Trends of the Year: the rise of Japan

With structural changes in place, increased appetite from LPs and strong dealflow, Japan will continue to be a major market for private equity.

Japan made headlines this year with mega-deals and oversubscribed fundraises, as private equity firms continue to cash in on enhanced corporate governance standards, demographic shifts and a buzzing mid-market scene.

Bain & Company characterised 2017 as one of the biggest years ever for Japan’s private equity market, on track to deliver its largest deal volume since the 2008 global financial crisis. Deal value climbed to $24 billion through September, an almost three-fold increase from the previous year’s $8.8 billion.

Global firms KKR and Bain Capital set their sights on closing mega-deals – $18 billion or Toshiba’s memory chip unit, $4.5 billion for auto parts maker Calsonic Kansei and $1.3 billion for Hitachi’s power tools unit, among others.

Fundraising activity also soared this year, with 12 Japan-focused vehicles raising more than $4 billion, dwarfing the $350 million that was raised in 2016, according to PEI data.

J-STAR and Advantage Partners held final closes for their latest buyout vehicles on a combined ¥168 billion ($1.5 billion; €1.4 billion). Final closings of more than $3 billion were also held for Integral Group, NSSK, Tokio Marine Capital, CITIC Capital and The Longreach Group, all of which will mainly invest in Japan. Nomura Holdings is also back in private equity after a three-year hiatus and is looking to seed a Japan-focused fund with $895 million of its own capital.

Richard Folsom, co-founder for Advantage Partners, expected the strong investment activity to continue in 2018. “Founder/owner successions have been a large part of that and continue to drive a lot of deal flow in the mid-market buyout space,” he said.

He pointed out that while corporate carve-outs in the large end of the market are getting a lot of attention with deals like the Toshiba and Hitachi subsidiaries, momentum is also building in the mid-market. “The fundamental drivers for both corporate carve-outs and founder/owner succession remain solid and we expect this to be an increasing trend in 2018,” he added.

Tsuyoshi Imai, a Tokyo-based partner at Ropes and Gray, added that a lot of private equity firms are bullish on Japan because of the strong exit activity in the last three to four years.

Among those who have been highly acquisitive are large corporations in Japan, which have record amounts of cash on their balance sheet, as well as large regional GPs which could be potential buyers for deals that mid-market firms grow.

Commenting on Advantage Partners’ own experience, Folsom said the firm’s biggest exit pattern has been to sell to Japanese strategic investors, which are looking to grow their businesses in areas that are more synergistic with their core focus.

Folsom believes the penetration of private equity in Japan, which is just 5 percent of overall M&A activity, will grow further going forward. “That 5 percent could move to 10 percent in the future, which means the size of the pie for private equity could double, opening a lot of room for new players in the market,” he said.