Key facts
- U.S. and European buyout firms are increasing their presence in Japan by opening new offices.
- These firms are targeting unprofitable businesses being spun off by large Japanese corporations.
- Midsize firms are focusing on regional cities outside of Tokyo, such as Osaka and Kyoto.
- Building long-term relationships is a key strategy for securing deals in these traditional markets.
- Japan is considered a prime market for private equity due to available assets and potential for consolidation.
- Carlyle has deployed a $3 billion fund and expanded its Japan deal team.
U.S. and European buyout firms are intensifying their expansion into Japan, establishing new offices and preparing to acquire non-core or unprofitable businesses being divested by large Japanese corporations. These firms, including KPS and Aurelius, are differentiating themselves by focusing on midsize deals and avoiding the large-scale transactions dominated by major players. This strategy involves setting up shop in regional cities like Osaka and Kyoto, where building long-term relationships is crucial due to the traditional business culture.
Bain Capital, for instance, spent approximately seven years to finalize the acquisition of the drugstore chain Kirindo in Osaka, highlighting the time investment required. Blackstone is also actively building relationships in the city, with Atsuhiko Sakamoto, head of private equity in Japan for the firm, noting the need to "do as the Romans do" to succeed in these markets. Observers suggest that the slower pace and relationship-driven approach in cities like Osaka and Kyoto present an opportunity for private equity firms willing to invest the necessary resources and time.
Japan has gained a reputation as a highly attractive market for private equity, characterized by companies with substantial cash reserves or non-core assets ripe for monetization. Nicholas Smith, strategist at Citic CLSA, described Japan as a "target-rich environment" with "succulent valuations" and "painfully diffuse market share inviting consolidation." However, with increasing competition and rising prices in Tokyo, firms are increasingly looking to regional hubs like Kyoto, Osaka, and Nagoya as the next frontier for deals. Hironori Momose of Bain’s Japan private equity team believes that Osaka is several years behind Tokyo in terms of private equity activity and is likely to experience a boom in the coming years.
Carlyle has further signaled its commitment to the Japanese market by deploying a $3 billion fund and expanding its local deal team to 35 professionals. This expansion supports accelerated activity driven by low financing costs and a consistent flow of corporate carve-outs and succession-led transactions. The strategy in these regional cities aims to build relationships well in advance of potential corporate actions, positioning firms to act decisively when opportunities arise and to avoid intense competition from rivals.