Private Equity Giants Size Up A Fresh Market In Japan

Megumi Kiyozuka, president of ­Japanese private equity firm Sunrise Capital, began raising money for his latest fund last year with a goal of hitting $500 million. He’d yet to take his pitch on the road outside Japan before global investors told him they were willing to commit as much as $2 billion.He decided to stick to $500 million—still plenty of money to put to work. It was a stark contrast to 12 years ago, when ­Kiyozuka traveled the world for an earlier fund, meeting 200 investors multiple times before finally cobbling together about $200 million from just two. “Years ago, people declined to invest in Japan because they said it was ­inefficient. Now everyone says they like Japan because it’s inefficient,” Kiyozuka says. “It’s the same reason, but it can be used as a reason to decline or to invest.”

For big investors around the world, Japanese companies that once seemed flawed are now more like low-hanging fruit: If a fund can buy them up and make some obvious fixes, it should be able to sell them again in a few years at a profit, either to another owner or in an initial public offering. The model has worked well for funds in the US, though in recent years a mix of higher interest rates, a slower market for selling companies and higher acquisition prices have weighed on returns. In contrast, Japan seems like fresh territory to hunt for bargains, especially given the relatively weak yen.

There have been 192 private equity deals in Japan so far in 2025, after 292 deals in all of 2024, according to data from the consultants at Deloitte. “Japan is fundamentally a very attractive market from a return perspective,” says Azusa Owa, a Japan-based partner at consulting firm Bain & Co. Between 2010 and 2024, Japanese private equity deals had the highest returns of any market globally, even after taking into account the fall of the yen. In dollar terms, deals in Japan returned 2.4 times the capital invested, edging out the 2.3 times return in the US.

The world’s fourth-largest economy provides ample deal targets, with almost 4,000 publicly traded companies. Many are cash-rich and conglomerate-like, with units that could be streamlined or sold off, or have avoided raising prices or negotiating costs for years as the country wrestled with deflation. And while financing conditions in other markets remain tight, banks in Japan are more than willing to lend. One key to private equity’s performance is that funds invest using debt, which ends up on the balance sheet of the companies the funds buy. Leveraged-buyout financing costs 3% to 4% in Japan, compared with 8% to 9% in the US. Japanese companies also have relatively low debt, making it easier for new owners to boost returns by borrowing now.

“Japan is still in the very early stage of its private equity history,” says Eiji Yatagawa, a partner and head of private equity at KKK & Co.’s Japan office. “This industry evolution still has a long way to go.” Japan is KKR’s top market for deploying capital outside the US; in one notable deal, in 2017, KKR acquired the company now known as Kokusai Electric Corp. from Hitachi for about ¥257 billion ($1.7 billion). It sold off noncore businesses to focus on semiconductor manufacturing and invested money in research and development and hiring before taking Kokusai public in 2023 at a valuation of around ¥424 billion.

KKR isn’t alone. Bain Capital has announced deals worth more than $10 billion in Japan so far this year. Within a two-week period in the summer, Blackstone Inc. and Swedish buyout firm EQT AB both announced deals worth about $3 billion to take public companies private. Firms such as the US’s Warburg Pincus and Singapore’s Hillhouse Investment Management have recently brought on executives for Japan and made plans to open physical offices.

The private equity business model has its critics around the world. Selling off assets or returning cash to reward new owners may leave companies weaker in the long run. “It does make sense that in an economy like Japan—where companies have historically not been focused on maximizing profits—private equity can sometimes help sharpen that focus,” says Ludovic Phalippou, a professor of finance and economics at the University of Oxford’s Saïd Business School. Still, “the pressure to increase returns can lead to cost-­cutting or strategies that don’t necessarily improve outcomes for customers or employees. In either case, however, PE fund managers do well, because they charge extraordinary fees.”

The biggest blemish on private equity in Japan in recent years is Marelli Holdings Co. Created in 2019 when KKR merged auto-parts companies it owned in Japan and Italy, Marelli saw its business suffer during the Covid-19 pandemic and the later upheaval in the car industry. It sought court-led rehabilitation in Japan and filed for Chapter 11 bankruptcy protection in the US. KKR took a $2 billion hit and later invested another $650 million to return the firm to ­profitability. “That was definitely a very challenging situation and a difficult outcome for us and for banks,” Yatagawa says. “We believe we did everything we could.”

For years in Japan, private equity firms were often referred to as vultures, and they sometimes had difficulty even getting ­meetings with potential acquisition targets. But now they’re getting a warmer reception. Some smaller, family-run private businesses are facing succession issues and find it easier to sell. And a slew of corporate governance reforms have forced public companies to think more about deals that could reward their shareholders.

The Tokyo Stock Exchange is pushing its listed companies to get their share price above book value, while a new government guideline is asking public companies to seriously consider takeover offers. Activist hedge funds have descended on Japan, buying up shares in everything from small manufacturers to storied companies like Nissan Motor Co. and clamoring for change. In response, many companies are becoming receptive to selling off peripheral businesses to boost their share price, or they’re taking deals to just go private.

Some challenges loom as the Japanese private equity industry matures. Once the most obvious target companies are picked off, it may prove harder to squeeze the same returns from the next batch of investments. Private equity firms are also taking longer to get out of their investments in Japan: Only about 44% of deals done from 2018 to 2020 were exited with sales or IPOs within five years, down from 54% of deals during the 2015 to 2017 period, according to Bain & Co.

“Deal opportunity and availability is evolving, however not as fast as money is raised,” Bain’s Owa says. “Some funds who raised money struggle to use it.” That could lead to inflated prices for acquisitions. Teppei Takanabe, co-head of investment banking at Goldman Sachs Group Inc. in Japan, says the bank is getting more client inquiries about mezzanine funding—a riskier debt tool used to bridge gaps in financing for deals. That suggests valuations are growing faster than expected.

Atsuhiko Sakamoto, Blackstone’s head of Japan private equity, says the dealmaking momentum is still building. “The boom is just expectations. Reality hasn’t caught up with the hype yet,” he says. “I’m very excited about the next few years.” —With Manuel Baigorri

Source: Bloomberg Europe