With the corporate governance movement gathering momentum and with an aging population of business owners, Japan offers significant opportunity for buyout funds especially post-COVID-19, says Toshihiro Toyoshima, CEO of Mercuria Investment Co., Ltd.
With the corporate governance movement gathering momentum and with an aging population of business owners, Japan offers significant opportunity for buyout funds especially post-COVID-19, says Toshihiro Toyoshima, CEO of Mercuria Investment Co., Ltd.
Why should private equity players look at Japan?
Business-succession-related deals and restructuring investments are well-known themes in the Japanese market. Many business owners recognize that urgent reforms are needed to revitalize the Japanese economy, though many have yet to undertake challenging initiatives or transformations – large-scale monetary policy easing has allowed many businesses to delay such plans.
That said, businesses have paid increasing attention to corporate governance and stewardship in recent years, and we believe that the COVID-19 downturn will accelerate structural reforms across the economy on all fronts. As such there will be many opportunities for private equity investors to facilitate restructuring and consolidation deals to increase productivity, or to make growth investments in digital transformation.
According to a study published in March 2020 by the Japan Private Equity Association, Japanese buyout funds consider succession as their primary focus. These funds have recorded an annualized IRR of 18.2% over the past five years (2014-2018) and 12.6% over the past 10 years (2009-2018). The opportunity set is huge: Japan's aging population of business owners is expected to expand, with about half of the 2.45 million SMEs with managers aged 70 or older are expected to be without successors by 2025. So buyout funds have a key role to play.
Our own 2016 buyout fund has made succession investments in five family-owned companies, two of which have already been successfully exited and the remaining are all performing well. This fund focuses on succession investments, while our other buyout strategies are targeted by special situations opportunities after the GFC. We plan to launch our next buyout fund in 2021, which will analyze both structural transformation factors and succession aspects to meet investor demand.
Funding aside, how do you support local businesses in their upscaling efforts?
Our principle is to never forget to pay attention to the true growth potential of businesses. We provide portfolio companies with management expertise and strategic advice. MIC develops a clear business roadmap for each of our investees that guides our growth strategy over the medium to long term, which has led to a strong track record.
We also act as a bridge between investees and appropriate business partners. For example, last year, we formed the Mercuria Biztech Fund with Itochu Corporation to invest mainly in B2B start-ups that are helping to boost productivity through digital transformation. LPs in this fund are real estate, leasing, and logistics firms that have a strategic interest in developing these relevant technologies. These relationships have allowed our portfolio companies to enjoy strong business growth amid COVID-19.
How do you help your investee firms compete globally?
We specialize in cross-border alternative investments, and have built up deep networks overseas that our portfolio companies can leverage as they expand globally. Our strategic shareholder, Itochu Corporation, is a global diversified conglomerate covering 62 countries and is one of Japan’s largest trading companies. We also have strong local business partners in each country we are active in. Furthermore, our own local teams in Beijing, Hong Kong, and Bangkok have allowed us to manage our investments in each region without interruption from the COVID-19 crisis.
We encourage our investee companies to be open to cross-border opportunities. For example, we invested in Thunip Holdings – a Chinese water supply and wastewater management company – assisting quickly by forming a strategic global alliance with a large chemical company in Japan. Despite the saturation of the Japanese economy, many of our investee firms maintain globally competitive products and services. Our capability to provide strategic bridges across geographic borders has enabled us to create a lot of value for our investees.
About Mercuria Investment
Mercuria Investment Co., Ltd. (MIC) was established in 2005 with Development Bank of Japan as a main sponsor. The firm was listed on the Tokyo Stock Exchange in 2016. MIC specializes in cross-border alternative investments, making investments in both private equity and real assts. Notable investments include Lifenet Life Insurance, Spring REIT, SONOKO, Izumi Seiki, and Mizutani Industrial Group.
For more information on the key trends defining the deepening private capital market in Japan, download our new report Preqin Markets in Focus: Private Equity and Venture Capital in Japan's Transitioning Economy.