Japan fundraising: Getting bigger

Pan-regional private equity firms buying assets from single-country managers is an increasingly well-trodden path in Asia: once an asset reaches a certain size or business scope, a larger GP is usually best-positioned to take it to the next level. Japan recently saw a deal go in the other direction as CVC Capital Partners agreed to sell Hitowa Holdings to Polaris Private Equity.

If the reported fund size is accurate, and Polaris really will pay more than JPY50 billion ($455 billion) for the asset, it would likely require a sizeable portion of co-investment given the GP closed its fourth fund at JPY75 billion in 2017. That vehicle was nearly twice the size of its 2012 vintage predecessor, but Polaris is now said to be planning an even larger step-up for Fund V, with a target of around $1.5 billion (JPY166 billion). Transactions like Hitowa might no longer be so unusual.

Perhaps in hindsight, the market got a taste of what was to come last year when Japan Industrial Partners (JIP) closed its fifth fund at JPY148.5 billion, including JPY46.2 billion for a co-investment vehicle. The GP’s rationale for scaling up from JPY67.4 billion raised for the previous fund was that it needed additional firepower to participate in Japan’s emerging corporate carve-out opportunity. 

Private equity investment in the country hit $11.4 billion in 2016 and $24.9 billion in 2017, primarily due to a handful of carve-outs completed by global and pan-regional firms. The combined total for that two-year period is more than for the five years preceding it.

In 2018, however, the amount of capital deployed slumped to $4.4 billion as the billion-dollar-plus deals dried up. Even the middle market appears to have been slower than in recent years. AVCJ Research has records of 64 buyouts, down from approximately 80 in each of 2016 and 2017. Most of these were sub-$100 million deals, but it is difficult to offer a more detailed categorization because valuations are seldom disclosed.

Polaris and JIP are routinely described as exceptional among Japanese mid-market GPs. The former is known for bidding aggressively on underperforming assets where there is the potential for revitalization and the latter is a carve-out specialist. Transactions involving corporates with unwanted subsidiaries are a common occurrence in their deal flow (Polaris’ three announced deals from 2018 all fit this profile), while most domestic counterparts concentrate on succession planning. As a result, perhaps the increases in fund size are more easily justified.

At the same time, around this time last year AVCJ was hearing accounts from fund managers and service providers about competition intensifying throughout the middle market, pushing up valuations. This inevitably drew attention to the amount of capital that had been raised for deployment in the current cycle. Notably, Japan-focused buyout funds received more than $2.5 billion in commitments in 2017 – the most since before the global financial crisis – as nine middle-market managers achieved final closes. 

It is worth watching how quickly that group of managers returns to market, how much they seek to raise, and how they map out the investment opportunity. Renewed interest in private equity from domestic investors allowed almost all of them to beat their targets and one or two succeeded in doubling their fund size on the previous vintage. Since then, some have deployed their capital rapidly, while others have struggled.

The underlying fundamentals that shape Japanese private equity are unchanged – take your pick from an aging population, corporates refocusing on their core businesses, and company owners that are more willing to do business with financial sponsors. But 2018 served as a reminder that it is a challenging market in which to operate.

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• Topics
• North Asia
• Fundraising
• Buyout
• GPs
• Japan
• Polaris Capital
• Japan Industrial Partners