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Trailing deal counts over the last 12 months through to Q1 2015 look to rebound and a strong exit environment continues to return cash to limited partners

Tokyo – May 28, 2015 –Japanese private equity (PE) market deal value in 2014 was up 10 percent from the previous year to 600B yen, in line with the past five-year average; this isaccording to Bain & Company's 2015 Japan Private Equity Review and Outlook. . While the PE market size in Japan has been relatively stable, two main factors could deter future growth: a softening in primary deals over $25M, which have declined from more than 30 in the mid-2000s to around 15 in recent years; and the country's strong economy, which leads to fewer distressed deals and high public valuations, limiting number of management buyout (MBO) deals.

Despite these challenges, Bain finds the industry is ready for a stronger run in 2015-2016. Trailing deal counts over the last 12 months through Q1 2015 show positive forward momentum, especially for deals over $50M. Recent changes in regulation and investor behavior are also increasing pressure on corporates, which is expected to drive more divestures of underperforming or non-core assets.

"Large Japanese companies have 18T yen in non-investment shareholdings and also still have many non-core, under-performing businesses in their portfolio, including those they acquired in the past. The increased focus on return on equity (ROE) and the requirement to explain these shareholdings may increase the pressure to consider divesting some holdings," said Shintaro Okuno, Partner at Bain Tokyo.

According to the report, pricing will likely continue to be high, requiring investors to price in upsides. Median enterprise value (EV)/EBITDA ratio of PE deals in Japan has increased to 9.9x in 2014. Drivers behind the high multiples are high public valuations, competition from cash-rich corporates for deals, and a desire from PE firms active in Japan to deploy the $14.7B and $7.8B funding they raised in 2013 and 2014, respectively.

"Pricing has been high and continues to be high, especially for deals sourced through competitive auction processes," said Jim Verbeeten, head of Bain's Private Equity Practice in Tokyo and author of the report. "Proprietary deals or processes with a limited number of bidders tend to provide more attractive valuations." 

Based on current PE trends in Japan, Bain identifies three key actions that PE funds should take to generate market-beating returns in the future:

• Be creative in deal sourcing to avoid auctions, in which valuation multiples tend to be high. This means: don't chase the crowd, sharpen the fund's differentiation, and be willing to demonstrate flexibility in capital structure
• Create value in portfolio companies by ensuring disciplined and early execution of value creation plans, refreshing the value creation plan after an initial 2-3 year holding period, and maximizing exit multiples by positioning the business for future growth
• Don't let underperforming deals take up all attention: more equity value can be unlocked by focusing on well-performing deals

"Maximizing exit value is more than dressing the bride and requires engagement 12-18 months ahead of exit," said Verbeeten. "Funds often try to turn around losers, but the real upside is making winners more successful."

Editor's Note: To schedule an interview with Bain Partners:

·         International media: Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

·         Japanese media: Miyuki Hiraishi at miyuki.hiraishi@bain.com or +81 3 6267 4916

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