TOKYO – April 26, 2023 – Private equity (PE) investors in Japan can win in turbulent times by applying a differentiated playbook across the deal lifecycle, as now is the opportune time for activist-owned firms to exploit and outperform slower-moving competition, according to Bain & Company’s Japan Private Equity Report 2023 launched today.

Compared to other markets in Asia Pacific, deal activity in Japan remained healthy, a result of investors diversifying away from China and a weaker yen.

Although deal value fell 13% to JPY 2.8 trillion (or 28% in USD) in 2022 compared to 2021, it was the second largest year in terms of deal value on record. PE investors also scored six deals larger than JPY 100 billion. Deal volume reached the highest in history at 146 deals in 2022. Although growth deals continued to grow in volume last year, it was buyouts that dominated total deal value.

According to Bain’s Asia Pacific Private Equity Report 2023 released last month, Greater China and Southeast Asia saw the greatest fall in deal value in the region at 53% and 52%, respectively. Deal value in Australia-New Zealand, Korea and India dropped 48%, 39% and 25%, respectively.

“Japan has been one of the PE markets most insulated from macroeconomic headwinds in Asia Pacific last year,” said Jim Verbeeten, a Tokyo-based partner from Bain Japan’s private equity practice. “Fundamental trends supporting the market remain similar - improvements in corporate governance and a continued need for succession solutions, resulting in longer term healthy growth across deal sources, sizes, and types.”

Japan’s PE share of M&A is also increasing to levels in line with other mature markets. One supporting driver is access to a broader range of funds, including long-hold, infra and real estate funds with lower IRR-hurdles for global investors.

“However, there is an urgent need to focus on exits. Distributions to investors have stalled due to challenging exit conditions including fewer IPOs and early exits, and portfolios are aging with a meaningful number of 6+ year investments still held,” said Sebastien Lamy, co-head of Bain’s Asia Pacific PE practice, based in Tokyo. Exit deal value and volume have fallen 68% and 47%, respectively, year-on-year.

Outlook 2023

Bain expects macroeconomic conditions to remain uncertain this year as inflation and recession risks weigh on global markets and geopolitical tensions persist. To succeed in a volatile environment, Bain suggests four key recommendations:

1. Invest smartly throughout the cycle: History has shown that deals done during and immediately after recessions have generated superior returns. Recessions increase the gap between winners and losers, as competitive fluidity increases, and activist-owned firms can outperform slower competition.
2. Identify winning themes and sector winners:  Bain’s analysis showed that in most sectors, top quartile companies outperform the average returns of the best performing sector. Sector winners are often aligned with key trend-supported themes or have the ability to pivot towards those.
3. Integrate an inflation lens into due diligence is critical, as it can affect business attractiveness in fundamental ways.
4. Deploy a “disruption period playbook” to secure value and pro-actively drive value creation in portfolio companies.

“Recessions are ‘inflection points’ for sharp divergence in company performance. The best PE funds are strong, focused, stewards of value creation in periods of disruption. Now is the time for PE funds to outperform,” said Azusa Owa, a Tokyo-based partner in Bain’s Japan PE practice.

Editor's Note: For more information or interview requests please contact: Ann Lee, tel: +65 6228 2960, email: ann.lee@bain.com, Bain & Company.