Destination: Japan

In search of dealflow and LP capital, private equity firms and professionals are heading east.

Can anything stop the imminent Japanese private equity party?

Domestic LPs are turning their attention to the asset class. The Government Pension Investment Fund, the world’s largest pension fund, recently appointed managers for its infrastructure and real estate mandates. Next up: private equity. Japan Post Bank, one of the country’s biggest institutional investors, is building its direct investment capability to make a run at some of the mid-cap and small-cap buyouts that were the preserve of GPs like Unison Capital, which is understood to be prepping its next Japan fund.

Fundraising for the country set new records in 2017. Aggregate capital raised by Japan-focused funds reached $4.7 billion, dwarfing the roughly $990 million raised in 2016, according to PEI data. As we revealed this week, Marunouchi Capital is set to hold an approximately ¥100 billion ($950 million; €770 million) final close on its latest fund in the next quarter.

Global firms have been expanding their Japan presence. Ardian opened an office in Tokyo last month and hired an ex-HarbourVest Partners principal to lead the effort. Placement firm Monument Group appointed a former Bain Capital Private Equity investor relations executive as a director in its Tokyo office. Meanwhile KKR, CVC Capital Partners, Blackstone and Partners Group all made substantial promotions or hires in the country in the last year.

Dealmaking opportunities in the country abound. A successful push for corporate governance reform has opened up deals for private equity buyers and we are experiencing a new era of Japanese mega-deals.

The country’s ageing demographic also offers potentially rich pickings for private equity. Succession-driven dealmaking is a key theme; more than 650 were recorded from 2012 to 2017, according to Bain & Co. However, deal sizes remain small, with most disclosed succession transactions under ¥1 billion ($9 million; €7 million) in value.

What’s more, the huge potential of business succession opportunities has not yet been unlocked. A government report estimates that the number of small business owners over 70 will rise to some 2.45 million in 2025, about half them without any successor. One industry source described it as “the biggest thing now in Japan”. Private equity is likely to be a beneficiary.

The Japan story is not one of unbridled optimism, however. As in other private equity markets, the availability of dry powder is a mounting concern.

Limited human capital is another concern for GPs and LPs, as both groups look to staff up and compete for investment professionals with private equity and international business experience. GPIF, for example, has added 10 investment professionals in the last year and is likely to add four more.

While some investment professionals view the latest rush to Japan as another false dawn (listen here to a recording of Hamilton Lane’s managing director and head of international Juan Delgado-Moreira on how he thinks the country will disappoint PE investors), many are positioning themselves for a bright future in the land of the rising sun.

For more analysis of the country’s private equity scene, keep an eye out for our upcoming Japan special.

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