As domestic growth becomes harder to achieve against the backdrop of Japan’s declining consumption and ageing population, private equity firms have increasingly looked to overseas markets to create value for their portfolio companies.
Data from Japan’s Small and Medium Enterprise Agency show that overseas expansion by Japanese small to medium-sized enterprises (SMEs) has been on the rise in the last 10 years. Specifically, enterprises in the service industry and information and communications industry have shifted their sales and profits abroad.
Japanese companies have gone as far as Mexico and many are now rapidly tapping into the growth engine of fast-growing Asian economies such as Vietnam, Indonesia and the Philippines. In addition, Japan’s cultural appeal – minimalist designs, unconventional and innovative ideas and quality workmanship – has been attracting considerable interest globally.
Ant Capital representative director and president Ryosuke Iinuma says: “The so-called ‘made in Japan’ brand has grown in popularity in global markets; consumer businesses including food, cosmetics, clothing and electrical appliances have largely benefited from this.”
Another serious driver for SMEs’ push for global expansion in recent years has been the support from local and regional banks. One example is Mizuho Bank, which supports the overseas expansion of Japanese SMEs through business matching in addition to financing.
Banks are also playing an important role in increasing private equity awareness and acceptance among local businesses, says Koji Sasaki, president and managing partner of Tokio Marine Capital.
“In the past few years, numerous family business succession issues happened and the founders turned to banks and financial institutions for help. While they can advise on financing, private equity firms were seen as a more attractive option as companies can capitalise on the know-how of firms in terms of operational management, tax and legal issues, labour management, as well as business succession planning. This is unique to Japan.”
Ramping up focus on international expansion isn’t without challenges, especially for local SMEs who may often face obstacles. Firms like Ant Capital and Tokio Marine are, however, not deterred and see this as a valuable opportunity for them to go in as a majority shareholder and support the growth of the business.
The depreciation of the yen has also had an impact on SMEs expanding overseas.
“Most of the SMEs we invest in import materials, parts or outsource their business processes to other parts of Asia, and they are seriously affected by the depreciation of our currency,” Iinuma says. “Unfortunately, they do not have an overseas market to sell their products and that means they need some hedge to find potential markets to sell their products abroad – this is where we step in to expand their network and to support them.”