Twenty years after the birth of private equity in Japan, distressed opportunities are – as they were at the beginning – centre stage. And for those domestic Japanese funds originally launched to help clean up the country's non-performing loans (NPL) mess in the late 1990s, that potentially is very good news.

Turning the clock back to 1997 transports you back to the aftermath of Japan's “ten lost years”, a decade during which Japanese banks put the brakes on new lending – handicapped as they were by NPLs.

One Japanese private equity professional who recalls the period describes the approach of the banks to the problem as “undisciplined” – essentially meaning that they did very little about it and perhaps just hoped that one day it would go away. It's very unlikely that it would have done had it not been for the “financial big bang” instigated by the government in 1997 by which state control over (and protection of) the economy was loosed in favour of a more free market approach. Finally, the banks were stung into action and looked more urgently to find ways of shifting NPLs off their balance sheets.

One way in which they did this was by creating pools of capital to enable the launch of distressed and turnaround funds, or “bailout funds” as they were commonly known. Many see this event as marking the birth of private equity in Japan. The funds were often staffed by some of the bank's own employees on secondment. Arguably the most famous of the breed was Phoenix Capital, which came to prominence when acquiring automaker Mitsubishi in 2004 – but it was only one of many. These funds ate up the NPL portfolios and the problem of bad loans gradually dissipated.

Once the rationale for their funds' existence had disappeared what were the investment professionals within the bailout funds to do? Some of the senior management in particular formed independent spinout funds and attempted to take advantage of what by now had become more of a mainstream buyout opportunity. It has since become apparent, however, that some of these funds were rather uncomfortable in this new environment.

Says the Japanese private equity professional referred to earlier: “If you were a former bailout professional, you were at a disadvantage trying to compete with the likes of Unison, Advantage and the various foreign funds that came in to exploit the buyout opportunity. It was a different ball game – some did a few deals but they hadn't learnt the rules of the game.”

For some of these funds however, a saviour that most people would view as a ghostly apparition is to be seen galloping over the horizon in the form of economic recession. Japanese companies tend to be heavily reliant on exports to the US and are consequently feeling the chill winds of America's economic slowdown, including the decline in consumer spending. In addition, in an unfortunate echo of their past problems, Japanese banks affected by the sub-prime meltdown are once again discovering under-performing loans on their balance sheets and are once more becoming cautious about new lending.

Therefore, the former bailout funds have, on the face of it, the chance to go “back to the future” and retreat to their comfort zones as distressed deals begin to appear again on the radar. They see the chance to exploit their experience from the post-big bang era as well as the connections they forged during that period. Observers say an irony is currently being noted in the Japanese private equity recruitment market as distressed experts that had been cast aside in favour of mainstream buyout pros now find themselves back in favour.

There is, however, an important difference in the situation this time around. Observers say that in former times the performance of the bailout funds was not scrutinised too closely. The funds' limited partners were mainly government agencies and the emphasis of the funds was more on rescuing companies than turning them round and making a profit. Today, the opportunity is more based on nursing back to health fundamentally sound companies that have found themselves loaded up with too much debt.

If the bailout pros of yesteryear find that their operating skills are not quite up to scratch, they may discover the institutional investors that are now their key stakeholders to be rather less forgiving of underperformance than those they answered to in the old days. Distress is back in Japan, but with a difference.