Carlyle, the US-based private equity firm, continues to pursue deal opportunities in Japan’s consumer & healthcare, general industries and technology sectors, Managing Director and Co-Head of Carlyle Japan Takaomi Tomioka told Mergermarket.

“Across our 23 years’ history in Japan, today’s environment represents a good time to carry out buyout deals in Japan. Our US headquarters recognizes the current momentum and continues to support our activity,” he noted in the exclusive interview with this news service.

Carlyle intends to drill down deal opportunities via the sector-focused approach with three dedicated teams, which have accumulated knowledge and deep understanding of each sector. The teams have continued to communicate with the management teams of Japanese companies, he added.

The global private equity firm has a robust outlook for the Japanese market and believes that the current strong momentum will continue in 2024, supported by three key drivers: the need of Japanese companies to improve their capital efficiency, the need to improve productivity, and the acceleration of globalization of their businesses, according to Tomioka.

Improving capital efficiency has been an important theme for Japanese companies for years, Tomioka pointed out.

Improving return on equity (ROE) is a key component of the revised corporate governance (CG) code, which was first implemented in 2015. However, even after the implementation of the CG code, 57% of the TOPIX 500 companies still have an ROE of below 10% as of 2022, Tomioka said.

This compares with 25% of S&P 500 companies and these figures show that Japanese companies are behind US companies in capital efficiency, he added.

The Tokyo Stock Exchange’s request, issued last year to Japanese companies to improve their capital efficiency, will also continue to help increase deal opportunities, he continued.

According to Tomioka, 43% of TOPIX 500 companies had a P/B ratio of less than 1.0. This compares with 4% of S&P 500 companies, he added.

The average EBITDA margin of Nikkei 225 companies is around 14%, still lower than the 19% of the S&P 500 companies, he added.

There are many listed industrials companies that have a P/B ratio of less than 1.0 and some of them have not fully deployed their business to overseas yet, Tomioka noted. “We can assist those companies to transform themselves into global companies”, he added.

Carlyle is also seeing opportunities in the healthcare sector as it is one of the few sectors that keep growing due to domestic demand from an aging society, Tomioka noted.

The consumer sector in Japan is another focus for the firm as Japan has very strong consumer brands that can grow in overseas markets, according to Tomioka.

“Our portfolio company Orion Breweries, which I am looking after, is an example. This company is expanding its overseas sales. We are going to support such Japanese brands further,” Tomioka added.

In the tech sector, Carlyle is looking for opportunities in both software tech and hardware tech companies, he noted. There are many excellent companies in Japan’s hardware tech segment in particular, he added.

Meanwhile, the number of privatization/management buyout deals is also likely to increase, and the firm intends to explore such opportunities in 2024, he added.

Carlyle’s recent privatization deals

The financial environment in Japan will also continue to be supportive for private equity firms, Tomioka said.

Even if the central bank changes its monetary policy slightly, the potential uptick of financing costs in Japan will be limited, as Japan’s inflation rates are not as high compared to the US and Europe, he noted.

“In Japan, the PE industry can get an LBO loan with an interest cost of around 3%. This compares with approximately 9%-11% in the US and Europe,” he said.

Meanwhile, Carlyle will continue to pursue exits from its portfolio companies in 2024 like in previous years, when the exit timing comes accordingly. The IPO market is expected to recover gradually in 2024 and that will help Carlyle to pursue IPO exits.

“We will pursue the best way of exit based on the character of each portfolio company, rather than changing the strategy based on the market condition,” he added.

Carlyle’s existing portfolio

*Mergermarket’s LTE predictive analytics scores to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.