To describe recent times as uncertain would be something of an understatement, but Japanese private equity firms are confident that the industry will build on its recent strength despite any market downturn. Here are five reasons to be optimistic that private equity won’t be derailed by recent events.
1. An inbuilt resilience
Jun Tsusaka, founding partner of NSSK, one of the leading Japanese GPs, argues there are cultural reasons for optimism that Japan can thrive in the face of adversity.
“The interesting thing about Japan is that it has often been compared (sarcastically to some extent) to the Galápagos Islands (no offence intended). Basically, very much an island nation with a large domestic economy, unique and distinct culture and heritage and seemingly never changing.
“In booming global markets, Japan gets left behind the leaders and innovators. In turbulent times, it finds a way to not only survive, but thrive. This has been proven through the 11 March, 2011 tsunami and earthquake as an example.
“We will see some winners coming out of Japan and the carnage to be manageable in light of the strong domestic economy and abundant money supply.”
2. There is strength in diversity
It’s a similar message of cautious optimism from Koji Sasaki, president of T Capital Partners. “I’ve noticed that some of our portfolio companies, contradictorily enough, are increasing sales due to the panic. One is manufacturing chilled desserts sold at convenience stores. Since schools are closed and children spend longer time at home, demand for snacks is increasing.
“The industry in daily essentials, including foods can be regarded as defensive. This is not a coincidence, but rather the result of our investment policy to diversify risks.”
While you can’t diversify away from all risk, “it is our hope to maintain and maximise neutrality from many risk factors, as a whole portfolio”, he says.
3. PE is in it for the long term …
For T Capital Partners’ Sasaki, PE funds have an advantage at times like this because they take a longer term view than the stock market.
“Therefore, even today affected by the panic, we will look carefully at the industry as part of a long-term strategy, and may be able to make new investment or bolt-on acquisitions easily, ” he says.
That’s a view echoed across Japanese GPs who have persuaded owners that buyouts are beneficial.
“Before private equity funds arrived on the scene in Japan, ageing business owners faced two extreme choices: one to keep their business, or to sell it to someone else for good through a 100 percent exit or IPO,” says J-STAR partner Tatsuya Yumoto. “Today, funds offer a hybrid option of allowing the entrepreneur or founder to retain a stake in the business while receiving a capital contribution from a larger player like ourselves. Younger entrepreneurs are looking to make better use of external capital to propel their businesses. These people are good at getting a business off the ground … but whether they can keep it growing … that’s a different question. Increasingly, they recognise that they need external support.”
4. … and has proved its credentials
And while there may be short-term fallout from the covid-19 crisis, it’s worth remembering just how far the private equity industry has come since the 1990s when buyout firms were regarded as little more than “locusts or vultures” taking advantage of companies in difficult situations. “It was a challenge to persuade companies to get comfortable with the idea of working with us. It was hard to get an audience with founder-owners – who still make up a significant proportion of the investment opportunity – and corporate parents to work on carve-outs,” says Taisuke Sasanuma, representative partner at Advantage Partners, which has three decades experience investing in Japan.
“Over our 20-year plus history, the market has come a long way. There are now dozens of successful investment examples, where GPs have acted as very responsible business stewards putting companies on a more competitive and sustainable growth trajectory and adding value not only to the businesses but to the economy more generally.”
5. Japan is seeing growing interest from overseas managers
Growth in the Japanese private equity market has attracted an influx of the global private firms in recent years, including Apollo Global Management which opened an office in 2018, joining the likes of long-time Japan players Bain Capital, KKR and Carlyle.
Senior executives at these firms remain optimistic about Japan’s potential, despite any covid-19 fallout.
“Japanese companies have significant potential to expand into global markets,” says Hiro Hirano, partner and co-head of private equity for KKR Asia-Pacific and CEO of KKR Japan. “That’s an attractive opportunity for global private equity firms like us as we can support companies in achieving growth and global expansion.
“In addition, many terrific companies have over-diversified across industries over the years and are now looking to spin off businesses that, while profitable, do not advance their core strategies. Here, we see great scope for assisting with corporate carve-outs and restructuring where there are stable, defensive characteristics and strong growth opportunities in the current market environment.”