Private Equity Bets Big on Japan: 5 Things to Know
TOKYO – CVC Capital Partners prepares $ 20 billion bid for Toshiba, while a Bain Capital-led consortium has offered to buy Hitachi Metals in a deal Nikkei says could be worth $ 7.3 billion of dollars.
These two movements highlight the growing appetite of private equity investors for Japanese transactions.
Here are five things to know about the private equity boom in Japan.
What drives private investors in Japan?
The most important factor is the rise of specialized mega-funds in Asia. KKR recently raised $ 15 billion for its fourth Asia fund – larger than its last North American fund, which raised $ 13.9 billion in 2017. Overall, dry powder – capital that has been raised but not yet spent – Fund focused on Asia-Pacific reached $ 477 billion in 2020, a 71% increase from 2017, according to Bain & Company.
The huge Chinese market has been the driving force behind the rise of mega-funds. But with the growing political tension between China and the United States and Europe, “there is now a risk in moving money from Asia to China,” said an executive of a major Asian asset manager.
This context, combined with the growing urgency of industrial conglomerates to restructure their business portfolios, is fueling a boom in mergers and acquisitions in Japan. The country’s extremely low interest rates also allow private equity investors to make bold bets, which are usually partially funded by debt.
Who are the main players?
The players leading the latest round of deals are no strangers to the Japanese M&A scene. Luxembourg-based CVC Capital Partners, the company behind the agreement with Toshiba, is one of the largest private equity firms in Europe. His past investments in Japan include the Skylark restaurant chain in 2006 and a recent $ 1.5 billion acquisition of Shiseido’s personal care business.
Bain Capital, which would be the top bidder on Hitachi Metals, also shopped in Japan. He was part of the consortium that bought Toshiba’s chip manufacturing unit for $ 18 billion in 2018 and deprived retirement home operator Nichii Gakkan last year.
Institutional investors, including government-linked funds, are a less well-known but important group of investors. These players not only invest in private equity funds, but increasingly invest directly in companies as co-investors, thus helping to increase the size of transactions. Nikkei reported that state-backed funds Japan Investment Corp. and the Development Bank of Japan are expected to participate in the acquisition of Toshiba by CVC.
What types of transactions attract capital?
Japan is unique for its large part of buyouts, which typically involve a buyout fund or the management of a company taking a controlling stake in the company. Growth transactions, on the other hand, involve the acquisition of minority stakes. In India and Southeast Asia, growth deals made up more than 80% of the total in 2020, while more than 70% of deals in Japan were buyouts, according to Bain.
Buyouts typically involve major changes in the target business to increase profitability, such as installing a professional CEO and closing loss-making divisions. Foreign private equity investors are generally considered a good choice for Japanese manufacturing companies because they can help the company find new customers abroad.
Recent transactions also tend to involve a conglomerate combining a sale and an acquisition, a sign that they are aggressively restructuring their business portfolios. Hitachi, for example, announced a $ 9.6 billion acquisition of US software company GlobalLogic. Pharmaceutical company Takeda, which bought Irish maker Shire for $ 62 billion in 2019, sold its consumer healthcare business to Blackstone for around $ 2.3 billion last year.
What does this mean for investors?
Supporters hope the growing acceptance of private equity will help revitalize conglomerates in Japan, which once led the Japanese economy but have recently become a symbol of how the country has fallen behind in the digital age. Japanese banks and pension funds struggling with low interest rates are also hoping private equity funds can increase their returns – a successful fund should typically at least double the money it raises from investors. .
But the ability of funds to generate a nice profit also depends on external factors, such as stock market valuations. Kioxia, the Toshiba chip, was scheduled to go public last year but canceled the offer at the last minute. Most recently, Applied Materials ended a $ 3.5 billion deal to buy its Japanese counterpart Kokusai Electric from KKR, saying it could not get approval from Chinese regulators. An executive at a Japanese financial institution said the recent boom in special purpose acquisition companies indicates that “the stock market is showing signs of overheating.”
Is there a refusal?
A revised foreign exchange and trade law that requires foreign investors to notify the government if they buy a 1% or more stake in strategic companies does not appear to have dampened investor appetites.
But some politicians have expressed concern over buying foreign capital into Toshiba, which operates national nuclear power plants. Fumio Kishida, the former Japanese foreign minister, recently tweeted that unlike the United States, Japan does not have a framework to prevent inward investment for reasons of national security.
“Freedom of investment remains important. But in the future, it is necessary to consider a framework that can avoid adverse effects on management and sensitive information for basic security industries,” he said. added.
Some investors also worried about the lack of protection for minority shareholders, who could be forced to accept unfavorable terms if the approval of the transaction reaches a certain threshold. Conflicts tend to arise when a private equity fund and large shareholders, such as family owners of a company who also sit on the board of directors, team up to privatize the company. In Bain’s takeover bid for healthcare firm Nichii Gakkan last year, Hong Kong hedge fund Lim Advisors criticized Nichii Gakkan’s management for failing to protect the interests of minority investors .