
Japan private equity: Heating up
Private equity is seeing more succession planning and corporate carve-out opportunities in Japan, but there is a risk that exuberance might turn irrational
Japanese private equity has been gradually bouncing back from the 2006-2007 leveraged buyout boom for a number of years. However, a recent upturn in investment activity and an improvement in LP sentiment suggests the industry has finally drawn a line under the fallout from that previous excess.
In 2006-2007, GPs deployed an astounding $29.4 billion in Japan. Most of the high-profile transactions from those vintages ended up struggling. There followed a period of restructuring and reflection. Some firms rebuilt their franchises; others reduced their fund sizes to reflect a more modest opportunity set; and still more exited the market completely.
Annual private equity investment didn’t surpass $10 billion until 2016. Similarly, capital raised for Japan-focused funds – which came within touching distance of $4 billion in 2008 – didn’t reach $2 billion until this year, and there are still more than six months to go.
The general spirit of bullishness is reflected in the most recent edition of Coller Capital’s private equity barometer: 41% of North American LPs, 45% of European LPs, and 71% of Asia Pacific LPs believe that recent changes in Japan’s business and economic environment will create more opportunities for PE over the next three years.
There are two threads the investment narrative. First, a generation of founder-owners are nearing retirement age and have no heir within their family to take over the business. Selling to private equity was once an unpalatable option, but GPs can point to a growing number of succession planning deals that have worked out favorably for all concerned.
Second, Japanese conglomerates are being pushed, by government policy and global economic reality, towards investing in their core business areas and divesting the non-core assets. Private equity firms have long prodded – diplomatically – at these gigantic entities in the hope of seeing pieces come free. Now their patience apparently is being rewarded.
Neither of these threads is new, but the message from mid-market country GPs to global buyout players is that activity is rising. Generally speaking, succession deals are responsible for the growth in deal volume and carve-outs drive increases in deal value. On both counts, there is every reason to believe that PE is only scratching the surface of a sizeable investment opportunity.
But it remains to be seen whether expectation is skipping ahead of reality. Pan-regional PE firms are looking to deploy more capital in Japan, having recognized the changing dynamics. Furthermore, the spike in fundraising suggests that mid-market GPs have more dry powder than ever before; in several cases, the increase in fund size on the previous vintage is well above 50%.
Deal flow requires careful cultivation in Japan; some of the investments being completed now have been in the works for years. Even though the marketing is opening up, there is a danger that GPs will in haste enter into transactions that might in other times be sensibly foregone.
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