Advantage Partner believes that Japan has one of the most attractive private equities markets in the world. After the first buyout in the late 1990s, the number of private deals within Japan rose and peaked in 2007, and after temporarily shrinking at the time of the financial crisis, it has been showing a slow recovery over the last few years. The flow of deals is increasing due to several market trends. Our key deals include the following:
Cases of the succession of businesses from their founders have always attracted attention in Japan as an target for private equity investment. Businessmen who began businesses after World War II are reaching retirement age. According to a survey conducted on small- and medium-sized enterprises, 86% of such companies consider the transfer of business as an important management issue while 62% have yet to start taking such actions or have no concrete succession plans. Many of the issues faced by founding owners include challenges such as the handling of personal assets and tax-related issues, including a lack of successors and company shares, which private equity can provide support for (source: 2013 survey by Teikoku Databank). A recent trend of note is the increasing number of cases of business transfers to young businesspersons. A tendency is seen to select private equity funds as partners for further business expansions or the launch of other businesses.
There are more than 250 large conglomerates in Japan (defined here as companies which have more than 50 consolidated subsidiaries), which possess 37,000 subsidiaries (as of fiscal 2012). In accordance with changes in the environment such as the 2011 earthquake and macroeconomic trends, many companies see selling non-core or unprofitable businesses as an important business strategies. This trend continues to provide a part of the deal flow for the private equity industry. Amid the rising needs for boosted governance, introductions of the Stewardship Code, and emphasis on ROE, these types of cases are expected to increase going forward.
The are many reasons why a company’s performance declines or is forced to declare bankruptcy despite having strong key products and a loyal customer base. In addition to the failures of companies following changes in the terms and conditions of loans due to the termination of the SME Finance Facilitation Act, enterprises are also recently going through bankruptcy due to manpower shortages. Private equity funds are not only able to assist with funding needs; they can also offer effective ideas about how to rebuild businesses, such as coordination with stakeholders, including existing lenders, and offer new perspectives on how to continue the business.
While management of listed companies are faced with changes in the stock market and pressure from the regulatory and business environment, they are still required to generate investor returns. As companies increasingly become the target of hostile takeovers, see their costs increase due to tightening regulations and accounting changes following the financial crisis, all while being pressured to generate profit as the markets themselves shrink, more companies are choosing to delist as continuing as the burden of being listed increases.
Whether listed or unlisted, companies often procure funds by issuing equity in order to fulfill their long-term funding needs. Some companies have chosen to utilize private equity funds for this end. When drastic reform is needed, such as when a business becomes distressed, private equity funds often acquire a majority of shares and seek to improve governance. However, there are some cases where private equity funds only take a minority position after investing fresh capital while existing shareholders continue to maintain their positions. Compared to the U.S. and Europe, there are a limited number of providers of risk money in Japan, and private equities are a leading party for the underwriting of such capital increases.