Global firms seek a piece of Japan carve-out action

Japan is shaping up to be an attractive market for established global private equity players but a lack of large deals may pose a challenge to dealflow.

Swedish manager EQT is one of the latest entrants eyeing the market: the firm has plans to hire more Japanese for its investor relations team and is considering opening a Tokyo outpost, as Private Equity International reported.

Apollo Global Management is also reportedly hiring a team of dealmakers in preparation for a Tokyo office launch by year-end.

In Apollo’s case, the firm has been “eyeing the market” in the past 15 years and holding off on what to do in Japan, the chief executive of a Tokyo-based asset management company told PEI. The firm is understood to have hired Japanese investment professionals and looked at opportunities in the market from their Hong Kong office.

These large private equity shops may, however, face difficulties sourcing deals in Japan’s predominantly small to mid-cap market.

One Tokyo-based director of a global fund of funds noted that it was not easy for such large GPs to find deals in Japan. “The number of large deals is limited. And if the GP does not have a local team, they are not treated as a serious player,” the director said.

According to Bain & Company’s Japan Private Equity Report 2017, private equity deal volume in Japan reached an all-time high of $23.9 billion from January to September 2017. The figure includes Toshiba’s $18 billion deal, although that transaction was completed in May this year.

Last year’s deal activity dwarfs the $8.8 billion of deals recorded in 2016, despite far fewer transactions. Corporate divestitures of more than ¥100 billion ($880 million; €780 million) have been on an upward trend in recent years. However, a majority of transactions are still in the lower mid-market space of between ¥1 billion and ¥10 billion, according to the Bain report.

“The bottom line is there aren’t that many large private equity deals in Japan. Valuation is also high due to increased competition and the abundance of cheap debt,” the director noted.

KKR has long seen Japan as a key market, setting up its Tokyo office in 2006 and investing in Japanese companies including Intelligence, Panasonic Healthcare and Pioneer DJ. Last year the firm invested close to $6 billion across three mega deals in Japan. Bain Capital, meanwhile, is behind the consortium that backed the $18 billion Toshiba Memory Corporation takeover.

Carlyle has raised a total of ¥335.1 billion across three Japan buyout funds. Permira, one of Europe’s largest managers, has been in Tokyo since 2005. In addition, Blackstone, KKR and CVC have hired heads of Japan in the last two years.

Apollo, meanwhile, has hired Ryo Hata, a former Tokyo-based investment director at CVC Capital Partners. Hata joined Apollo’s Hong Kong office last year as director for Japan private equity, according to his LinkedIn profile. The firm has its mammoth $24.6 billion ninth flagship vehicle – the largest private equity fund ever raised – to invest. The firm joins KKR and Bain Capital as global firms that have been more active in Japan in recent months.

Hiroki Sugita, a partner in law firm Orrick’s Tokyo office, said “it’s getting more expensive – what used to be 6x a couple of years ago is now about 8x – but still comparatively cheaper than US assets.

“Because of the legal system and culture here, there are also less litigation associated with M&A. From that perspective, private equity shops could have certainty in closing large deals.”

Apollo approached US company Xerox Corporation in May for a potential takeover of its printer and copier business, amid a proposed merger with Japanese photography and imaging company Fujifilm, according to Reuters. Apollo’s offer comes at a time when corporate governance and shareholder activism are gaining momentum in Japan.

The firm declined to comment on the transaction and its activities in Japan.

Corporate divestitures and business succession are two of the favoured investment strategies, especially as the government puts pressure on businesses to improve corporate governance and return on equity. Restructuring in manufacturing, chemicals and auto parts companies shifting to electric vehicle production will provide investment opportunities, Sugita noted.

Industry consolidation and add-on acquisitions are other strategies private equity firms are keen to employ to increase value in their portfolio companies. KKR portfolio company auto components maker Calsonic Kansei in October acquired Fiat Chrysler Automobile’s subsidiary Magneti Marelli unit for €6.2 billion, according to a statement from the company.

“Investors are now more positive than in the past – more subsidiary divestments by large conglomerates means more opportunities in the large-cap space. This is what the global funds are expecting and hoping,” the asset management CEO said.