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Homes sweet homes: Japan nursing care M&A ramps up as 2025 problem looms

Nursing care in Japan is expected to see a surge in deal activity, as corporates and financial sponsors look to capitalize on an aging population and invest in one of the country’s most promising sectors.

The value of Japan’s nursing care-home M&A spiked to USD 383.2m in 2022 across 34 deals compared with USD 162.5m over 34 deals in 2013, according to Dealogic data.

(Note that the figure for 2021 is an outlier because of Tsukui Holdings’ acquisition by MBK Partners and its repurchase for USD 863m (combined), out of total deal value of USD 1.3bn in 2021)

Age concern

The Japanese government warns that by 2025, all of its ‘dankai’ generation – that is those people born between 1947 and 1949 – will be over 75, while people at or over the age of 65 will comprise about 30% of the country’s total population.

There is concern that Japan’s medical system and the nursing care currently available may be unable to keep up with this shift in demographics, hence the government’s term – the “2025 problem”.

Moreover, some 2.45 million founders/managers of small businesses will be over 70 years old in 2025, and half of them are expected to have serious succession issues.

While the 2025 issue is likely to weigh on the country’s economy, Japanese strategic buyers (typically large-caps), as well as private-equity (PE) firms with considerable dry powder, are poised to seize on such opportunities as they arise.

Homes alone 

As a fully-regulated industry, nursing care services have steep barriers to entry, according to one industry banker, making it challenging for those new entrants that lack know-how and knowledge of local regulations. In addition, nursing care-home operators are constantly exposed to labor shortages, with a turnover rate among staff of 14.9% in FY20.

A further blow to Japan’s care-home business is changes in the government’s reimbursement policy (a care compensation system), which often happens unexpectedly (and rarely in favor of nursing care-home operators).

The amount of nursing care compensation granted in the country is reviewed every three years. Changes can significantly affect the profitability of a nursing home provider.

“It’s a double-edged sword for dealmakers,” says the banker. While the negatives appear overwhelming for founder-backed small and mid-size nursing care-home operators, they also present good opportunities for cash-rich strategic buyers looking to extend their reach and grow business.

Indeed, major strategic players have already run nursing care-home business typically through their subsidiaries, as part of their diversification play, hence they already have enough skills and know-how.

Large players in the nursing care-home industry include: Sompo Holdings [TYO:8630], Benesse Holdings [TYO:9783], and Nichii Gakkan (acquired by Bain Capital in 2020 via an MBO).

PE’s care carve-up

A number of PE firms – both global and domestic – have acquired nursing care-home operators in recent years.

Asia-focused PE group MBK Partners acquired Tsukui Holdings in 2021 via an MBO, one of largest deals of that year. In September 2016, another global PE firm, CVC Capital Partners, bought a majority stake in Hasegawa Holdings (since renamed HITOWA Holdings), while in October 2016, Japanese PE house J-Star added Visiting Nursery Care Service Business from Live Cross. In 2020, Bain Capital acquired Nichii Gakkan, which operates a nursing care-home business, among others.

Although there had previously been small deals by strategic players and venture capitals buying up nursing care businesses in Japan over the past 10 years, those businesses have since grown and become large, bringing them back onto the radars of PE firms hunting attractive investment targets.