Animal spirits stirring as Japan revives

After decades of stagnation that left many Japan investors disillusioned, the persuasive power of positive sentiment on both buyers and sellers is becoming increasingly apparent.

One year into Abenomics, Prime Minister Shinzo Abe’s ‘three arrows’ plan for economic revival, it looks as though animal spirits are finally being stirred: the stock market has spiked nearly 50 percent, the yen has dropped 20 percent against the dollar, and some large corporate divisions have (finally) been carved out and sold.

Sentiment – consumer, business and investor – has clearly lifted. And the recent news that Japan is to host the 2020 Olympics has only added to the positive atmosphere.  

“One clear effect of Abenomics is that sentiment has changed dramatically,” says Mark Chiba, chairman and partner of the Longreach Group, a Japan-focused firm. “The sense that there needs to be a more aggressive pursuit of growth has come back into the market.” 

SLOW FLOW

Dealflow has been a big disappointment to investors for the last decade, particularly those elusive corporate divestitures. The size and scale of the world’s third largest economy certainly has more to offer than 30-60 transactions annually, which has been the level of activity since 2008, according to data from Brightrust PE Japan, a Tokyo-based independent LP advisor. 

“In Japan, the biggest challenge is deal sourcing,” says Dongao Yan, vice president of FLAG Squadron (who stresses that this is his own opinion and not necessarily that of his firm).  

Weijian Shan, chairman and chief executive of PAG, which last year made a $250 million equity investment in Universal Studios Japan, has a similar view. He recently told PEI: “Japan is attractive to private equity investors because it is rich, big and developed with clear rules to follow. But the challenge, particularly for foreign investors, is to find good and sizeable deals.” 

Yet early indications suggest the economic stimulus has created a greater readiness to complete transactions among both founder/owners with no succession plans and corporates divesting non-core assets – the two main streams of opportunity for private equity. 

The founder buyout has been an ongoing investment theme for years. Of the 3,500 public companies in Japan, around two-thirds have a market cap below $300 million, according to FLAG’s Yan. These small-to-mid size deals typically don’t go to auction, sources say; a select number of potential acquirers are screened by an advisor, who then chooses a few to put forward a proposal. 

Founder/owner deals have appeared only gradually, as Japan’s population has continued to age. However, the rising stock market has had an impact, sources say, prompting more such opportunities than in previous years – because founders now see the potential for a high company valuation. 

Tokyo-based Polaris Capital Group is in the later stages of three founder buyouts, all expected to close in the first half, says Hideo Mitsuda, partner & co-chief investment officer. He expects the firm to complete five deals this year, which would be four more than it managed in 2013. 

“Before Abenomics, the Japanese equity market was sluggish, so business owners didn’t want to sell their company due to valuations that didn’t meet expectations. More owners are willing to sell now.”