Japan economics: The third arrow

In 2012, the event was held barely a fortnight after Permira bought sushi chain Akindo Sushiro from Unison Capital - grist for the mill to those keen on discussing trade sale exits, secondary buyouts and overseas expansion. And then last year's conference fell in June as investors were enjoying Prime Minister Shinzo Abe's reform policies and yet still figuring out the longer-term implications.

The 2014 forum should more or less coincide with Abe's formal presentation of a long-term growth plan. It is expected to include the structural reforms that comprise the third of his three arrows, the first two - addressing monetary and fiscal issues -already been released. Between them they are supposed to address Japan's three economic woes: slow growth, deflation and a dependence on deficit spending.

There are already signs as to what the growth plan will involve. A corporate tax cut was announced last week, and this week measures have been unveiled to get more foreigners and women into the workplace. Public pension funds are set to be reformed and a corporate governance code for listed companies will be introduced.

There have also been pledges to deregulate energy, health and infrastructure and double foreign investment.

PE investors speak of the double-edged sword of Abenomics, regarding arrows one and two. Macroeconomic tailwinds may encourage domestic companies to divest assets or they may retain businesses because performance is improving. Either way, the rise in public equities likely made private market valuations less appetizing and IPO exits all the more attractive.

PE-backed IPOs have already generated proceeds of $4.1 billion so far this year, more than twice last year's total. Exits reached $3.6 billion to mid-June, roughly half the 2013 figure, although trade sales have been noticeably slower, likely due to public market valuations.

Investment currently stands at $3.1 billion, compared to $5.9 billion in 2013. For all the talk of bigger deals in Japan, there have only been eight buyouts in excess of $300 million since the start of 2013. Only three of these were above $500 million.

Kazushige Kobayashi of Capital Dynamics and Soichi Sam Takata of Tokio Marine Asset Management, when asked about the importance of the third arrow for private equity, both stated that the impact would be indirect and a long time coming.

It is unclear whether deregulation and restructuring in certain sectors would lead to increased deal flow for PE firms operating in those areas. The resistance to change often found within domestic management teams would stifle the potential of such reforms almost regardless of government encouragement.

But Japan's broader economic revival is dependent on the third arrow hitting its targets, whether deregulation or wage hikes, and the fortunes of PE are inextricably tied to this. As Yoshihiko Miyauchi, CEO of Orix Corp, observed last year, "a failure in releasing the third arrow could turn Japan's honeymoon into divorce."

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• Topics
• North Asia
• Japan
• Economy