Bain says the record year for Japan private equity is no one-off

by Min Jeong Lee and Takako Taniguchi


Japan’s banner year for buyouts is just the start of a bigger boom in the market, says the fund responsible for more than four-fifths of private equity deals in the country by value in 2017.

The year won’t be a one-off, says Yuji Sugimoto, the Japan head for Bain Capital Ltd. Japan Inc. will need to turn to deep-pocketed partners to turn around or carve out failing business units as the country’s companies push themselves to become more profitable for shareholders, a chronic problem that Prime Minister Shinzo Abe is seeking to resolve through his corporate governance overhaul.

Bain spent an estimated $1.2 billion (around ¥130 billion) last month to acquire 87 percent of Japan’s third-largest advertising agency, Asatsu-DK Inc., through a tender offer that initially drew criticism from shareholders over the price. In September, an investor group led by the Boston-based firm inked a $18 billion deal to buy cash-strapped Toshiba Corp.’s memory-chip business after months of contentious negotiations.

Thanks largely to that transaction, announced private equity buyouts in Japan surged to $23.6 billion in 2017, almost tripling from $8.7 billion the year before, according to data from Preqin Ltd. That’s the largest annual amount since the London-based research and consultancy firm started compiling the data in 2007. Even excluding the Toshiba deal, the remaining $5.7 billion tally is still higher than the annual average of $4.6 billion over the 10 years through 2016.

“Many companies want to reform their businesses quickly,” Sugimoto said in an interview in Tokyo. “We’re going to see more and more examples.”

Japan has long been a tough market for private equity companies to crack, partly because of the country’s history with investment funds. Gains made by foreign investors from the 2004 IPO of Shinsei Bank Ltd. — at the expense of the government — led to a suspicion of such funds. That image worsened as activists such as Warren Lichtenstein’s Steel Partners tried to force change at companies, while homegrown investors such as Yoshiaki Murakami fell afoul of insider trading rules.

That mistrust is fading as companies now have a better understanding of what private equity funds do, Sugimoto said.

Takao Yamakoshi, a senior fund manager at Tokio Marine Asset Management Co. in Tokyo, broadly agrees. “The aversion Japan had to funds in the past is receding,” he says. “But there’s still resistance.”

The private equity market in the country is still small. While Japan saw some big transactions last year, the number of announced deals fell to 33 from 42 the previous year, according to Preqin. The U.S. had $161 billion in private equity-backed deals in 2017, almost seven times the amount in Japan.

Valuation levels after the Japanese stock market’s surge to a quarter-century high are also a concern, according to Yamakoshi. “It won’t be a problem as long as companies maintain steady earnings growth, but that’s not something that’s sustainable over time,” he says.

Still, for Sugimoto, whose private equity fund sold stakes in companies including Macromill Inc., Domino’s Pizza Japan Inc. and Bellsystem24 Holdings Inc. last year, there’s room for the Japanese market to expand.

“Companies face limitations on their own,” he says. “We’ll see more and more examples of companies forming partnerships with private equity firms.”