Japan’s mid-market: Ready for take-off

Riding a wave of fundraising and dealmaking, the Japanese mid-market is gathering pace.


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The Japanese mid-market has reached a tipping point. With memories of some pre-financial crisis poor performance fading in light of a robust stream of recent realisations and domestic LPs clamouring to put capital to work locally, last year saw a wave of fundraising.

Chris Lerner

The local LP appetite is indicative of the industry’s evolution from an asset class perceived as “vulture investors”, to one founded on captive vehicles and big buyout funds, to one shifting focus to local managers.

“We’re seeing the emergence of strong institutional-quality, truly local funds,” says Chris Lerner, partner and head of Asia at placement agent Eaton Partners. The firm helped NSSK to raise its second vehicle, which closed in October, oversubscribed, on ¥60 billion ($570 million; €460 million). “When you look back – they’ve not been absent, but less prominent,” Lerner says.

More than a dozen Japan-focused funds reached final close in 2017 raising a combined total of more than $4.7 billion, according to PEI data. Managers across the mid-market spectrum have taken advantage of strengthening appetite to raise significantly larger vehicles. At the larger end, Tokio Marine Capital closed its fifth fund on ¥51.7 billion ($491 million; €399 million), exceeding its initial target and double the size of its ¥23 billion previous fund. In the lower mid-market, Ant Capital Partners closed the latest vehicle in its Catalyzer series on ¥34.2 billion, almost triple the size of the ¥13 billion raised for Catalyzer 4.

GPs now have track record. “A number of funds came to market primarily from the same GPs that have been active over the past five to 10 years,” says Richard Folsom, representative partner and co-founder of Tokyo-based Advantage Partners, which reached final close on its fifth vehicle on its ¥60 billion hard-cap in May. “The number of players has been consistent but the number of deals is rising.”

This is thanks to a preponderance of small and medium-sized businesses in Japan that industry participants say are increasingly receptive to private equity approaches. At the same time, government pressure on businesses to improve corporate governance and their return on equity has already begun to spur the divestiture of cross-holdings and underperforming non-core assets.

Jim Verbeeten

Deal value hit a record $10.7 billion in 2017 (not including the $18 billion Bain Capital/Toshiba Memory Corporation sale, completed early this year), according to data from S&P Global Market Intelligence. “There is good reason you can assume a similar level of dealflow this year that hopefully will translate into transactions,” says Jim Verbeeten, Tokyo-based partner at Bain & Company.

Exits too are expected to mirror 2017, when, in the first nine months, GPs realised investments in 40 portfolio companies with an average size of $200 million, according to Bain & Company. “What you might see is more secondary deals driven by the fact that last year there were relatively few,” says Verbeeten.

A number of fruitful realisations – including sales to larger buyout funds – have generated momentum and helped spark renewed LP interest in private equity. “Things changed in 2011-12 when a couple of deals were exited with a clear growth story. Private equity made money for themselves and the consumer benefited,” says Verbeeten, citing Unison Capital’s exit of restaurant Akindo Sushiro to Permira in 2012 and Advantage Partners’ sale of coffee chain Komeda to MBK Partners a year later. “They were real success stories that didn’t cut costs, fire staff or lose money,” he notes.

The result has “been one of the most active periods [for allocations from local LPs] in the last 20 years,” says Folsom.

Banking on it

The broadening range of domestic institutions looking at private equity includes mid-tier asset managers, corporate pensions, trust banks and government-backed behemoths such as the Government Pension Investment Fund and Japan Post Bank.

Due to GPIF’s size – it accounts for about half the Japanese pension market’s $3 trillion of assets – and commensurate need to make large commitments, the pension fund is expected to focus overseas when it finally makes its foray into private equity. Its domestic impact has been to awaken local pension fund interest in the asset class, says Folsom.

Japan Post Bank, which already invests as an LP, poses little threat to mid-market GPs with the launch of its ¥120 billion direct investment vehicle, say market participants. “Japan Post is not looking to compete with GPs for opportunities. They want to be complementary and put in capital alongside us,” says Folsom.

Among domestic institutions, Japanese regional banks are noticeable for their new interest in private equity. In an environment of negative interest rates, low-yielding bonds and a restricted supply of investment opportunities such as real estate investment trusts, they are seeking new places to allocate capital and generate better returns, says Tuck Furuya, chief executive of placement agent and LP advisor Ark Totan Alternative.

