Private equity has been carried out in Japan since the Meiji restoration of 1868, in the sense of entrepreneurs who have sourced foreign and domestic capital for domestic investment opportunities.

But private equity as we know it now is only a decade or so old and has a very mixed bag of reported performance. Japan is not even through a full economic cycle in 10 years, and it is only through half of the post-bubble cycle.

So it is difficult to use performance track record given the partial economic cycle and the small number of managers in the private equity population, operating diverse strategies such as large cap, small cap, growth, domestic only, and domestic and foreign, among others, which all means the testing base is imperfect.

“A savvy investor has to use different criteria and a different set of measurement norms in Japan,” says Richard Pyvis, chairman of CLSA Capital Partners, who is based in Tokyo most of the time.

"That comes very much back to the team, how experienced they are, who has runs on the board, how the team is structured, motivated and remunerated. As an example, some private equity teams have very top-heavy remuneration with one or two guys taking the lion’s share, which clearly distorts effective team performance.”

CLSA Capital Partners today manages CLSA Sunrise Capital, an opportunistic growth and mid-market buyout fund focused on Japan.

“A GP needs to take a very careful look at the sector he is entering and make sure that the sector can grow domestically by virtue of people with high disposable income and the propensity to spend, in order to help it grow," he says. "That’s critical."

“Some invest in businesses that they believe offer growth potential, but aren’t in reality very exciting and investments are consequently made "on a wing and a prayer" with little prospect of outperformance. I wouldn’t invest in a firm that is stuck in a time warp and only able to continue with the status quo domestically. It has to be able to grow.”

So where does he perceive there are areas of real growth?

“I see two main groups of people with high disposable income in Japan. Firstly, the elderly spend on items that enhance their quality of life. I’m not referring to Japan’s mainstream healthcare sector, which is bureaucratised and regulated, but the homeopathic healthcare industry.

“Secondly, women between 20 and 45 often live with parents or in very affordable accommodation and have a lot of disposable income for personal enhancement, particularly appearance [clothing].”