Private equity deals in Japan are set to reach a record-breaking year.

Private equity funds and advisors predict that take-private deals will reach a new record in Japan this year. They expect the total to surpass the $40.3 billion in 2023. This is because companies are under pressure to increase returns for investors.

Private equity was once seen as a threat by Japanese companies, who referred to it as "hagetaka", which means vultures. They are now more open to buying out companies and letting go of their once prized listed status, as activist investors and the Tokyo Stock Exchange call for a revamping of capital management and cross shareholdings.

Private equity players report unprecedented interest in Japan from their investors, and that the number of deals in this year has bucked a global trend towards a slowdown.

Dealogic data show that private equity transactions totaled $27,6 billion in the year ending August 20. This is almost triple the $9.5 million for the same period of 2024.

Blackstone's $3.5billion offer for engineering staffing company TechnoPro, and EQT’s $2.7billion bid for elevator maker Fujitec are two of the most notable deals announced over the last month.

Kazuhiro Yamada, Carlyle Japan's managing director said: "We have incredibly rich pipelines of deals."

Yamada stated that "of the more than 300 business opportunities Carlyle Japan sees across its three core industries, 30 of them have a good chance to close in the next 12-to-18 months."

Tokyo Stock Exchange set stricter governance standards to increase the attractiveness of listed companies for investors. This is forcing some companies to consider delisting.

A reform drive by the bourse, in response to Japan's unusually high number of undervalued shares, has led to a wave of share buybacks and asset sales, as well as management buyouts.

Private Equity vs Activist Investors

The growing activist activity is encouraging speculation about the stock prices of companies that are being targeted.

Akihiko MANAKA, Bank of America's co-head of M&A and investment banking in Japan, said that speculators could push up the price of a share so high, no one would be able to make an offer.

Fujitec's share price has more than doubled between the time that Oasis, an activist group, first targeted the company and EQT EQT bid for the company in July.

Private equity firms offered a discount on the market price.

Kohei Fujishima, a director of EQT, who worked on Fujitec's deal, said that it is often too late for a company to consider potential partners.

Industry players report that companies increasingly talk to private equity firms in order to avoid this situation. This is before investors who are agitating for changes target management.

Eiji Yatagawa is a partner with KKR Japan.

Yatagawa stated that some managements are already taking action to privatise before shareholders become activists.

According to fund managers, up to half of the discussions they have with companies now are initiated by them.

The opportunity to restructure the company away from the public market is a great benefit for the existing management.

"At C-suite levels, it is the practice of PE funds to give the existing management a chance," said Jeremy White. He is a partner at Morrison Foerster and the global co-head for M&A.

Funds claim that Japan's capital market is robust and supports relistings. Companies pursuing mergers, acquisitions, and other funds offer potential exits.

Teruyuki A. Asaoka is the managing director of EQT Japan's private equity group.

He said that private equity firms are gaining in strength as buyers because there is a lot more capital available. (Reporting and editing by Sonali Paul, Anton Bridge, Miho Uranaka)

(source: Reuters)