Japan buyouts: Large check limbo

The Nikkei 225 Index is up 34% on a 12-month basis. At the end of May, it surpassed the previous peak set at the height of the technology boom in 2000. Nearing the mid-point of 2015, private equity investors have deployed $1.9 billion in the country. This compares to $6.5 billion for 2014 as a whole. The average for the previous five years is $7.7 billion and approximately 450 deals.

In percentage terms, the drop-off in Japan is more severe than in any other major Asian market. Meanwhile, in Australia, where the S&P/ASX 200 Index has challenged pre-global financial crisis highs, PE investment is up year-on-year. Contrasting outcomes reached due to a common factor - the ability of large-ticket deals to move the needle in leverage buyout markets.

Not all deal values are disclosed, but AVCJ Research has records of six investments worth in excess of $100 million in Japan so far this year. They are led by Bain Capital's acquisition of span hotel operator Ooedo-Onsen for $423 million.

Australia has seen three deals of $1.4 billion or more, including the $6.2 billion acquisition of GE Capital's Australia and New Zealand consumer lending unit. Japan hasn't seen a $1 billion-plus deal since KKR bought a majority stake in Panasonic Healthcare in 2013.

Given there were 14 deals of $100 million or more in 2014 - and 11, 14 and 11 in the three years before that - the mid-market space is not discouraging. While valuations are a concern, industry participants say they can rely on a steady stream of opportunities involving companies that face succession planning issues or require support to achieve certain expansion goals.

Bain's Ooedo-Onsen investment was as succession-planning deal, but a fair portion of these larger transactions are carve-outs from domestic conglomerates. Eight of the 16 biggest deals announced since 2012 fall into this category. As the country's gargantuan conglomerates come under economic and political pressure to boost performance, private equity investors hope to see more divestments.

AlixPartners is also bullish, citing the 97% of respondents in its latest Asia-Pacific corporate restructuring and turnaround survey who expect increased activity in Japan as companies recognize the importance of timing in corporate reorganization.

For private equity firms that have raised ever-larger pan-regional funds, Japan is a key market. Alongside Australia, it is - for now, anyway - one of few destinations where it is possible to write large checks. They need Japan to deliver on divestments.

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• Topics
• Buyouts
• North Asia
• buyout
• Japan