Japan PE growth sees impact and secondaries momentum

Competition heats up

Private equity firms active in the Japanese market have been busy. PE investment in Japan surged in 2021, with deal value reaching a record $28 billion, 138 percent higher than the 2016-2020 average, according to Bain & Company. It was also a strong year for divestments – exit value hit $16 billion, 123 percent higher than the average for 2016-2020.

The growth of private equity activity in the country has been accompanied by an increase in competition, not only for deals but also for talent. More international players have been eyeing opportunities in the market and recruiting senior executives to lead their operations. In October 2021, for example, EQT appointed Tetsuro Onitsuka as head of private equity for Japan. The former Japan Post Investment managing director has been tasked with building out the firm’s Tokyo-based team and exploring thematic investment opportunities in the region.

$28bn
PE deal value in Japan in 2021

Source: Bain & Company’s Asia-Pacific Private Equity Report 2022

There have also been high-profile hires on the LP side, with the Japan Science and Technology Agency’s new university endowment fund bringing onboard Yasuyuki Tomita – a former deputy general manager at Development Bank of Japan – as head of private equity in March. The endowment hopes to grow its small team so it has more internal resources to make direct fund investments, Tomita told Private Equity International in April.

The pool of “experienced people [is] running out in the Japanese PE market. I want to hire more, but I feel this is quite a challenge”, says Tomita. “The number of LP professionals is very limited in Japan. I have nearly 20 years’ experience in [private investments], but that’s quite rare.”

Finding individuals with private equity expertise and the language skills required to work in the Japanese market is posing a challenge for firms growing their presence in the country, particularly as private markets firms are competing not only with each other, but also with other industries. “If you are a banker, you could join a growing company that is planning to IPO as a chief financial officer or chief strategy officer, which means private equity is not necessarily the first option,” says Tokyo-based Peter Matsumoto, a principal in Korn Ferry’s global financial markets practice.

While younger generations are becoming more open to the opportunities that a career in private equity or venture capital can offer, firms will have to be cognisant of how attractive their brand and culture are for prospective recruits. As Matsumoto notes: “The private equity business is tough, so standing out as a progressive and flexible employer is important when it comes to attracting talent.”

Interest in GP-led deals begins to grow

While the growth of GP-led transactions has been one of the defining stories of the secondaries market over the last two years, Asia accounted for just 4 percent of 2021’s transaction volume by fund geography, per Evercore data. Secondaries activity in Japan has historically centred around LP sales, but there are signs that manager interest in sponsor-led deals is starting to rise.

In May, Japanese private equity firm J-STAR told PEI that it was exploring whether the GP-led secondaries market could help it to avoid overstepping concentration limits. “We’re considering several new tools and techniques to maximise the return for our investors, one of which is GP-led secondary transactions,” investor relations principal Kenta Shima said. “Another idea we are considering is a single-asset GP-led secondary to provide liquidity to younger vintage funds whose [distributed to paid in] isn’t that high yet. And at the same time for us, because we do lots of add-on acquisitions, we also have to be very careful about the concentration limit of each one.”

“Standing out as a progressive and flexible employer is important when it comes to attracting talent”

Peter Matsumoto
Korn Ferry

Meanwhile, Japanese fund of funds manager Alternative Investment Capital partnered with domestic secondaries and growth equity firm WM Partners last year to launch a jointly managed fund, Japan Private Equity Opportunity 2021. Although the fund will primarily target LP interests from domestic investors, it will have the flexibility to participate in GP-led transactions as well. Japan and Southeast Asia-focused secondaries firm Bee Alternatives also span out from Japanese buyout firm Ant Capital Partners last year.

While hurdles – such as concerns around buyside demand and access to the Japanese market – may need to be overcome for GP-led secondaries’ potential to be realised, managers’ rising interest in the strategy, and the fact that some LPs are already au fait with such processes, could provide some added impetus. “Some Japanese investors… have experienced GP-leds prior to covid-19 because they had invested in US funds,” explains Fumiki Otokuni, chief executive officer at Bee Alternatives, adding that “at this moment, GP-leds are growing rapidly”.

Impact prepares to go up a gear

In November, the Japan Impact-driven Financing Initiative launched with the backing of 21 financial institution signatories. The initiative aims to advance the impact investing ecosystem, and to facilitate the sharing of best practice among market participants.

Although there are Japan-focused impact funds – for example, Japanese PE firm NSSK has been active in the space since 2016 – generally, the country’s impact investing market is relatively nascent when compared with regions such as North America and Europe.

However, it appears that investors are gradually waking up to the opportunities that impact strategies can provide. According to a survey by the Japan Social Innovation and Investment Foundation, impact AUM in Japan grew by 2.5 times between 2020 and 2021 to reach ¥1.3 trillion ($10 billion; €9.4 billion).

“There is increasing growth in Japan both of dedicated impact funds and more holistic integration of impact considerations into broader investment practice,” Daniel Wiseman, head of Asia-Pacific policy at the UN Principles for Responsible Investment, tells PEI.