Briefing: Rediscovering Japan

Attendees at industry conferences tend to go for coffee when it comes time for the Japan panel. The prevailing wisdom about the country’s private equity industry has been the same for years: returns are poor; there are no deals; a stagnant economy saps portfolio company growth; and the cultural disdain for change will prolong the above indefinitely.

Finally, those views seem to be receding. The flat economy and aging population haven’t gone away. But Japan fatigue peaked perhaps 12-18 months ago, sources say – and the country has, for several reasons, started to look compelling again. 

Externally, interest has been sparked by the disillusionment with China and India. Last year, it became clear that GDP growth in Asia’s two most attractive markets was slowing, and fund managers are struggling to exit. “The fast and big return potential represented by China doesn’t seem to be happening,” says Tatsuo Kawasaki, partner at Unison Capital. 

Another boost is the new government’s $116 billion stimulus package that has, at least in the short term, pushed stock prices higher and the yen lower, aiding exports and boosting business confidence. “[The measures] are enhancing the Japanese economy upward, but more importantly they have a positive effect on the mindset of Japanese business leaders,” says Tamotsu Adachi, managing director of the Carlyle Group in Japan.

Exits (in comparatively illiquid Asia) are another positive indicator. Unison Capital’s 2012 exit of Akindo Sushiro, a sushi restaurant chain that it sold to UK-based Permira for $1 billion, generated an 8x exit multiple, says Kawasaki. He admits this was an “outlier”; he doesn’t expect to see many returns like this in Japan. 

Nonetheless, there have been some eye-catchingly large exits lately (see chart following article), in stark contrast to the fund managers in China and India that continue to hold assets and collect management fees, waiting for better times. 

“Exits can yield multi-baggers and that’s drawing attention to Japan,” says Kyung Kim, CIO of Diamond Dragon Advisors, which is raising a $400 million Japan fund for mid-market buyout firm CLSA Sunrise Capital Partners. “LPs haven’t seen their money coming back [in China and India], and disappointment has made them look elsewhere.”

The result? “A lot of investors are giving Japan a re-look,” says Kawasaki.