Mega deals fuel Japan private equity

Foreign private equity firms armed with the capital are betting big on carve-out opportunities in Japan, a Bain & Co. report revealed.

Driven by big-ticket transactions, private equity deal volume in Japan has reached an all-time high of $23.9 billion from January to September 2017, according to Bain & Company’s Japan Private Equity Report 2017.

This year’s deal activity dwarfs the $8.8 billion of deals recorded in 2016, despite there being far fewer transactions. Only 25 deals were recorded through September compared with 63 deals last year – with corporate carve-outs making up more than half of the deals in excess of ¥25 billion ($223 million; €190 million).

“We expect this trend to continue as key fundamentals, such as improved corporate governance and a sustained focus on return on equity, continue to strengthen, providing sound support for future deals,” Jim Verbeeten, head of Bain’s private equity practice in Japan, said in a statement.

This year’s mega deals include the $18 billion acquisition of Toshiba’s memory unit by Bain Capital and a consortium of investors including Apple, Dell, Japan’s Hoya Corporation and South Korean flash memory manufacturer SK Hynix. KKR is another investor that has increased its focus on corporate Japan. The firm invested close to $6 billion in Hitachi Koki and Calsonic Kansei earlier this year and is currently in talks to acquire Hitachi Kokusai Electric, in deal valuing the unit at $2.3 billion.

“Many of Japan’s largest companies have literally hundreds of subsidiaries that could be deemed non-core, and as corporate governance and shareholder activism gain momentum, they are increasingly being identified as potential sources of value creation,” Henry McVey, KKR’s head of global macro and asset allocation, wrote in its latest economic report.

However, Verbeeten said these larger, more public deals are few and far between and private equity firms need to have a “play to win” mentality in order to qualify and make it through multiple rounds of competitive bidding.

This means winning large deals requires “being in the process and paying up”, as private equity firms compete not just with each other but also against corporates. Winning the large deal entails “forming alliances earlier, building a credible bid presentation, locking up expert advisors early on, and validating upsides and paying for them”, the report noted.

Capital funding these transactions is also unlikely to diminish as limited partners are increasingly more positive on Japan. More than 50 percent of investors surveyed by Bain said they “are expecting better opportunities in Japan over the next three years”, compared with just 17 percent in 2016.