As the Japanese population ages, small to medium enterprises (SMEs) in the country are facing both succession challenges and the risk of closure despite their profitability. These firms account for approximately 99% of all businesses in Japan, and employ approximately 70% of the workforce. According to the Ministry of Economy, Trade and Industry, more than 300,000 SME owners will reach the age of 70 within the next five years; with an ageing population and a low birth rate, hundreds of thousands of heirless SMEs will shut down without realizing their full potential. When a profitable and productive business closes, it not only impacts the economy’s overall performance but, in Japan’s case, it also leads to the loss of exclusive technology.
Private equity firms in Japan see opportunities in Japanese SMEs that would have faced cessation due to a lack of successors. As Japanese banks are risk averse and tend to be more reluctant in lending to small businesses without substantial collateral, securing financing has always been a challenge for SMEs, even during stable economic times. On top of capital for succession transition needs, private equity firms often provide management expertise and strategic advice which are essential in ensuring a business’s long-term sustainability.
Among the 235 Japan-based private equity fund managers currently tracked by Preqin, 15% have exposure to succession investments. The 10 largest by total capital raised over the past 10 years are shown in the table below. Marunouchi Capital has raised two buyout funds targeting succession and carve-out opportunities, Marunouchi Capital Fund 1 and Marunouchi Capital Fund 2, with target sizes of JPY 100bn each. These vehicles focus on Japanese mid-market companies across various industries with sustainable growth potential.
Polaris Capital Group also employs a similar strategy through its buyout funds. Through Polaris Private Equity Fund II the firm acquired SFP Dining, a Japanese restaurant chain specialized in Japanese cuisine and izakaya. Polaris Capital Group helped SFP Dining improve its management and financial structures, in turn enhancing its brand presence throughout Japan. The fund manager continued its effort in supporting succession transitions in the domestic market with the subsequent Polaris Private Equity Fund III. After buying out Yodogawa Transformer Co., Ltd, a power generation equipment and services company founded in 1965, the private equity firm grew the company through providing management expertise, strategic advice regarding its business model and organizational restructuring for more efficient and optimal operations. Within two years, Yodogawa Transformer Co., Ltd demonstrated increased efficiency and profits, establishing its leading position in the industry.
With $5.0bn in estimated dry powder, these types of deals are likely to be completed by succession-focused private equity fund managers headquartered in Japan. Additionally, significant easing of succession tax with relaxed requirements has been implemented by the Japanese Government to further encourage business succession. These efforts suggest that both private and public sectors are playing their roles in preventing closure of profitable businesses, while preserving unique technologies and products in the country.