With nearly $24 billion in deal value, 2017 is on track to be the biggest year ever for Japan’s private equity market

According to Bain & Company, deal size – not deal volume – is driving momentum across the country, spurred by corporate divestitures

Tokyo – Oct. 16, 2017 – The Japanese private equity (PE) market is on track to deliver its largest deal year, in terms of value, since the 2008 global financial crisis, topping a better-than-average 2016. According to Bain & Company, which today published its seventh annual Japan Private Equity Report, deal value peaked at nearly $24 billion (¥2.5 trillion) through September 2017, driven by large deals (those in excess of ¥25 billion) – most notably the Toshiba Memory deal.  However, deals of this size are few in number resulting in stiff competition, and the fragmented universe of corporate sellers makes a focused sourcing strategy difficult. Amid this challenging environment, a ‘play to win’ mentality is essential for those in pursuit of large deals.

Bain’s research finds that the steady momentum behind corporate governance improvements in Japan helped to spur divestitures and boost overall deal value.  As a result, limited partners are increasingly positive on Japan PE investments – more than half said they expect better opportunities in Japan over the next three years, compared with just 17 percent in 2016.

“Japan’s deal environment benefitted from an uptick in corporate divestitures in 2017 that, to date, account for more than half of large deals and 90 percent of deal value,” said Jim Verbeeten, who leads Bain’s Private Equity Practice in Japan.  “We expect this trend to continue as key fundamentals, such as improved corporate governance and a sustained focus on return on equity, continue to strengthen, providing sound support for future deals.”

In terms of exits, both value and number increased over 2016.  More assets were sold to strategic buyers than via IPOs, while secondary transactions were noticeably absent. 

Looking ahead, those in the market for larger deals in Japan will face a number of challenges.  First, competition for deals over ¥25 billion is intense with PE often battling corporates.  Investors are also limited by a highly fragmented universe of corporate sellers, which makes it difficult to focus on specific corporate sellers or industries.

In response, they must “play to win,” said Verbeeten. “This requires investing to qualify and make it to the second round of competitive processes. Capturing value and de-risking investments early on is also becoming ever more important, as it is likely that recent and upcoming deals will be held throughout an economic downturn.  Meanwhile, high entry valuations due to abundant debt and equity capital will require planning for multiple compression.”  

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