US private equity investment in Japan rises

U.S. private equity dealmaking in Japan continued to pick up steam throughout 2022 as the weak Japanese yen and macroeconomic headwinds nudged Japanese businesses to reorganize their portfolios.

In the year to Sept. 12, U.S. private equity firms poured $11.26 billion into the Japanese market, a 15% increase from the $9.54 billion invested across 11 deals for the entire 2021, according to S&P Global Market Intelligence data.

Given the soaring value of the dollar against the Japanese yen and lower stock prices in Japan, U.S.-backed private equity firms will likely remain keen to search for Japanese businesses for a potential acquisition, Japanese M&A experts said.

Dynamics at play

"U.S. private equity has been interested in investing in Japan for many years. However, sellers have been wary of transacting with private equity firms given their concern for the continuity of the business and the availability of other options, including holding assets in lieu of selling," Yoshiyasu Tominaga, an associate partner at EY Strategy and Consulting Co. Ltd. said in an email to S&P Global Market Intelligence.

However, a combination of factors, such as the COVID-19 pandemic and the yen's fall, as well as Russia's invasion of Ukraine driving up energy and material prices, may be prompting Japanese companies to review themselves for potential restructuring and sales, said Tatsuya Yumoto, partner at J-STAR Co. Ltd., a Japanese private equity firm.

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Many Japanese corporates that are executing portfolio strategies are actively pursuing carve-outs of assets that are deemed noncore to maximize their capital allocations in increasingly challenging economic and market conditions, Tominaga added. Furthermore, recent laws such as the Corporate Governance Code, and interest in ESG issues, are encouraging parent companies to evaluate their listed subsidiaries and assess exit options.

U.S. private equity firms carried out several carve-out deals with Japanese businesses in the year-to-Sept. 12 period. The largest among the deals announced in the period is the $6.04 billion buyout of Hitachi Transport System Ltd., a unit of Japanese conglomerate Hitachi Ltd., by KKR & Co. Inc.'s KKR Asian Fund IV. Other notable deals include Bain Capital Pvt. Equity LP's agreement to buy Olympus Corp.'s scientific instruments business for $3.12 billion as the Japanese medical devices company further shifts its focus to healthcare, and KKR & Co. Inc.'s $1.94 billion acquisition of real estate asset manager Mitsubishi Corp.- UBS Realty Inc. from Mitsubishi Corp. and UBS Asset Management, a unit of UBS Group AG.

As seen in the buyout of Hitachi Transport System, the reorganization of Japanese conglomerates such as Toshiba Corp. or Mitsubishi Electric Corp. could give buyers a chance to take over some of their units, helping to push up the value of M&A deals further, said Tsuneo Watanabe, an executive at Nihon M&A Center Holdings Inc., a Japanese M&A advisory firm.

Toshiba, which has already divested some of its core units such as its medical equipment and semiconductor businesses, is still in the process of restructuring and seeks to discuss a turnaround with "multiple potential partners," Toshiba Corp. said.

Fundraising stalls

Private equity and venture capital funds in the market have collected $2.84 billion as of Sept. 13, a 79% drop from the $13.68 billion collected in the entire 2021, according to Market Intelligence data.

Tokyo-based Globis Capital Partners Co. Ltd.'s Globis Fund VII LP, which collected about $491.9 million at first close, is the biggest private equity fund in the market. Other active funds include Bay Bridge Ventures Management LLC's Bay Bridge Ventures ESG+ Fund I, which had raised $400 million to invest in mid-stage technology companies, as well as Endeavour United Co. Ltd.'s Endeavour United Partners Three Investment Partnership buyout fund, which has pulled in about $369.9 million to invest across Asian markets.

The weak Japanese yen, caused by the policy divergence between aggressive U.S. interest rate hikes and the Bank of Japan's resolve to keep monetary policy ultraloose, should be a tailwind for buyers to snap up Japanese companies, more than offsetting higher fundraising costs, said Kenta Shima, a spokesperson at J-Star.

Private equity interest to continue

Japan's low interest rate and stable regulatory environment makes it an attractive destination for private equity firms to deploy capital. In addition to existing players, many global private equity funds are starting to expand their teams in Japan, and several more large carve-out and divestment deals are expected in the coming 12 months, EY Strategy and Consulting's Tominaga said.

"When [U.S. private equity firms] look for M&A in mature Asian markets such as Japan, South Korea and Australia, they would pick Japan as they are reluctant to extend their reach to China," Shima added.