“Japan is like a sleeping beauty that just woke up”


Japan’s position as the world’s third-largest economy has never been fully reflected by the scale of private equity activity in the country. But a massive increase in dry powder targeting Japan and big firms increasingly setting up shop locally look set to drive large-scale dealmaking – and the sleeping giant of the country’s gargantuan household savings pool is stirring, Karin Wasteson reports.

On February 27 this year, Investcorp finally opened the doors to its new Tokyo office. If it wasn’t for Covid, the launch of the Tokyo bureau would have happened sooner according to Investcorp CEO Hazem Ben-Gacem – and the firm is not alone in eyeing up what seems to be an outsized opportunity in the country.

Why Japan, and why now? “The country has a number of interesting dichotomies; mainly on the capital raising front, or investor sentiment, and the available investment opportunities,” explained Ben-Gacem.

Japan has by far the highest rate of household savings in the world, at $14tn. “Japan is like a sleeping beauty that just woke up,” said Ben-Gacem.

“When that $14tn starts to move and shake, it will make a significant splash that will see businesses thriving and consumers spending, but also employees looking for pay raises. Those pay rises will have a terrific effect on consumer behaviour.”

Out of Investcorp’s $50bn in AUM, around $2bn comes from Japanese institutional investors. A lot of the thinking [about private equity deal-making in the country] is derived from there, according to Ben-Gacem.

He said, “Increasingly, Japanese investors are seeking access to global alternative investment strategies that we are well positioned to provide given our decades of experience in Asia.”

US interest

Rising interest in Japan’s potential is not limited to tapping up its LPs, however. US private equity investments in Japan saw steep growth in 2022, for example, amid ample dry powder of funds launched within the past three years.

US private equity activity in Japan saw deal value totalling $13.31bn across 10 transactions in 2022, compared to $8.12bn across 11 transactions the previous year, according to S&P Global Market Intelligence data.

There are three reasons why PE opportunities are growing in Japan, according to Kazuhiro Yamada, head of Carlyle in Japan: succession issues for family-owned businesses, changing management mindset on driving shareholder value and increasing pressure from corporate activists, and corporate spin-offs by Japanese conglomerates to focus on their core businesses.

Carlyle Head of Japan Kazuhiro Yamada

While Japan did see an overall drop in M&A in 2022, transformative M&A should return as Japanese companies revise their portfolios following the pandemic, according to “M&A in Japan: Pressing Pause on Transformative M&A”, a recent report by Bain & Co.

The high multiples that accompany transformative deals, combined with the depreciation of the yen, made potential buyers hold out.

Yamada believes we could see larger deals taking place in the future, and that the firms which can make large commitments are overseas investors. But, he says, given the importance of track record and that Japanese culture is “very unique”, it can be difficult for foreign GPs that are new to the market and don’t have a strong long-term commitment to get a foothold.

“It’s an interesting, but challenging market in that sense,” he commented. “Understanding the Japanese culture and speaking in Japanese are quite important.”

High inflation, ageing population

For three decades the Japanese economy has operated within a deflationary environment.

“Now, for the first time, Japan is living with an inflation of around 3 percent, and that will lead to a significant revision in how consumers choose to spend their money,” Investcorp’s Ben-Gacem said. “Where will that subsequent hike in consumer spending go? It could be allocated to alternative investments. Japan is going through the same excitement that Europe and the US had around alternatives around 30 years ago.”

Three primary strategies are pursued: middle market, real estate and niche sectors such as logistics, serviced apartments for the aging population, and direct lending. “SME lending in Japan is quite a cumbersome process, so that’s somewhere we could capture value,” Ben-Gacem added.

According to Professor Heizo Takenaka, who sits on Investcorp’s board, Japan needs increased foreign investment to improve return on assets in an era of high inflation and currency volatility, coupled with its aging population.

In his view Japan’s economy – the world’s third largest – is at an inflexion point and calls for a shift from savings to investments.

Pause mode

On the one hand, Japanese companies are hesitant to make larger deals in the current volatile macroeconomic environment. 2022, therefore, was a year of scaling back on the size of deals and changing focus, the Bain & Co report said.

But enterprise value multiples of public companies in Japan are lower than in the US, for example, partly due to a lack of a well-defined growth strategy – something which makes them attractive targets.

And even as Japanese companies took a pause on large M&A deals, smaller deals still went ahead, including Nippon Steel’s cross-border deal for G Steel and G J Steel, two Thai steelmakers, for about $763m.

Noteworthy divestitures included Olympus selling microscopy business Evident to Bain Capital, and Hitachi parting with Hitachi Transport Systems to KKR for $6bn – the biggest transaction with US private equity involvement in Japan in the last two years.

Embracing change

“Large corporations are embracing change in Japan”, David Gross-Loh of Bain Capital Asia told CNBC. Bain Capital Asia conducted the second largest deal in Japan just over three months ago when it acquired Hitachi Metals – a large company with globally dispersed operations. Closing the deal was a long and complicated process, according to Gross-Loh.

Bain Capital has two offices and over 50 employees in Japan, and the principal says Bain Asia has spent a good amount of time building up its business in Japan.

“This is part of the trend in Japan with large corporations embracing change and thinking about their portfolios more strategically. We believe this is the beginning of an important secular trend within the Japanese economy,” he added.

The Bain & Co report outlines some underlying trends that indicate Japanese companies are indeed likely to resume deals. One such is that Japan’s private equity market remains hot.

Not without its challenges

Funds created for investing in Japan are growing, and many Asia funds are currently shifting their focus from China to Japan. The amount of dry powder to be invested in the country will remain substantial. Interest rates are still comparatively low in Japan, making it affordable to borrow for deals.

There are domestic players that are bucking the trend of pausing large M&A deals too. In February, Toshiba received a $15bn buyout proposal from a consortium led by Japan Industrial Partners, in what could potentially be the country’s largest take-private deal to date.

The opportunity to take Toshiba private attracted much-publicized interest from the likes of Bain Capital and CVC in recent years, before the bidding process reportedly settled on JIP in October.

Yamada points to the need for PE firms to have deep local market experience when pursuing larger high-profile deals in Japan.

“In order to secure the larger ‘eye-catching’ corporate carveout deals, investors need to know how to obtain consensus from multiple stakeholders, not just from the seller or management team, but from the government and society too,” he added.

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