14 ASIAN LEGAL BUSINESS – JANUARY-FEBRUARY 2024 WWW.LEGALBUSINESSONLINE.COM PRIVATE EQUITY Japan has emerged as the latest hotspot for private equity (PE) investment as geopolitical risks and weak return outlooks dampened the attractiveness of other traditional Asian markets, amongst them notably China. The Japanese private equity market saw deal activity of $25.1 billion in 2023 through 155 completed deals, according to research from Willis Towers Watson. These included the $15.2 billion buyout of electronics giant Toshiba by a consortium led by private equity firm Japan Industrial Partners. Indeed, in a year where prolonged interest rate hikes severely impacted debt capital markets and brought global dealmaking to a standstill, Japan largely bucked the slump and saw a continued increase in mergers and acquisitions (M&A) activity, including private equity M&A. “Private equity has continued to enjoy the Bank of Japan’s ultra-loose monetary policy, providing ample liquidity and low financing costs,” says David Azcue, a Tokyo-based partner at Simpson Thacher & Bartlett. He is also cohead of the firm’s private funds practice in Japan. “It is also worth noting that Japan has long had among the lowest M&A penetration among developed economies, leaving significant room for growth,” Azcue adds. And compared to other developed markets, relatively low EBITA multiples have also helped boost Japan’s allure for PE investors and stimulate capital inflows, he observes. Randy Laxer, a partner and co-head of Asia private equity practice at Morrison Foerster’s Tokyo office, underscores the strong U.S. dollar, the weak Japanese yen, and the low corporate valuations as amongst a range of factors contributing to this emerging trend. “Major international private equity sponsors have responded to these favourable conditions by launching new funds specifically tailored for Japanese investment and expanding existing operations and fundraising activities in Japan,” notes Laxer, adding that Japan has fewer obstacles to foreign investment than certain of its Asian neighbours. DOMESTIC DRIVERS Stepping into 2024, economists are overall bullish about Japan’s equity markets, banking on the country’s expected exit from deflation, continued fund inflows and resilience valuation, as well as structural market reforms. Although the global macro environment has played a crucial role in reshaping Japan’s ‘investibility’, official policies and changes from within the Japanese society have proven pivotal in accelerating PE-backed deal flow. “Government initiatives in recent years, including the 2019 Fair M&A Guidelines, the 2022 Tokyo Stock Exchange (TSE) market restructuring, and the 2023 Guidelines for Corporate takeovers, coupled with a rise in shareholder activism, have sharpened Japanese companies’ attention to stock performance, portfolio rationalisation, capital costs and profitability,” notes Azcue. Specifically, Laxer points out that “the TSE and activist investors continue to pressure Japan-listed companies to increase price-to-book (P/B) ratios above one, which means increasing market capitalisation to a level above net book value. As a result, an increasing number of TSElisted public companies are exploring opportunities to carve out non-core assets and increase shareholder value.” In response, “we have seen an increasing number of management teams of listed companies exploring management buyouts, as a means of implementing structural reforms, and turning to PE firms to sponsor and/or financially support these buyouts. Management and PE firms see investment in these companies, with low P/B ratios, as an opportunity to unlock value and realise investment returns,” notes Laxer. In addition, Japan’s rapidly ageing population has sent the succession plans of SMEs – representing more than 99 per cent of Japan’s corporate enterprises - to a tailspin, with many founders either childless or without an otherwise viable successor. Consequently, focuses on labour shortages, succession planning, and new management have created opportunities for PE-backed acquisition and investment opportunities. “PE has helped fill this need by providing a mechanism for founders to ensure not only the succession of their businesses, but the institutionalisation and expansion of these businesses through access to capital, managerial talent and business options that many founders may not have conceived on their own,” explains Azcue. With Japan’s birth rate continuing to stay low and the baby boomer NEW DAWN With global private equity investors falling out of love with a misfiring China, and other Asian alternatives coming up short, Japan has become the region’s new PE darling, bolstered by favourable monetary policies and government initiatives, market and regulatory reforms, and its unique socio-economic development. And lawyers are bullish about the country’s PE activity going into 2024. BY SARAH WONG