Japan’s business succession wave creates buying opportunities for J-STAR

Mid-market firm J-STAR has invested over $130m across a string of succession-led deals as more Japanese companies pass the reins to private equity managers.

Tokyo-based manager J-STAR has sealed three deals this week as Japan’s private equity market sees more opportunities arising from the country’s business succession issues.

J-STAR has invested over $130 million across three separate transactions in metal recycling company Harita Metal, online retailer Itty and fire hydrants manufacturer Yokoi Manufacturing.

“Business succession continues to be a major theme in our transactions as most owners of companies in Japan reach their senior years and are ready to hand over the reins of the business to new owners,” Gregory Hara, J-STAR chief executive and managing partner, told Private Equity International.

“However, we noticed a number of cases supporting second generation management chief executives by taking majority stakes. Generally speaking, any business model needs to be re-modelled or updated within 10 to 30 years,” Hara pointed out. “We have observed that second generation owners, who are often in their 30s to 40s, are very sensitive to our current low growth environment, which might not be understood by older generations who grew up in the bubble economy. This younger generation is looking to private equity not just for capital injection but also for market expansion and consolidation.”

Hara also noted that Harita and Yokoi are two examples of transactions in which the founder-owners retire and sell their shares to the fund, while succeeding management pick up minority shareholding of between 20 percent and 30 percent.

More than 650 succession deals were recorded from 2012 to 2017, according to Bain & Company’s latest Japan private equity report. However, deal sizes remain small, with most disclosed succession deals under ¥1 billion ($9 million; €7 million) in value. Notwithstanding the small deal size, Bain expects private equity to capture more opportunities in this space as more companies face succession challenges. Fifty percent of company owners in Japan are over 60 years; the average age of company presidents has also risen, from 50 years in 2000 to 58 in 2015, Bain found.

Following the trio of succession-led deals, nearly 40 percent of the firm’s current fund, the 2017-vintage ¥33.25 billion J-STAR No.3, has now been deployed, a source with knowledge of the matter told PEI.