Japan: Seven key trends

A surge in both fundraising and deal volume is being hailed as a ‘golden era’ for Japan’s private equity industry.


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After a banner year in 2017 amid a huge increase in fundraising and record deal volume, there is a powerful sense that Japan really has come of age as a private equity market. The causes are many and varied: demographic shifts, a buzzing mid-market scene, corporate carve-outs at the large end of the market and the big domestic investors such as Japan Post Bank opening up their own units to invest in private equity, to name but a few.

Foreign investors such as KKR are also aggressively targeting Japan. The country is one of the main focuses of the biggest-ever Asia fund, the $9.3 billion KKR Asian Fund III which closed in June 2017, and last year saw a consortium led by Bain Capital agree to buy Toshiba’s memory chip business for $18 billion in what would be Japan’s largest private equity deal in a decade.

It comes as no surprise that leading industry figures such as Jun Tsusaka, managing partner and co-founder of Tokyo-based private equity firm NSSK, are talking of a new ‘golden era’ for the nation’s buyout industry. But what are the key trends? Here are seven major forces driving the Japanese private equity market, according to market participants.

1. Fundraising is buoyant amid growing LP interest

Funds raised by Japan-focused private equity firms all closed on or above target in 2017, owing to increased investor appetite and realisations. Twelve funds closed in the last year, amassing $4.7 billion among them, dwarfing $300 million raised in 2016, according to PEI data.

Buyout funds made up the majority of the funds closed by Japan-focused managers in 2017. Such funds also raised the largest proportion of capital (94 percent) in the period.

NSSK raised approximately ¥60 billion ($532 million; €453 million) in October, surpassing its $500 million original target, supported by institutional LPs from North America, Europe and Asia, a first for a mostly Japanese LP-backed manager. Advantage Partners closed its fifth flagship fund on its ¥60 billion hard-cap in May, while J-STAR smashed its $270 million target for its third fund in April 2017.

Tokio Marine Capital, CLSA Capital Partners and Integral Corporation, among others, also achieved final closes in the past year totalling more than $1.5 billion of investor commitments, PEI data show.

2. Deal volume is racing ahead

Japan-focused private equity firms won over more targets in 2017 as corporate divestitures continued across all segments.

Last year was the biggest on record in terms of domestic deal value since 2013 – a total of $10.7 billion worth of deals across 447 transactions were completed, a more than threefold increase from 2016’s $3.3 billion, according to data from S&P Global Market Intelligence. This excludes the $18 billion Bain Capital/Toshiba Memory Corporation sale, which has yet to complete.

Transactions included KKR’s $3.3 billion acquisition of Calsonic Kansei, Bain Capital Private Equity’s $1.2 billion purchase of Asatsu-DK and MBK Partners’ $1.2 billion takeover of Accordia Golf. Key drivers for deals above ¥25 billion ($235 million; $190 million) were improving corporate governance and a focus on return on equity.

Meanwhile outbound deals made by Japanese private equity firms also saw an uptick in activity. There were 216 deals totalling $11.8 billion completed in 2017, compared with 169 deals worth about $8.1 billion in the previous year.

3. Consumer and industrials led the way

Last year saw a marked acceleration of deal activity in the consumer, industrials, information technology and healthcare sectors. As of end December, about 60 percent or $6.3 billion of all private equity investments in Japan occurred in the consumer discretionary sector. Industrials has overtaken information technology as the second most popular sector for private equity investors in Japan, accounting for approximately 20 percent or $2.2 billion of all activity. Meanwhile transactions in IT companies totalled $1.2 billion and healthcare $589 million.

4. Competition in the $1bn-plus deal market is heating up

Dealflow is expected to remain healthy but funds will have to compete hard for assets, says Jim Verbeeten, Tokyo-based partner at Bain & Company.

At the large end of the spectrum, where the supply of assets is constrained, the contest is expected to be particularly fierce. “At $500 million there are fewer succession opportunities and you are starting to look at corporate divestitures, secondary transactions and management buyouts,” says Verbeeten, adding that the number of divestitures should grow “a little bit”.

In the $1 billion-plus space, competition will be particularly strong. “There is a limited but known set of [private equity] competitors looking at all those transactions and vying for the same deals,” Verbeeten says.

The profile is specific. Funds targeting large assets would need to be at least $1 billion in size, as well as have a local presence in order to source and complete transactions, and execute post-acquisition, Verbeeten says.

Funds active in this space, which include the likes of Carlyle, Permira and KKR, are not only competing against each other but also cash-rich corporate buyers hunting for assets to push growth. Managers bidding on those assets “will need to be willing to pay up and have the confidence that they can improve these companies significantly, whether through revenue growth or margin improvement, to make these companies worth what they paid for them”, Verbeeten says.

5. Japanese LPs are showing more interest

Japanese mid-market private equity firm Advantage Partners, which closed its fifth Japan buyout fund in May, noted the strong appetite of Japanese LPs for private equity, especially regional banks.

“We’ve seen that with the recent fundraising activity in Japan, some of the regional banks are getting into private equity investing for the first time. Similarly, some of the insurers that had been active several years ago and had taken some time out of the market are now back and making new allocations,” Richard Folsom, co-founder of Advantage Partners, told PEI.

Sixty five percent of Fund V commitments came from Japanese LPs such as banks and financial institutions, while the remaining 35 percent came from international LPs including European insurers and Asia-based funds of funds whose capital is drawn from US-based pension funds and family offices.

By last summer, more than half (52 percent) of LPs expected “better opportunities in Japan over the next three years”, up from just 17 percent a year earlier, according to consulting firm Bain & Company’s Japan Private Equity Report 2017.

6. Strategic investors are buoying exit activity

Among those who have been highly acquisitive are large corporations in Japan, which have record amounts of cash on their balance sheet, as well as large regional GPs which could be potential buyers for deals.

Commenting on Advantage Partners’ own experience, Folsom said the firm’s biggest exit pattern has been to sell to Japanese strategic investors, which are looking to grow their businesses in areas that are more synergistic with their core focus.

He believes the penetration of private equity in Japan, which is just 5 percent of overall M&A activity, will grow further going forward. “That 5 percent could move to 10 percent in the future, which means the size of the pie for private equity could double, opening a lot of room for new players,” he says.

7. Mid-market businesses are tempting corporate talent

Senior executives once satisfied by the stability offered by a job at an established corporate are looking further down the scale for leadership roles at mid-market enterprises, including those owned by private equity.

“A younger generation of management talent is now maybe more open-minded and willing to move from a big corporate salary to be a chief executive or take a top position at a private equity-backed company,” says Chris Lerner, partner at placement agent Eaton Partners.

NSSK’s founder Jun Tsusaka says that when the GP set about strengthening the existing management team at portfolio company US Mart it was able to attract senior executives from blue-chip organisations to the indoor playground operator. “People are what drive change,” Tsusaka says. Of the company’s new chief financial officer, who joined from IHG ANA Hotels Group, he asks: “In a society that was thought to have limited human capital mobility, why would someone of that calibre join a small mid-market firm like US Mart?” The answer: “He saw the potential and the excitement and the chance to have immediate impact in a material way.”

He notes the business also hired a senior district manager from McDonald’s Japan.  The trend is set to continue. “Talent is easier to recruit for investee companies,” agrees John Cheuck, managing partner of Ant Global Partners. “In the past there has been some hesitation to join mid-market companies but that is changing.”