Last October, the yen fell to its weakest point against the US dollar since the 1990s. While it has broadly begun to recover, the currency’s depreciation has had an impact on some Japanese institutions’ ability to invest in private equity funds, especially US dollar-denominated vehicles. Some LPs have had to reduce ticket sizes or the number of cheques they write, and have thus become more selective about which funds they back.

“Investors have to become more selective in terms of which GP they want to re-up with,” Miho Hosoya, a senior consultant at Mercer, tells Private Equity International. “Of course, some investors may have reduced the average ticket sizes, but at the same time I think most investors are trying to be more selective in terms of the tickets that they invest.”

At the same time, some market participants point to the weaker yen as one of the reasons why Japanese companies have become increasingly attractive targets for international investment. Indeed, US PE and venture capital M&A activity in Japan totalled $13 billion in 2022, up from $8 billion in 2021, according to data from S&P Global Market Intelligence.

The exchange rate is just one of the drivers behind dealmaking activity in the Japanese PE market, which a growing bench of local and international managers are looking to tap. This has been buoyed in particular by corporate carve-out and succession-related transactions, along with increasing recognition that private equity is strategically well placed to build businesses and help them navigate through more testing environments.

Add to that the many businesses in Japan that have been under managed and have lacked investment, and there are plenty of “hidden gems” in corporate portfolios, as Tatsuya Ochi, head of Partners Group’s private equity direct investment business in Japan, tells us.

A rising number of alternative asset managers have also taken note of Japan’s promise and ramped up their presence in the country, highlighting its potential. Northleaf Capital Partners, for example, established an office in Tokyo at the end of last year – its second in Asia-Pacific. Jeff Pentland, a managing director and head of Asia-Pacific at the firm, told affiliate title Buyouts that its aim was to create “a more immediate and local connection” with new and existing LPs in the region. This year, Investcorp followed suit with its own Tokyo office launch.

According to figures from PwC, the private equity market accounts for around 3.2 percent of GDP in the US and 2.4 percent in Europe. In Japan, it represents just 0.2 percent of the country’s GDP. Evidence there’s room for growth – and then some.