TOKYO – May 31, 2024 – Japan became the largest private equity (PE) market in Asia Pacific last year, according to Bain & Company’s Japan Private Equity Report 2024 launched today.

While the rest of the world was plagued with challenges from macroeconomic uncertainties, Japan’s PE market bucked the trend. Deal value doubled in 2023 to JPY 5.9 trillion compared to the prior five-year average (2018-2022), making it the leading deal market in Asia Pacific. Large ‘take private’ deals (over USD 1 billion) were the key factor behind Japan’s surge in deal value, boosting deal value to 30% of the Asia Pacific total, up from 7% over the previous five-year average. However, after a strong finish to 2023, 2024 started off with fewer large deals.

Compared to previous years where carveouts were the main source of deals, 2023 saw a different story as take private deals became the dominant deal type accounting for two-thirds of Japan’s deal value. Growth equity deals also maintained strong momentum but remain relatively small compared to other Asia Pacific markets.

Improved exit conditions allowed exits to ramp up to JPY 1.6 trillion, meaningfully above the previous five-year average, however, distributions still lag deployments as portfolios age.

“Compared to the last boom period, Japan’s PE market is now in a much stronger position. A combination of too much money, lower quality assets, and too little experience backfired on Japan’s PE market upon the 2007-2008 global financial crisis. This time, we have better deal supply and talent fundamentals, but funding exuberance and new entrants may increase competition,” said Jim Verbeeten, a Tokyo-based partner from Bain Japan’s PE practice.

The tailwind of corporate governance improvements received new momentum with Tokyo Stock Exchange’s focus on price-to-book ratios and overall capital efficiency, and updates to the M&A code that create space for unsolicited bids. This bodes well for deal supply in Japan as it enables more activist activity, and increases overall levels of M&A, while emphasis on ‘market checks’ can allow PE entry into corporate M&A deal processes. Additionally, more companies are preferring to go private.

“With Japan PE providing some of the highest returns globally, fundraising is looking to be a breeze. Increasing LP appetite for Japan also stems from a desire to redeploy capital previously aimed at China. These increases in funding mean we should expect more competition in the PE market,” said Sebastien Lamy, co-head of Bain & Company’s Asia Pacific PE practice, who is based in Tokyo.

The report noted that there is a growing number of investors chasing deals in Japan. The number of GPs with a Japan office and a latest buyout/turnaround fund that is more than or equal to JPY 50 billion have doubled between 2012 and 2024, with more domestic GPs growing to this size. Additionally, there is a large group of foreign investors not yet ‘on the ground’ in Japan that is showing clear interest to be more active.

“With the myriad of different PE players entering the market, a ‘business-as-usual’ strategy is no longer viable. Domestic GPs need to decide how big they want to be in the buyout space and if required, change their operating model. With growing fund size, they should invest in sector expertise and post-acquisition capabilities to compete with international firms,” said Azusa Owa, a Tokyo-based partner in Bain’s Japan PE practice.

“Foreign firms already in Japan should consider applying investment discipline while managing expectations for levels of capital deployment locally, strengthening sourcing muscles to avoid competitive secondary auctions, reinforcing post-acquisition and exit muscles further as a source of differentiation and protecting their best talent from being poached – especially those that can operate in an international environment.

“New entrants to Japan PE will require a clear approach and focus, and tenacity to play the long game.”

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Media contact: Ann Lee: ann.lee@bain.com

Full report and Japanese contact: marketing.tokyo@bain.com

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