Naofumi Nishi and Masa Suekane are partners at Bain Capital and lead the firm’s Japan private equity team. Bain is one of the most active global sponsors in the country, through its large-cap pan-regional and mid-cap Japan strategies. Recent investments include York Holdings, a USD 5.4bn carve-out from Seven & I Holdings, Mitsubishi Tanabe Pharma Corporation, acquired from Mitsubishi Chemical for about USD 3.4bn, and a USD 338.5m take-private of Jamco.

Q: The York Holdings carve-out will rank among the four largest PE buyouts in Japan – and three of those closed in the last three years. Are deals just going to get bigger and bigger?

NN: For those large deals – above JPY 500bn (USD 3.5bn) in enterprise value – there will probably consistently be three to five each year. What will drive the market in terms of deal count is the mid-cap to smaller large-cap space. The number of deals in the JPY 30bn to JPY 100bn range will expand at a much faster pace. The split between take-private, corporate carve-out, and founder-succession hasn’t changed a lot over the last 10 years. The number of deals across all types has increased, and quickly, especially in the last five years.

Q: What big picture developments do you see in corporate carve-outs?

MS: The carve-out opportunity will continue to expand. What we have seen over the last 10 years is just the tip of the iceberg. Hitachi Group did a great job carving out non-core assets, selling to private equity firms like us, and investing the proceeds in IT infrastructure, which is their core business. A lot of smaller conglomerates are now trying to do similar things. These might be smaller businesses, but there is still a lot of scope for operational improvement.

Q: Hitachi remains the standout example?

MS: We’ve seen some others – Fujitsu, for example – but in terms of the degree of transformation, Hitachi is top notch. Their stock price has risen 5x in the last 10 years, which is amazing for a giant, traditional Japanese conglomerate. In 2009, they recorded the biggest loss in their history. New management came in and started a significant restructuring, despite a lot of resistance within the organisation. Hitachi Metals [now known as Proterial], which we acquired in 2022, was regarded as a crown jewel of Hitachi Group, yet management was brave enough to sell to private equity.

Q: Does the combination of wider appreciation of the benefits of divestments and increased pressure on listed corporates from activist investors make carve-outs easier to do?

MS: Even though transaction flow has expanded because of activist pressure, valuations have become higher than in situations where activists are not on the shareholder register. The question we must ask is what kind of operational improvement opportunities remain in the asset. Some of the lower-hanging-fruit actions might have already been taken as a result of activist involvement.

Q: Is there a sense that no company is too large to be immune to activist investor pressure?

NN: In the past, only large corporations were targeted by activists. Now, activists are looking at mid-size companies with market capitalisations of JPY 100bn to JPY 200bn or even smaller. The smaller the company, the larger the percentage stake they can buy, which increases their influence. Last year, we acquired Trancom, a mid-size logistics company with an enterprise value of about JPY 100bn. Dalton Investments had increased its holding from 10% to 20%, which ultimately enabled the deal.

Q: Have you seen any change in the nature of activist proposals?

NN: What they are asking for hasn’t changed much – share buybacks, liquidation of assets, take-privates at a risk premium to the stock price. However, they are becoming more aggressive. They are asking companies for bigger returns.

Q: What kind of direct engagement would you have with these investors?

NN: In terms of deal sourcing, it’s about 50% advisors suggesting companies talk to us and 50% is us approaching companies. We might have informal discussions with activist investors about potential opportunities, or we might reach out to them after talking to the target company. But we wouldn’t talk to an activist first and then approach a company; we would only talk to the activist if company management agreed to it. We think that works better in a Japan context. Other private equity firms take different approaches.

Q: Can you envisage private equity firms making hostile takeover bids in Japan?

NN: There are situations where private equity firms submit proposals subject to the approval of management – unsolicited but only quasi-hostile. I think it would be difficult to go 100% hostile. Most private equity firms need to secure leveraged financing, and to get that, typically you need management consent. Generally, we find that companies are increasingly aware of the importance of corporate governance and shareholder returns, so they are more willing to listen to our opinions. Some are already adopting Western-style corporate governance, others are more traditional. But directionally, they are all moving towards a Western-style approach.

Q: How is this shift in corporate mindset impacting private equity exits?

MS: As large corporations divest non-core assets, they double down on core businesses, doing synergistic M&A. Appetite is increasing in this area, and it creates exit opportunities for us. At the same time, Japan’s capital market has been stable relative to other regions, and for the larger deals, where strategic options are narrower, we are more reliant on IPOs. We also see more new GPs coming into the Japanese market. They might struggle to do primary deals, so they are turning to secondary fund-to-fund deals. However, we prioritise strategic exits and IPOs.

Q: To what extent is that strategic agenda apparent in recent Bain exits?

MS: With Japan Wind Development, the buyer [Infroneer Holdings] already had a construction business related to renewable energy and wanted to expand into ancillary businesses. That was one of the motivations, to my understanding. Nippon Life Insurance was also looking to expand into ancillary areas when it acquired Nichii Holdings from us. At the time, Japanese insurance companies were struggling to find the next pillar of growth – their core life insurance business faces headwinds related to the declining population and the industry was in the process of being deregulated. Nippon Life had seen one of its competitors buy a nursing care business, so it expanded accordingly.

Q: Is simplification the key to positioning assets for sale to strategic investors?

MS: The simpler the better for strategic buyers – they want to focus on what they really want to buy, and they don’t like assets that require heavy restructuring or transformation. That’s a job we can do, and having 70 private equity professionals on the ground is a big advantage. In the case of Nichii Holdings, the previous owner, who was also the founder, had expanded from the core nursing home, childcare, and medical BPO businesses into areas like English-language schools and pet care. We downsized the company, selling some businesses and shutting down others, so management bandwidth could focus on the core business. The company grew significantly through inorganic and organic activities, and we doubled EBITDA. When we sold to Nippon Life, the margins and growth rates were both higher.

Q: Why does real estate seem to come up more frequently in value creation efforts?

NN: We are seeing more opportunities involving corporate real estate. It’s not always the same approach: we might sell off unused real estate, we might do a sale and leaseback, or we might see the potential to increase the value of real estate through operational improvement. With York Holdings, for example, the Ito-Yokado store locations are in very attractive locations across the Kanto region, and we think we can add value through renovation and by bringing in new tenants. I’ve been with Bain for 18 years and we’ve always been interested in unlocking real estate value, but corporates didn’t care so much about it. Now, with the emphasis on governance and shareholder value, and pressure from activists, there is increased awareness.

Q: What impact does increased competition from private equity have on the sourcing and underwriting of deals?

MS: There are more GPs looking to participate in auction processes, but we still see opportunities for exclusive negotiations because of our track record and reputation in Japan. In the case of Jamco, we had previously invested in Showa Aircraft Industry [another aviation components business] and tripled EBITDA in three years. The major shareholders [Itochu Corporation and ANA Holdings] wanted Jamco to grow faster and they thought it would be achieved more easily under private ownership. We were able to convince them we would be a good owner, based on what we did for Showa.