enabled lifestyle changes.

Targets are often led by founders in their 30s and 40s, who are looking for partners that can help drive expansion ahead of an IPO. These founders are not selling 100%, so they choose private equity sponsors based on chemistry, track record, and strategy, rather than focusing on price, said Megumi Kiyozuka, president of CLSA CP.

“It is more like a joint venture investment between the founder and us. Approximately half our current portfolio companies fall into this category,” Kiyozuka added.

Bolt-on acquisitions remain an area in which private equity firms can distinguish themselves, leveraging their industry knowledge, M&A experience, and professional networks. J-Star, for example, has completed 46 platform investments and more than 60 bolt-ons in the past 15 years.

Unison Capital is seeking consolidation opportunities in the healthcare sector specifically, having established dedicated platforms. Tsutomu Kunisawa, a partner at the private equity firm, noted that top players in different sub-sectors of healthcare usually have a market share of only 1-2%, which means there are plenty of M&A targets among the smaller players.

Kunisawa added that similar phenomena are apparent in food wholesale and agricultural materials, which have historically received government protection.

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• Topics
• North Asia
• Buyouts
• Japan
• AVCJ Events
• NSSK
• Unison Capital
• Advantage Partners
• Permira Advisers
• Japan Industrial Solutions (JIS)
• J-Star
• CLSA Capital Partners
• The Longreach Group Limited
• activist investor