Story of the year: Private equity moves in on Japan

Investors are more positive than previously, and an underpenetrated market means more room for new players.

Welcome to the golden era of Japanese private equity.

While 2017 was a banner year for fundraising, with a total of about $4.7 billion raised collectively by domestic funds according to PEI data, 2018 is seeing the completion of multi-billion-dollar deals and global buyout firms boosting their Tokyo presence.

Apollo Global Management is reportedly establishing an office in the country’s capital by year-end; Swedish firm EQT Partners is also mulling plans of a Tokyo expansion. The Carlyle Group, KKR and Blackstone have been expanding and staffing up their respective deals and advisory teams in the country. Most notably, 2018 saw the completion of the largest PE-backed deal in the country – the $18 billion takeover of Toshiba Corporation’s chipmaking unit by a Bain Capital-led consortium.

What’s more, the government has recognised that private equity is a vital asset class. Japan Post Bank and Japan Post Insurance, two of the largest investors with more than $2 trillion of assets, set up their own PE fund management company in February. Called Japan Post Investment Corporation, the unit will have up to $1.1 billion to co-invest alongside domestic and overseas fund managers across buyouts and venture capital. In addition, Japan Investment Corporation was set up by the government in September with a minimum of about $18 billion, earmarked for both domestic and global “society 5.0”-type of investments, which includes artificial intelligence, cyber-physical systems and big data that address Japan’s ageing population.

Jun Tsusaka, managing partner and founder of Tokyo-based mid-market firm NSSK, told PEI in April that the first golden era of Japanese private equity is about to begin. ”If you go back to the 1980s in the US and 1990s in Europe, you’ll see a similar period where every year there was an increase in the number of transactions and exits and a rise in participants, as well as the generation of steady returns over time. The industry is building in a systematic and sustainable fashion, which hasn’t happened before. As we look back at the post-Abe period, we’ll see this decade or two as a very attractive period of Japanese private equity investment.”

Market participants, however, highlight that although Japan offers multi-billion-dollar carve-out deals, the opportunity set is still small. Nevertheless, investors are now more positive about Japan than in the past, the chief executive of a Tokyo-based asset management firm said. “More subsidiary divestments by large conglomerates means more opportunities in the large-cap space. This is what the global funds are expecting and hoping.”