Japan Special: Why global firms are marching on Japan

Overseas managers, lured by the promise of corporate divestitures, face an uphill climb in breaking into Japan.

Japan is becoming the destination of choice for global private equity firms. Apollo Global Management became the latest blue-chip to plant its flag in Tokyo with a new office late in 2018, following a similar move by London’s Pantheon several months prior. Scandinavian giant EQT is also mulling an outpost in the city.

The Carlyle Group – which has been in Japan for almost two decades – KKR and Blackstone have also been staffing up their existing deal and advisory teams in Japan.

“When we started here in 2000, there was almost no private equity industry besides a few local players,” Kazuhiro Yamada, head of Carlyle Japan, tells Private Equity International. “In the last two to three years, the private equity industry here has really evolved.”


Growing interest from mega-firms is due in part to the proliferation of mega-deal opportunities.

Traditionally, almost all companies in Japan hold other companies’ shares in order to expand or maintain the business relationship – a remnant of traditional business relationships as well as part of anti-takeover measures against foreign companies post-Second World War. Japan’s recent Stewardship Code is now prompting some owners to focus more on their core businesses and to spin-off non-core segments, which can now be done tax-free. This has created attractive buyout opportunities for private equity firms.

These deals can involve big bucks. A Bain Capital-led consortium completed Japan’s largest private equity buyout in 2018 when it acquired Toshiba Corporation’s chipmaking unit, TMC, for $18 billion.

Carlyle, which has traditionally invested in Japanese mid-caps, is now looking at large corporate carve-out opportunities in addition to those within its original segment, Yamada says. The firm hired former Morgan Stanley managing director Tomofumi Matsuyama in December to focus on large technology and industrial spin-off opportunities.

Spin-off opportunities are “very competitive” and always involve auction processes, Yamada notes.

Corporate divestitures account for most of the large-deal segment of $200 million or more and the number of such deals in Japan fell to three in 2018 from eight a year earlier, according to Bain & Co’s Asia-Pacific Private Equity Report 2019. Fewer deals caused the average transaction value to drop to $67 million last year from $344 million in 2017, though the latter figure was warped by the Toshiba deal.

Bain & Co also attributed the decline to a lack of pressure on sellers to dispose of quality assets, with shareholders opting to improve their balance sheets through alternative means.


Breaking Japan is easier said than done for global players, who can be at a disadvantage to local firms with strong domestic relationships, cultural understanding and the same language.

“Japan is a tough market,” says David Gross-Loh, managing partner of Asia for Bain Capital, which has had a physical presence in Japan for more than a decade. “It takes years to build teams, relationships and credibility.”

Bain had to work with the Tokyo Stock Exchange; TMC’s customers; the government and the semiconductor industry in China, among others, to get its Toshiba deal over the line, Gross-Loh says. The firm also spent three years speaking to Hiroshi Hashimoto, founder of hot spring chain Oedo-Onsen, to help him understand its approach and culture before acquiring the business in 2015.

“Japanese firms have a home-field advantage today and in the mid-market segment a lack of familiarity or scepticism of foreign players may persist,” says Chris Lerner, head of Asia for placement agent Eaton Partners.

The majority of capital dedicated to Japan has been raised by domestic players in recent years. Managers collected $1.5 billion across five Japan-focused private equity funds last year and $5.5 billion across 16 funds in 2017, a five-year high, according to PEI data. Japan’s Marunouchi Capital, which is backed by Mitsubishi Corp and Bank of Tokyo-Mitsubishi UFJ, collected ¥94.3 billion ($848 million; €753 million) across two funds in 2018 – more than any other buyout firm.

Only one of the Japan funds closed last year was managed by a firm headquartered outside of the country: US-based Salesforce Ventures raised $100 million for the Salesforce Japan Trailblazer Fund, a venture capital vehicle, and Carlyle is the only global mega-firm to have raised a Japan fund. It is in the early stages of raising its fourth Japan buyout fund, for which it is expected to seek ¥200 billion, according to Bloomberg. The firm declined to comment on fundraising.

“We’ve seen a progression in locally owned Japanese firms raising capital to invest both domestically and abroad, but global firms setting up Japan funds is unusual and not something we see too often,” Lerner adds. “I don’t think we’ll see many other global firms setting up Japan dedicated funds – we’re more likely to see more talent setting up independent shops.”

Pan-Asian funds do have considerable firepower compared with smaller Japan funds. KKR collected $9.3 billion for its third Asia fund in 2017 and identified large Japanese carve-outs as an area of interest. The firm has five Japanese businesses in its portfolio, according to its website. London’s CVC Capital Partners is reportedly seeking $4 billion for its fifth pan-Asia fund and has completed four investments in Japan to date.


Local teams are crucial for international firms hoping to invest in Japan but building these can be tricky. “It took us some time to build up a local team, which we have relied on to forge relationships,” Gross-Loh recalls. Bain employs 21 staff in its Tokyo office, according to its website.

One obstacle for global firms is a limited number of potential candidates with private equity experience in Japan, Yamada adds. Bain & Co’s report also identifies recruitment and staff retention as a challenge in Japan.

“People working at Carlyle are being targeted by recruiters so it is important for me to spend time deciding how best to retain them,” he says, pointing to carry as one such incentive. Carlyle currently has 19 investment professionals in Japan. Four of its five managing directors have an average 14 years’ experience at the firm, with the fifth being the new appointment Matsuyama.

“We hire junior MBAs who are familiar with the Japanese culture and business and have experience working overseas, and we educate them about private equity internally. That’s the best way to keep staff and expand our resources.”