Global investors bullish on Japan private equity

Investors are increasingly bullish about the prospects for Japanese private equity, according to Coller Capital. However a few limited partners on the ground are calling the recent rush of fundraising the start of a bubble.

Investors in private equity funds are upbeat about the prospects for Japanese private equity funds, according to an industry survey. 

Many of the investors, known in the industry as limited partners, expect the recent changes to Japan’s business and economic environment to result in more opportunities for private equity over the next three years.

Over 70% of Asia-Pacific LPs hold this view, as do 41% of North American and 45% of European, according to the results of a bi-annual global survey by private equity secondaries manager Coller Capital, released on Monday. The survey of 110 LPs was conducted across March and April.

Private equity firms have rushed to meet this demand, raising new funds.

KKR said earlier this month that it had raised another $9.3 billion, and will focus increasingly on big buyouts in Japan. It has already put some of the money of its new Asian Fund III to work in the acquisition of buyout in Japan of Hitachi Kokusai Electric.

Homegrown funds are benefiting too. Japanese private equity firm Integral; Advantage Partners and Tokio Marine Capital were amongst a record number of firms to spot the opportunity last year.

“It’s a kind of bubble,” said one limited partner based in Japan.

Many global and regional LPs have been disappointed by China of late, particularly the ability of funds to return capital to them quickly.

As China’s economy slows, and regulators restrict private equity’s ability to sell companies on its stock markets, some investors are turning once again to more mature buyout markets – including the world’s third-largest economy, Japan.

The price tag on deals also appears more reasonable in Japan. Buyout multiples in China have averaged 25.9 times Ebitda versus 9.8 times in Japan between January 2014 and April 2017, according to data provider Mergermarket.

Japanese private equity funds are able to juice returns to investors given banks are keen to offer leverage after the Bank of Japan adopted a policy of negative interest rates.

The world’s largest pension fund, Government Pension Investment Fund (GPIF), and Japan Post, the country’s biggest bank by deposits and insurer by assets, are poised to invest in alternatives, including private equity.

Many other Japanese asset owners have already begun shifting money out of negative-yielding government bonds and into these riskier but potentially more rewarding products.

Coller Capital’s Hong Kong-based principal Zhan Yang said typical returns from Japan funds that his firm tracks have been inking deals at between 1.8 and 2.5 times return on investment.

Source: Coller Capital

Cautious on the region
Most institutional investors globally have become more selective elsewhere in the Asia-Pacific region given the relatively lower returns, with European asset owners in particular keen to reduce their headcount there, the survey found.

They are least optimistic about North America, given the uncertainty over potential tax and regulatory changes under US President Donald Trump.

A third of the 110 respondents said they were making little change to their Asia-Pacific PE investment strategy. But just over half (54%) said they were more selective in picking managers – or general partners (GPs) – in and for the region.

Indeed, one-fifth of European institutional investors are planning to cut down their Asian private equity teams, compared to just 8% that intend to expand their staffing in the region.

However, four in 10 Asia-Pacific LPs are planning to strengthen their private equity headcount in the region. And their prospects of doing so look better than they used to, despite the fierce competition for talent.


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