They’re back. After a hiatus earlier in the new century, Western private equity firms are increasingly targeting Japan for their Asian investment strategies. And the Japanese government and regulators have introduced bold initiatives to welcome them and facilitate remaking Tokyo as Asia’s premier global financial market.
Back in the late 1990s and early 2000s Japan was a preferred target for Western alternative asset managers. In 1999, for example, Newbridge Capital, co-founded by Texas Pacific Group (now TPG), took a majority stake in the internet service provider Livedoor.
And, in 2000, J. Christopher Flowers and Ripplewood Holdings organized a consortium of investors to purchase Japan’s distressed Long Term Credit Bank, renaming it Shinsei (translation: “rebirth”). After Shinsei went public in 2004, the deal was widely regarded as one of the most successful private equity transactions, not only in Asia, but in the history of private equity investing at that time.
Interest Waned
But by the time of the Great Financial Crisis, Western firms began to find other Asian countries, most notably China and South Korea, more open and welcoming –countries where investors could attain greater financial rewards with fewer regulatory roadblocks.
While Western investors retreated, Asian PE funds continued to commit to Japan. The Asian PE giant PAG continued to build its team and investments in Tokyo. The firm bought Universal Studios Japan in 2015 and reportedly exited three years later with a five-times return on their investment. PAG’s most significant investment of late is the largest theme park by physical size, Nagasaki’s Huis Ten Bosch.
One industry observer told Asia Times that while, about a decade ago, there were a few of what he calls one-off “predecessor transactions” by mega global funds including KKR and Bain, Western PE firms had largely remained circumspect about Japan – at least until recently when the country made a conscientious effort to win them back by committing to a series of sweeping regulatory initiatives. These included:
• Implementation of the Corporate Governance Code (2015, revisions in 2018 and 2021): Introduced to improve transparency, accountability, and decision-making in Japanese corporations, which aligns with international standards, the code encourages companies to have more independent directors to provide companies an outside perspective and commitment to shareholder rights, making Japanese companies more attractive to foreign investors, including PE firms.
• Implementation of the Stewardship Code (2014, revised 2020): This code encourages institutional investors to engage more actively with the companies they invest in, focusing on sustainable growth and shareholder returns. Western PE firms find environments with active shareholder engagement conducive to implementing value-adding strategies.
• Tokyo Stock Exchange market restructure (2022): This initiative simplified and restructured the TSE into three new segments: Prime, Standard, and Growth Markets. The restructuring aims to clarify market dynamics, improve market visibility, and attract international investments by highlighting promising growth sectors.
• Guidelines for Corporate Takeovers (2023): This bold action by The Ministry of Economy, Trade and Industry (METI) is designed to facilitate mergers and acquisitions (including hostile takeovers), recognizing them as critical to business revitalization and growth. The 2023 Guidelines aim to bring Japanese public M&A practices closer to global standards by incorporating principles such as shareholders’ intent and the board’s responsibility as fiduciary, to make the Japanese corporate control market more accessible to international buyers. This directly benefits private equity firms, which are a major driver of inbound M&A and as a “white knight” alternative to hostile activists.
Industry observers today say the regulatory shift toward encouraging greater foreign investment is also aided by a weak yen and consistently low interest rates.
Strong rebound
The impact on deal growth has been impressive. The Japanese Private Equity Association and the Japanese Venture Capital Association track the number of private equity deals in the country as well as the value of those transactions. In 2020, there were 96 private equity transactions valued at 1.2 trillion yen. By 2023, the deal numbers and size had jumped to 125 private equity transactions valued at 5.9 trillion yen.
Expediting the re-entry of western private equity firms has fallen largely to FinCity Tokyo, founded in 2019. FinCity Tokyo, a public-private collaboration, was created to help investors understand and maximize value in the new regulatory environment. Its stated goal is making Japan’s capital an “international financial center.”
To do so, FinCity Tokyo coordinates with the government of Japan, the Tokyo Metropolitan Government and 57 member organizations including industry associations, major financial institutions, global investors and service providers. The organization also provides strategic support to financial firms seeking to enter and operate smoothly in Japan. Since 2022, it has helped nine global firms, with assets of nearly $1.3 trillion, to successfully enter and compete in Japan.
FinCity Tokyo’s Executive Director Keiichi Aritomo says one of its roles is helping foreign investors secure personnel in a tight labor market. The organization even subsidizes recruiting fees for PE investors in search of experienced personnel.
Accepting non-family control
The failure of Japanese business owners to establish family succession plans used to strike Western investors as a stigma, but owners now have come to welcome external ownership and professional management by Western buyers. Or as FinCity Tokyo’s Aritomo notes, “Private equity firms offer the experience to offset labor shortage with skilled management and productivity gains.”
Bain & Company, in a report published last spring, said that Japan was the leading deal market in Asia-Pacific in 2023 with private deals as the dominant strategy, noting “more companies are preferring to go private.” And the capital needed to complete deals via limited partnerships is plentiful. “There is increasing LP appetite for Japan,” noted Sebastien Lamy, co-head of Bain & Company’s Tokyo-based Asia Pacific PE practice.
PE firm Carlyle, based in Washinton, DC, with investments and operations globally, is also focused on Japan. In a report last September, the firm pointed to the positive regulatory changes, the attractive valuations, the stable political climate and the continued investment opportunities. “We are seeing many overseas GPs [general partners] establish offices in Japan for the first time,” the firm said.
And, in an analysis last year, the management consulting firm, McKinsey & Company, noted that, while Japanese private equity is a growing presence in the financial landscape, the industry still has more room to grow.
Increasingly, western private equity players have gotten the message.
Owen Blicksilver is a New York-based public relations executive specializing in private equity.
