The Japan story seems the same every year: few deals, low returns and zero growth economy. However, 2012 began to see glimmers of change.
Instead of the expected one big annual buyout, Japan had three key transactions: Bain Capital’s $1.24 billion 50 percent buyout of Jupiter Shop Channel in June, Permira’s $1 billion buyout of sushi restaurant chain Akindo Sushiro in August, and The Carlyle Group’s $377 million buyout of Diversey Japan in October.
Corporate restructuring may encourage more buyout opportunities. “Japan valuations are reasonable at 11.5x, making way for a huge buyout deal flow,” according to one industry source.
David Gross-Loh, Bain Capital’s managing director of Japan, added: “The aggregate level of transaction value is getting back to 2009 levels. There’s more serious corporate restructuring going on after the  earthquake, which was a wake-up call. Corporates are moving in the direction of more US-style corporate management and that leads to opportunities.”
Even though Japan is one of the world’s largest economies, oddly it has very few large buyouts. Since 1998, 78 percent of buyout deals have been less than $125 million. Only 3 percent were over $1.2 billion, according to figures from advisory firm and fund of funds Brightrust PE Japan.
Buyouts aside, the small-cap buyout market has been vibrant, with deals under $125 million making up 77 percent of all private equity activity this year, figures from Brightrust show.
Gregory Hara, president of small cap buyout firm J-Star, said that Japan has about 2000 potential target companies for small-cap deals.
Most deals at this level, however, remain “under the radar screen” and proprietary, explained Michael Chae, managing director of alternative investments at PineBridge Investments Singapore.
On the exit side, most have been trade sales in 2012. Strategic buyers in Japan are often cash-rich companies willing to pay “aggressive prices” for the companies they see synergy with, according to Joji Takeuchi, chief executive and co-founder of Brightrust. J-Star, for example, reported a $50 million trade sale of Apo Plus Station for a 3x return in October.
Chae believes secondary sales are emerging and several took place in 2012 (see chart). Though only 12 percent of Japan’s exits were secondaries in 2012, according to Brightrust, Chae believes secondaries will continue in 2013 due to the market conditions in Japan.
“[Japan’s market] creates dynamics where funds need to invest and funds need to sell, and those two things are a catalyst for an increase in secondaries,” he explained.
IPO exits have faltered. Due to poor market conditions, Carlyle shelved planned public listings this year for portfolio companies AvanStrate, an LCD manufacturer, and ball bearing manufacturer Tsubaki Nakashima. Private equity-backed IPOs totalled $342 million across fifteen listings on Japan’s stock exchanges to 1 November, according to figures from Thomson Reuters – only slightly below the $360 million across nine IPOs in 2011. In India, by comparison, seven IPOs raised $1.3 billion.
In 2013, Japan opportunities will continue to emerge, only gradually.
Bain’s Loh points to a wave of businesses that went public in the 1980s and now have aging owners that don’t want to turn the business over to the family.
“[The businesses] may be just sitting there as a public traded company with no real liquidity. Those are opportunities for private equity to provide professional management.”