Thawing sentiment in Japan

LPs have long been cool on Japan funds, but more realistic fund sizes and smaller niche deals are starting to bring them back to the table.

The fundraising pattern in Japan lately has been telling: only one private equity fund usually closes each year, and it often misses the targeted amount by about half. 

Last year, the Longreach Group closed a Japan vehicle on $400 million, less than the initial target of $750 million. In 2011, CITIC Capital closed on $190 million, well short of its $320 million target. And before that, Japan Industrial Solutions closed on $430 million, a long way below its $1.06 billion target.

The recurring question LPs ask is ‘Why Japan’?, says Kyung Kim, CIO of Diamond Dragon Advisors, which is helping mid-market buyout firm CLSA Sunrise Japan raise a fund targeting $400 million. CLSA held a first close on $150 million in December, backed by three US LPs re-upping, and expects to hold a final close by December, she adds.

“A lot of foreign LPs ask: `Why invest when there is zero growth?’ I say that’s the beta plan. The opportunity is where you get alpha by identifying niche areas of growth within a flat economy and ageing population.”

Currently 19 Japan-focused funds are in the market, trying to raise a total of $3.6 billion, according to Private Equity International’s Research & Analytics division. The majority were launched in 2012 or later, supporting the idea of renewed LP interest (though target sizes are modest; see chart following article).

Japan funds typically have to rely on offshore capital. The local banks have been stymied by regulation, while insurance companies don’t have the balance sheet strength following recent natural disasters. Pension funds have also been slow to invest – although GPs believe that may change if Japan’s $1.4 trillion Government Pension Investment Fund (the world’s largest), which has been researching alternatives asset, decides to up its allocation when it reports in April.

“We do have a sense that lack of consistent returns on public markets is definitely forcing some [pension funds] to rethink how to invest,” says Tatsuo Kawasaki, partner at Unison Capital (which expects to raise a new fund this year). 

Low balling

Japan’s top five funds in market have modest targets

Firm Target US$M Vintage Type

JAFCO Co. $640 2013 Venture
Sumitomo Mitsui Trust Capital $320 2012 Mezzanine
Polaris Capital Group $320 2012 Buyout
Daiwa Quantum Capital $300 2009 Growth/expansion
Advantage Partners $210 2012 Buyout

Source: Research & Analytics division of Private Equity International