Reviving Japan short of dry powder

For the third consecutive year, Japan has had more exits than deals.

Japan had $5.7 billion in private equity transactions across 41 deals in 2013, roughly the same as in 2012, underscoring a general lack of capital to invest, according to a report from Brightrust PE Japan, a Tokyo-based independent LP advisor.

“The lack of dry-powder at many independent GPs seemed to continue to affect their ability to close more transactions,” the report said. “Very slow fund-raising in the past several years has forced many GPs to forego deals, especially larger deals.”

Japan fell out of favor with investors over the last several years, in part due to the chronic zero-growth environment. As LP sentiment toward Japan diminished, many GPs scaled down headcount or stopped fundraising altogether. 

The recent government efforts begun in early 2013 to jolt the economy appear to be having some positive effects, particularly on the stock market, supporting more deal opportunities — for fewer GPs with less capital. 

In another sign of dwindling dry powder, Japan had more exits (49) than new deals for the third consecutive year, the report said. 

Japan’s backlog of 2006-2007 investments has steadily decreased and in 2013, about one-third of all exits were deals executed during that time period. 

Among last year's exits, roughly 80 percent were sales to strategic buyers, which were nearly all Japanese. “They typically have abundant cash and the banks are willing to lend for M&A transactions,” the report said.

Tokyo-based Advantage Partners, for example, had some strong exits in 2013, capped by the sale of United Communities to Tokyu Community for JPY 36 billion (€257 million; $352 million), reportedly reaping a 23x multiple.

Small cap buyout firm J-Star had two trade sale exits and the Carlyle Group, Bain Capital, Polaris Capital and Ant Capital were among several other firms that divested assets last year.

Exit momentum is expected to continue, the report said, as corporates are generally reporting strong earnings. “With ample idle cash on the balance sheet (over $2 trillion is said to be held by Tokyo Stock Exchange-listed companies) and banks’ strong appetite for acquisition finance, Japanese corporations will remain the main buyer of fund portfolio companies.”

The lack of dry powder has been noted by the private equity industry. Several Japanese firms are expected to fundrasie this year, including Advantage, Unison Capital Partners, Polaris and J-Star, industry sources told Private Equity International.

Foreign players currently fundraising for Japan include Carlyle, which in August held a first close on an undisclosed amount for its third Japan-focused vehicle with a target of JPY 100 billion, PEI reported earlier. 

Mid-market buyout firm CLSA Sunrise Capital Partners is raising a Japan fund targeting $400 million.