“Foreign funds were a limited yet important source of capital four or five years ago. Now it’s easier and quicker to tap regional banks, which ask fewer questions”

Tuck Furuya

For regional banks, which manage yen-denominated balance sheets and typically have limited experience of private equity, investing locally avoids any foreign exchange risk and language barrier, Furuya says. For GPs, “foreign funds were a limited yet important source of capital four or five years ago. Now it’s easier and quicker to tap regional banks, which ask fewer questions,” he says.

In response to this surge in interest, Furuya urges caution. “There are [only] about 40 institutional-quality local funds. The industry is young. Not all Japanese buyouts are time-tested. There have been distributions and robust fundraising but that is less about Japanese private equity and more to do with a lack of other places to invest,” he says.

Since Ark Totan helped Aspirant Group close its second fund in mid-2017 on ¥27.2 billion, the firm has adopted a conservative approach. “We don’t want to introduce the wrong strategy [to our LP clients] at the wrong time,” Furuya says.

At seven to eight times EBITDA, Japanese entry multiples are appealing relative to double-digit multiples in the US and Europe, and to other Asian markets that do not offer the same access to control deals as Japan. But prices are rising, putting pressure on funds to generate future returns, Furuya says.

He adds that managers increasing their fund sizes will either have to undertake more transactions – putting pressure on existing deal teams, write bigger cheques, or hire more investment professionals. “There is more competition in mid-market buyouts and funds need to deploy more money quicker than before.”

Funds may be tempted to expand their strategy focus from succession deals to carve-outs to tap corporate divestitures, he says. “This is tricky. Carve-outs are an entirely different strategy.”

Moving up the scale also exposes funds to stiffer competition from cash-rich corporates for a limited supply of assets. “Japanese corporates and strategics are very active buyers. They have record amounts of cash on their balance sheets and are not just divesting but repositioning their businesses [through acquisition],” says Folsom.


Compounding escalating valuations is the intermediary market, which is “really busy”, says Furuya. GPs are being shown the same assets and competing in auctions where there is a risk of overpaying, he says.

However, Ant Global Partners managing partner John Cheuck sees increasing intermediary activity as positive. “Investment banks, boutique M&A firms as well as financial advisors are holding succession seminars for SME business owners. It reflects a socio-economic trend. There are not enough funds to invest in all these companies.”

Two-thirds of Japanese business owners, who have an average age of 60, have no successor, according to NSSK research. They are not getting any younger and their need to divest is increasingly urgent. However, the potential for succession-related sales does not make these deals any easier to find.

“Intermediaries are a necessity in Japanese business culture. Sourcing is more important than people realise to get the right deal at the right price”

John Cheuck

“In the mid-market there is more opportunity for proprietary sourcing of deals but it does mean you need to figure out where to get them,” says Verbeeten. “That requires some form of specialisation, either by limiting yourself to a certain number of industries or key networks that you tap [for transactions]. Some mid-market firms take a regional focus [within Japan]. It’s important to have focus to generate that dealflow.”

Cheuck agrees: “Intermediaries are a necessity in Japanese business culture. Sourcing is more important than people realise to get the right deal at the right price.”

LPs committing capital today will have to wait until the end of this investment cycle to know whether managers have exercised that skill.

Shopping around

The sector spread of succession deals has forced GPs to be opportunistic.

A historically limited supply of transactions has meant managers have had to cast their net wide and target companies that were available for acquisition rather than narrowing in on specific sectors. “The number of absolute deals has been relatively small and GPs couldn’t afford to exclude them,” says Verbeeten. “They’ve been opportunistic. They’ve had to be.”

While the broad universe of succession deals means mid-market managers have been active across all sectors in Japan, retail and consumer sectors continue to draw particular attention. “If you invest in a business that grows in line with the economy, it will grow slowly,” says Verbeeten. “Japan is a large market and the retail sector is fragmented. In a fragmented market, you can grow quickly.”

From Lerner’s pan-Asian vantage point, “investment activity in the middle market will continue to be driven around core investment themes in health, wellness, leisure, entertainment and other consumer and financial services businesses with strong regional footholds poised for expansion,” he says.

These include businesses ready to grab “an increasing share of private consumption as the country’s wealthiest segment of the population enters its golden years and inbound travel and tourism continues to flourish ahead of the 2020 Olympics.”