PE fund business in Japan

【Summary】 
  • There is a social context in Japan that requires the expansion of PE fund business 
    • The need for business succession in Japanese companies
    • The need for business portfolio replacement in large Japanese conglomerate companies 
    • Japanese companies have low productivity (international comparison), and part of the cause is related to PE funds 
      • Too small size of SMEs to invest in infrastructure
      • Inward-looking orientation: Japan is shrinking market
      • Lateness in digital utilization: Investment amount is also low
      • Uneven distribution of management skills, concentrated in Tokyo and Osaka
        • Unable to expand overseas
        • Unable to utilize digital technology
      • Difficulty in self-purification, although not unique to Japan
  • PE fund business has achieved results in Japan and is widely recognized 
    • Increasing number of acquisitions by PE funds
    • Henry Kravis was featured in a corner of the Nihon Keizai Shimbun talking about memories: signaling his establishment as one of the business leaders in Japan 
    • The largest IPO of 2023 was KKR's KOKUSAI ELECTRIC 
    • It can be said that the PE fund business no longer has a bad reputation, and traditional companies that value their reputation, such as Mitsubishi Corporation and Mitsui & Co., have entered the market
  • The government is aware of its important role, and a trend to encourage the expansion of the PE fund business has recently emerged in Japan
    • With the establishment of guidelines for corporate takeovers in August 2023, legal evaluation procedures have been established
    • The former Prime Minister Kishida established a powerful organization within the Liberal Democratic Party toward a nation built on asset management in 2024
    • The government is personally handling public relations activities to attract investment
  • There are many opportunities for PE fund businesses to enter the market 
    • The Financial Services Agency has prepared a guide and the procedures are expected to be simple
    • The liberalization of hostile M&A has brought opportunities for funds to enter the market
      • The acquisition proposal by the founding family for Seven-Eleven is an opportunity for funds to enter the market
      • There are other acquisition proposals out there as well 

Many small and medium-sized enterprises in Japan are struggling to choose successors, and the situation is reported along with statistics in the White Paper on Small and Medium Enterprises published annually by the Small and Medium Enterprise Agency of the Ministry of Economy, Trade and Industry. According to the paper, small and medium-sized enterprises struggling to choose successors are considering fund acquisition as an option, and the government has prepared a tax system to support this. The number of M&As in Japan has been increasing year by year, exceeding 4,000 in the last three years, but there are more than 400,000 companies in Japan, defined as having 20 or more employees (retail companies have 5 or more), and even if they enter a crisis/portfolio replacement period in which they consider M&A once every 10 years, I think there is still room for the number of M&As to continue to grow.

Japan's leading conglomerates continue to replace their portfolios for various reasons, including global investment competition in growth businesses such as semiconductors and AI, and criticism from the stock market of low profit margins (greater understanding of fund activities has also led to increased activity by activists). If you look at major Japanese companies such as Hitachi and Toshiba, you will see that they are generally in the process of replacing their portfolios.

Next, the economic theory that the small size of small and medium-sized enterprises leads to low productivity has been widely taken up by the government, and a former leading analyst at Goldman Sachs and a former leading consultant at the Boston Consulting Group have strongly advocated the theory that restructuring them is the way to restore Japan's national strength.It is true that the small and medium-sized enterprise protection policies that the Japanese government formulated during the era of population growth (fearing that businesses would go out of business and the unemployment rate would rise) have hindered metabolism and left a large number of low-productivity small and medium-sized enterprises behind, so now that a change in policy has finally been made, major reforms to the restructuring of small and medium-sized enterprises will likely proceed from now on.

The shrinking Japanese market is explained by its declining population. All Japanese people share a sense of crisis about this issue.

Japan is heavily concentrated in Tokyo and Osaka, and has not created a situation where there are powerful commercial cities in various regions like in the United States. People who graduate from famous universities want to find work in limited urban areas, creating a situation where companies in regional cities cannot access resources. PE funds have the potential to overcome this situation because their business model involves finding top regional companies as investment targets and then sending in strategic consultants and people with management track records to increase the company's value after investing.

Investment by PE funds is on the rise in Japan, and the situation is being reported in various media. Here, we will introduce a special page of the Financial Services Agency, the financial authority of the Japanese government.


A symbolic event showing the progress of US-based funds also occurred in 2024. The Nihon Keizai Shimbun, a newspaper read by almost all business people in Japan, has a column in which respected business leaders write serial memoirs, and Henry Kravis, founder of KKR, appeared in this column. I think this was a symbolic event. I think it symbolized the fact that many people in Japan now recognize PE funds as legitimate businesses that grow together with companies, rather than exploiting them, and that they are worthy of respect.

As mentioned in the memoir, Japan's largest IPO in 2023 was the IPO of KOKUSAI ELECTRIC, a KKR investment.

The serialization in the Nihon Keizai Shimbun alone is enough, but just to add a little, the PE fund business is no longer considered a bad business, as Mitsubishi Corporation, a traditional large Japanese company that cares about its reputation, has entered the fund business on a large scale with Marunouchi Capital, and Mitsui & Co. has entered the fund business with MSD Corporate Investment.

Japan's legal system is being steadily improved, and last year the Ministry of Economy, Trade and Industry issued guidelines for M&A. Many PE funds are already expanding their business in Japan.

However, the Japanese government believes that the current scale of the fund business is insufficient, and is planning to further develop the industry. Former Prime Minister Kishida, who has played an active role on the international political stage, including hosting the G7, created a parliamentary group within the Liberal Democratic Party in 2024 to promote the creation of a nation built on asset management, and is continuing to promote this.

The government is already promoting itself as a nation built on asset management on its official website.

Financial authorities make all procedures available in English and are free of charge. If you are interested, you can simply contact them to find out how much time it will take.

I think there are certain barriers to entry for PE funds coming from overseas to Japan to find deals, but now there are more and more opportunities to enter by lending a hand to companies that are having trouble with hostile takeovers. In terms of something currently underway, Seven-Eleven is a large deal. There are daily reports that the founding family of Seven-Eleven is considering an MBO of the company and is sounding out funds. This is not the only case, and in the Japanese market, where hostile M&A has become the norm, there are likely to be many more opportunities if you keep your eyes open.


（Afterword）
 I usually work at a consulting firm, working to improve management to turn good large companies into great ones, but when I think about the prosperity of Japan as a whole, I think that the issue of strengthening the management capabilities of sluggish large companies, or sluggish departments within large companies, and small and medium-sized companies is an issue that needs to be addressed just as much or even more. If you are looking for new business opportunities, I would like you to pay attention to and consider Japan's PE fund industry.

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