The sun is rising again for Japanese private equity

First, let's deal with the negatives. While the country's economy has improved dramatically since the natural disasters of March 2011 and remains the third-largest in the world, GDP numbers still point to a long-term gradual decline. Private equity fundraising is, if anything, even more depressing. Nine funds have raised a total of $253 million so far this year, well short of the $2.3 billion committed last year, not to mention the $7.7 billion in 2006, during private equity's heady days.

The numbers are certainly modest, but they don't fully reflect the changes taking place in the market. Foreign LPs, traditionally ignored by smaller independent domestic managers, accounted for a much larger share of capital committed in 2011 than is normally the case (bear in mind that Japan's large-cap GPs have until recently been absent from the fundraising scene).

For mid-market players, going overseas has become a matter of survival as domestic LPs stay on the sidelines, dissuaded from making further allocations to the asset class following the excesses - and subsequent losses - of the pre-global financial crisis period.

The days of the massive leveraged buyouts are long gone. In recent years, more attention has focused on the likes of Polaris Capital, Ant Capital and J-Star. These are veteran investors targeting small- to mid-size companies with a view to adding value through consolidating and globalizing businesses. There are some solid track records out there and it is to be hoped that international LPs will be sufficiently reassured to put money in places where they haven't trod before. However, the jury is still out and whispers we hear from the fundraising trail offer a mixed picture.

Activity is also picking up in the higher end of the market thanks for a number of secondary buyouts, such as Skylark and Bellsystem24, both acquired from their former private owners by Bain Capital, as well as Permira's recent $1 billion purchase of Akindo Sushiro, Japan's largest sushi chain, from Unison Capital.

Meanwhile, KKR's reported interest in acquiring chip maker Renesas suggests that there is also scope for large-scale restructuring transactions. It is worth noting that private equity lost out to strategic investors on a similar deal - Elpida Memory - so even if there is sustainable deal flow in this area, it doesn't necessarily mean more buyouts for financial players.

Finally, there is a potential silver lining to the dark clouds that hang over those trying to tempt capital from the clutches of Japanese LPs. The big game changer is whether or not the country's $3.4 trillion pension fund industry will start making allocations to private equity and other alternatives.

With an ageing population, the pension funds need to create alpha. As many of their US counterparts have already concluded, one of the best ways of doing this is to place more emphasis on higher risk investments like private equity where have historically outperformed other asset classes.
It is a big ask in a country where a 5% return is considered acceptable, but we live in hope.

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• Topics
• North Asia
• Buyouts
• Japan
• KKR
• Bain Capital Asia
• Polaris Principal Finance