Co-investing yet to gain traction in Japan

At the Private Equity International Japan roundtable, participants explained why this burgeoning market trend hasn’t taken off in the country.

As regular readers of Private Equity International’s pages will be all too aware, appetite among limited partners for co-investment opportunities has mushroomed in recent years. Ask any market participant about key industry trends, and co-investment is bound to be mentioned.

But thus far the private equity industry in Japan has remained impervious, according to industry experts who gathered in Tokyo recently for PEI’s Japan roundtable. The abundance of deals in the small to mid-cap bracket and the comparative lack of larger buyout deals means the opportunities simply aren’t there.

“Outside of Japan, LPs now are trying to really enjoy each ride after paying the entrance fee [commitment to funds] and entering Disneyland,” said Taisuke Sasanuma, representative partner at Japanese mid-market firm Advantage Partners.

“I’m sorry to say that this isn’t happening in Japan. The deal sizes are not big enough to provide frequent co-investment opportunities for LPs.”

Yasufumi Hirao, president and chief executive officer of fund of funds Alternative Investment Capital, agreed: “One reason why co-investments are not prevalent in Japan is that the deals are mostly below $50 million, so funds don’t need a co-investor.”

Apart from the relatively small deal size, deal sourcing is also a challenge. Japanese companies are slow to sell their businesses, limiting the size of the marketplace for private equity investment. While the country teems with small to medium-sized enterprises with world-class technology and the need to grow, cultural factors and massive conglomerates still thwart transactions.

However, CLSA Capital’s managing partner Megumi Kiyozuka said global LPs do seek to impose co-investment rights alongside fund commitments. “When I receive a commitment from a foreign investor, especially funds of funds, I think co-investment rights are almost a must, a standard requirement,” he said.

“When it comes to Japanese co-investments, it is not that easy for them because of the language barrier, the quick turnaround of documents and so forth. It’s getting common and it’s becoming the preferred practice globally, but in Japan it’s not that easy to do.”

Look out for the full Japan roundtable, featuring Alternative Investment Capital, Ant Capital Partners, CLSA Capital Partners Japan, Tokio Marine Capital and Advantage Partners in the April issue of Private Equity International.