Japan LBO returns are lagging – but for how long?

Japanese funds have generated a lower TVPI multiple than other developed markets, according to investment software firm eFront.

Returns from leveraged buyout funds in Japan are languishing behind those in other developed markets, according to research from investment software firm eFront.

Japanese LBO funds of all vintages had generated a 1.26x total-value-to-paid-in multiple as of the fourth quarter of last year, according the firm’s Private Equity Performance Overview. Around 70 percent of this value has been distributed in a form of cash back to investors, with the remainder comprising the net value of assets in their portfolios.

Western Europe was the standout market for LBO performance, with all vintages generating a 1.61x cash-on-cash return as of Q4 and around 74 percent of that value having been returned to investors. US LBO funds and developed Asia-Pacific markets generated a 1.56x and 1.48x TVPI respectively, with 75.3 percent and 81.6 percent of this distributed to LPs.

The relative immaturity of Japan’s LBO funds – having distributed the smallest proportion of their value – suggests there is still room to improve. Fundraising soared to $4.7 billion last year and dealflow hit record levels, leading some to believe the country is about to enter a “golden era” for private equity.

Prospectors could find a rich vein in Japan’s mid-market. Industry participants say the country’s preponderance of small- and medium-sized businesses are increasingly receptive to private equity approaches. At the same time, government pressure on businesses to improve corporate governance and their return on equity has already begun to spur the divestiture of cross-holdings and underperforming non-core assets.