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Land of the Rising Asset Class: Private Equity in Japan

by Sho Kawashima

  • 21 Jun 2019
  • PE

Global private equity investors reduced the pace of new commitments in 2018, causing a slowdown in fundraising. Fund managers and investors largely agree that the record high valuations in the private equity market indicate that the asset class is at the peak of its lifecycle.

Amid global concerns of a potential market downturn, the story is somewhat different in Japan. Optimism permeates the local private equity landscape, with increased investor interest and an incremental flow of government funding allowing the asset class to gain considerable traction. In Q1 2019, 13 Japan-based private equity funds secured an aggregate JPY 221bn, 3.8x more capital than in Q1 2018. These early indications suggest that new fundraising records could well be ahead in the Japanese market.

Preqin spoke with a Tokyo-based private equity firm on this Japanese success story: “The fundraising environment has been favourable in recent years compared to the post-Global Financial Crisis period when we raised our predecessor fund,” said a spokesperson, “there is a growing number of regional banks keen on private equity investments while in search of steady returns.”

Investors Are Bullish
Institutional investors of all sizes are turning to private equity, following in the footsteps of giant investors like GPIF and Japan Post Bank. Preqin tracks 303 Japan-based institutional investors investing in alternatives, of which 58% are active in private equity. Almost all (96% of) Japan-based investors interviewed for the Preqin Investor Outlook: Alternatives in Japan report told us they plan to make new private equity investments in the next 12 months, indicative of a bullish stance towards the asset class.

Such increasing appetite was evident when Globis Capital Partners (GCP) announced the first closure of its sixth venture capital fund in March 2019 (on JPY 36bn), with institutional investors accounting for nearly 80% of the total fund commitments. Soichi Kariyazono, Managing Partner at GCP, pointed out that in 1999, 90% of its commitments originated from overseas investors. Today, on the other hand, most of its current LPs are domestic investors.

Support from government organizations such as the Organization for Small & Medium Enterprises and Regional Innovation, JAPAN (SMRJ), has been fundamental to the development of private equity in Japan. Leading from the front, SMRJ has committed more than JPY 434bn to over 250 private equity funds. Its capital injection is expected to escalate further as it raises the ceiling on its typical commitment size from JPY 6bn to JPY 8bn. SMRJ plans to increase its allocation to private equity funds by 20% over the next five years as part of its efforts to address the challenge of business succession in Japan.

Changing Perceptions
Once referred to as ‘vulture funds,’ private equity vehicles were said to swoop in on financially distressed businesses and flip them for sheer profits. Now, however, they seem to have shed this old reputation, as private equity funds have been instrumental in improving corporate productivity and facilitating business succession in Japan. This shift in attitude has been the main force fuelling the robust fundraising market in Japan.

As of June 2019, Preqin tracks 68 Japan-based private equity vehicles currently in market, seeking to raise approximately JPY 650bn* in aggregate capital – the largest funds are shown in the table above. Fundraising is expected to pick up in the latter half of this year, with major players such as JAFCO and Polaris Capital Group due to launch new funds targeting JPY 75bn and JPY 150bn respectively. At the dawn of the new imperial era of Reiwa, the outlook for the Japanese private equity market in 2019 is decidedly buoyant.

For more information on the activity and future plans of alternatives in Japan, the full LP survey results and exclusive on-the-ground commentary from local LPs, please see the recently released Preqin Investor Outlook: Alternatives in Japan.

*For six funds with target size in USD; figures have been converted to JPY using the conversion rate as of 4 June 2019 when the data was extracted from Preqin Classic.

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