1. PRIVATE EQUITY IS IN A CONFIDENT MOOD
Deal volumes are growing, funds are smashing their targets and a number of the big Japanese GPs including J-STAR and Advantage Partners expect to close their latest funds in the next few weeks.
2. THE ECONOMY IS SLOWLY EMERGING FROM ITS TORPOR
While the jury remains out on Abenomics, Japan’s economy is showing increased signs of stability. Annualised quarterly growth was above 1 percent for all four quarters in 2016, the first year without a decline since 2005. Japan also finally posted a record in terms of nominal GDP in 2016 for the first time since 1990, boosted by increased domestic demand.
3. THE SHRINKING POPULATION HAS FRIGHTENING CONSEQUENCES
Japan’s population peaked at just over 127 million in 2009, and has been declining ever since, falling below 126 million by the start of 2016 for the first time in 17 years. A low birth rate coupled with an ageing population – more than a quarter of Japanese are aged over 65 – has left Japan facing a demographic time bomb. The UN predicts Japan could lose 44 million people by the end of the century when the population is predicted to slump to 83 million.
4. DEMOGRAPHIC CHALLENGES OPEN UP OPPORTUNITIES
General partners say that succession problems at Japanese SMEs – there aren’t enough suitable candidates to take the reins of the business – have left them turning to private equity to provide expertise and management know-how.
5. JAPANESE INVESTORS ARE WARMING TO ALTERNATIVES
Negative interest rates and overexposure to the domestic stock market have further worsened investment returns – the Government Pension Investment Fund of Japan lost ¥5.3 trillion ($52 billion; €47 billion) in fiscal 2015 – prompting a move towards private equity to boost returns. GPIF, which has private equity, real estate and infrastructure among its alternative holdings, has pledged an allocation of up to 5 percent or as much as ¥5 trillion to alternatives.
6. REGULATORS HAVE PROVIDED A HELPING HAND
The Stewardship Code, published by Japan’s Financial Services Agency in 2014, is designed to ensure companies manage their assets better. This should encourage companies to sell their underperforming assets, opening up opportunities for private equity firms, observers say.
7. FOREIGN GPS ARE TARGETING CORPORATE CARVE-OUTS
The Carlyle Group, KKR and Bain Capital are among those confident about prospects for the Japanese market, with Tokyo’s hosting of the 2020 Olympics seen as a positive factor. Henry McVey, head of global macro and asset allocation at KKR, believes Japanese conglomerates are increasingly looking to shed non-core businesses. In his Asia: Pivot Required report, he said there is “great potential for operational improvement in Japan” as many companies are trading at extremely favourable enterprise values to EBITDA.