Japan’s Private Equity Market Shines in 2024

While enthusiasm for the Asia-Pacific private equity (PE) market has waned among many overseas investors, Japan is emerging as a notable exception in 2024. Leading institutional investors like KKR and Blackstone have highlighted Japan as one of the most exciting markets for traditional buyouts, praising their success in acquiring Japanese companies at reasonable prices and repositioning them effectively.

Hidden Value and Real Estate Opportunities

Global investors, including activist funds, are increasingly recognizing hidden value in Japanese companies, particularly those owning valuable real estate. Bain Capital, for instance, is expanding its real estate team in Japan to capitalize on these opportunities. The firm aims to source deals and manage or sell off properties held by Japanese companies it invests in.

Factors Driving Japan’s Appeal

Several factors contribute to Japan’s growing appeal for private equity investments:

Carve-Out and Take-Private Opportunities: Private Equity International notes that PE firms are particularly excited about opportunities arising from Tokyo Stock Exchange reforms.

Business Succession: With an ageing population, Japan offers numerous business succession opportunities in the small and mid-cap space.

Favourable Economic Conditions: Negative interest rates and a weaker yen make Japan’s M&A market attractive to overseas buyers.

Geopolitical and Economic Shifts: Some limited partners (LPs) active in the Asia-Pacific region are shifting their focus from China and emerging markets to more developed markets like Japan due to geopolitical, regulatory, and macroeconomic factors.

Record-Breaking Performance

Japanese equities, as represented by the Nikkei 225, have outperformed the S&P 500 over the past five years, recently setting a new record high for the first time since 1989. This performance is partly driven by strong earnings from Japanese companies, which benefit from a weak yen due to their reliance on exports.

Impressive Returns

Japanese buyout funds launched between 2010 and 2023 have delivered a median DPI (Distributed to Paid-In) of 1.01x as of January 2024, according to CEPRES data. This is significantly higher compared to 0.42x in Australasia and 0.13x in India.

Rising Investor Interest

In response to Japan’s rising appeal, many Japanese buyout funds are returning to the market, experiencing unprecedented investor interest. Japan-headquartered funds raised $6.6 billion in final closes last year, the highest annual total since 2020, and have already collected $1.75 billion this year through interim and final closes.

Conclusion

Japan’s private equity market stands out in 2024, driven by unique opportunities, favourable economic conditions, and a shift in investor focus towards more stable, developed markets. As global investors continue to uncover hidden value and capitalize on Japan’s dynamic market landscape, the country is poised to maintain its status as a premier destination for private equity investment.