Japan’s private equity market sparks back to life

Sources point to a change of atmosphere amid renewed interest from domestic and international investors. Almost all surviving funds are understood to be in fundraising mode.
Japan’s private equity market sparks back to life

Domestic and international investor interest has reignited in Japan’s private equity market, with almost all funds that survived the post-crisis lull understood to be seeking to raise fresh capital.

The shock of Lehman Brothers’ collapse in September 2008, followed by the ruinous earthquake of March 2011 and the eurozone sovereign crisis hit the industry hard in Japan, with the prospect of raising capital almost non-existent.

However, through the latter stages of 2012 and this year, sources note a change in atmosphere, amid a renewed drive to improve corporate governance in the interest of shareholders.

The market revitalisation project under prime minister Shinzo Abe has re-kindled international interest, while it’s understood that government officials are pressing Japan’s pensions industry to support its quantitative easing programme by putting money to work more aggressively.

“Over the past year things have calmed down to the extent that there are now various ways to exit investments globally,” Megumi Kiyozuka, managing director of CLSA Capital Partners Japan, told AsianInvestor’s second annual Institutional Investment Forum in Tokyo last week.

“Thanks to Abenomics, overseas investors are paying a lot of attention to Japan’s private equity market. Of the funds which have survived, almost all of them are entering the fundraising phase and it has become very active.”

Private equity firms in the frame for raising new capital are understood to include Unison Capital, Bain & Co Japan, Advantage Partners, Polaris Capital Group and Carlyle Group Japan, while J-Star Co recently closed a $200 million fund targeting middle-market companies.

Kiyozuka noted that Japanese investors, Asian fund of funds and US and European institutions are now probing Japan’s PE market for opportunities. “Every week now one or two companies from overseas is visiting us,” he added.

Independent sources confirm this jump in interest both among domestic and international investors and Japanese PE dealmakers, with the $1.3 trillion Government Pension Investment Fund known to be considering investing in alternatives. “The government is encouraging pension funds to take on more risk in their investment,” says one industry source.

Kiyozuka noted that the positives of Abenomics outweigh the negatives in terms of re-awakening Japan’s private equity market, including a potential improvement in the overall economic environment and return to risk-on mode among investors.

“This year there has been a change of atmosphere,” he said. “Overseas investors are interested in re-investing in Japan and they are considering new investments, so this is a positive in terms of the inflow of money.”

On the negative side, he noted that up until last year companies listed on the Tokyo Stock Exchange were trading at an Ebitda of less than five times. “It was a good buying opportunity, but now the Nikkei 225 has gone up so the opportunity for buying at a discount has been lost.”

At the same time, he suggested that Japan’s private equity market now has a variety of exit opportunities to provide liquidity, including trade sales and overseas listings. “This kind of liquidity is a strength of Japan private equity compared with other PE markets around Asia.”

He argued that increasing institutional interest in private equity was an unstoppable global trend in a low-yield world and that Japan was no different in that respect.

While the demographics are against it in terms of its ageing society, Kiyozuka said certain groups such as the elderly, bachelors and heavy internet users were growing in importance as potential customers.

CLSA Capital Partners targets a 25% internal rate of return from its private equity investments. “Private equity is alpha in its ultimate form,” Kiyozuka said.

A recent Preqin report found that among investors into private equity globally, corporate pensions made up 15%, followed by fund of funds (14%), foundations (13%), public pension funds (10%), university funds (8%) and insurers (6%).

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