As Japan’s Business Owners Move On, Could Private Equity Move In?

With Japan’s previous generation of entrepreneurs and business founders reaching retirement age, the country’s commercial landscape is facing a serious challenge. An aging population driven by a low birth rate, as well as historically low levels of immigration, have resulted in company founders and CEOs finding it difficult to appoint suitable successors.

“The Japanese market is unique in that SMEs represent 99% of all businesses, and the segment employs 70% of the workforce. And at the moment, nearly 2.5 million Japanese SMEs are facing succession issues,” explains Tokyo-based Scott Reynolds, Country Executive Japan for Alter Domus, a fully integrated fund and corporate services provider dedicated to international clients. “In light of a substantial 55% inheritance tax, many business owners approaching retirement age are choosing to look for potential buyers instead of handing over the reins to the next generation. This presents a clear opportunity for the PE (private equity) market.”

Looking to stimulate the market, Japanese lawmakers are considering new tax perks to increase cross-border M&A deal activity – which set a fifth consecutive record of 777 transactions in 2018.

As one of the most mature economies in the region, Japan offers a stable platform for investors with relatively low risk. Scott explains, “Right now, it’s an interesting place to invest, and PE is definitely ahead of the curve in identifying opportunities. Building on robust due diligence, PE firms are seeing the value in the market – which is characterised by more conservative returns offset by relatively lower risk. Recently, almost two-thirds of primary transactions have been linked to succession issues.”

For many Japanese firms, PE investment not only offers a financially rewarding exit opportunity, but also a chance to keep the business alive when an appropriate heir is unavailable or unwilling to take over. Private equity investment can breathe new life into traditionally-run Japanese companies through corporate reorganisation and productivity enhancements – as well as improvements in transparency, governance, management and strategic planning.

According to Scott, “Another trend we are seeing is large conglomerates selling off non-core assets and divisions. In many of these cases, the companies are solid, but could easily benefit from cost cutting or additional investment in IT infrastructure. Leveraging their business networks, PE investors can also quickly expand distribution by providing access to new domestic and international markets.”

Although some wariness remains amongst older generations of business owners, younger founders and CEOs are proving receptive to the idea of foreign investment, seeing it as an opportunity to grow the business. “In this aspect, global PE firms with strong brand recognition and due diligence teams have a comparative advantage – not just in terms of financial strength, but also in the receptiveness of Japanese companies,” comments Scott.

With well-established roots in the market, Alter Domus is noting strong investor interest in the large-cap health care and health-related technology sectors, as well as manufacturing support companies – such as those feeding into the country’s mature automotive industry. However the country’s recent succession issues have been unearthing attractive opportunities across all major sectors, and PE firms would be well advised to keep an open mind when evaluating potential investments in Japan.

“Alter Domus has the global and regional footprint, as well as the deep local knowledge to serve clients across the world’s key financial centres.  With 2,400 professionals located around the world, we are initially serving a proportionately higher ratio of foreign clients through our Tokyo office – clients who appreciate our consistent service, stringent internal controls and transparent reporting, as well as our emphasis on cyber security,” Scott added.

He concluded, “Japan offers a balance of stable returns and relatively low risk. As the succession issue paves the way towards increased foreign investment, Alter Domus has the experience, knowledge and expertise to guide private equity investors as they seek the most attractive and potentially rewarding opportunities.”