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Bucking the trend: Japan lures record investment from financial sponsors

Global financial sponsor (FS)-led investment is in the doldrums, slumping 26% in the year-to-date (YTD; to 15 September), but in Japan, it is a different story. While Australia, India, South Korea, and China in particular, all lag last year’s totals, with fewer sponsors putting their money to work, the land of the rising sun has bagged USD 21bn of financial sponsor capital so far this year, a staggering 127% rise from the same period last year and an all-time record, according to Dealogic data. The number of sponsor-led deals into Japan has also soared 25%.

Financial sponsors are spurred by the depreciating yen, down almost 20% YTD against the dollar, while the country’s ultra-low interest rates make for bargain debt financing. On the sell side, corporates are focusing on core businesses and streamlining assets. One such example is the ongoing sale by surgical instruments manufacturer Olympus [TYO:7733] of its microscope business, Evident, to Bain Capital, a long-time investor in Japanese medical products, for around USD 3bn. Domestic firms are increasingly waking up to the benefits of outside capital, especially in cases where succession issues loom.

Transport, auto driving investment

The bulk of deal volume has come from two single transactions in transportation and auto, both involving KKR [NYSE: KKR]: an ongoing bid for a majority stake in Hitachi Transport System [TYO:9086] for almost USD 6bn, and a pending USD 5.3bn purchase of the existing auto-parts portfolio of Marelli Holdings, which is undergoing debt reorganization. Even without these deals, investment in Japan by financial sponsors would be on a par with last year’s level. The third and fourth largest-deals have come in real estate/property and healthcare, respectively. The flood of money into the country means that for the first time since 2009, Japan ranked second in Asia-Pacific as an FS investment destination. Over the past 12 years, the top-three spots have been dominated by China, Australia, and India.

Exits on the rise

Following a two-year lull, when exits by financial sponsors averaged USD 700m YTD in both 2020 and 2021, the rate has picked up to USD 1.1bn so far this year, although this remains a far cry from USD 2.2bn in 2019 YTD prior to the advent of the pandemic. Activity has been marked in the dining and lodging space thanks to three exits that have catapulted the sector to first place in terms of volume.

Bain Capital sold off hotel operator Ooedo Onsen Monogatari Hotels & Resorts to Lone Star Global Acquisition for USD 526m; fruit and veg retailer Oisix Ra Daichi [TYO:3182] is in the process of purchasing a 33% stake in restaurant operator Shidax [TYO:4837] from Unison Capital for USD 71m; and grocery company Yamae acquired Nihon Pizza Hut from Endeavour for an undisclosed sum. Of the 27 exits in the space in 2022, 85% have been in trade.

Pipeline strong to year-end

Financial sponsors are expected to remain busy for the rest of the year. Bain Capital is considering the sale of Works Human Intelligence, a Tokyo-based software developer for human resources; home-grown firm Integral has announced an MBO with real-estate management player Shinoken Group [TYO:8909]; and Baring Private Equity Asia (BPEA) is reported to be weighing up a sale of Bushu Pharmaceuticals, a Saitama-based contract drug and device maker.

The question now is whether Japan can maintain this heightened level of activity in 2023 or whether the country’s deal intensity will taper off, in line with the rest of the world.