Everything about Japan’s private equity industry is rapidly internationalising, except the people. The talent buildout will be a much slower transition, but as such will deliver investors more opportunity to establish a competitive edge.

The demographic and cultural challenges of seizing this moment are reflected in even the most international of domestic GPs. Longreach Group might claim to be just that.

The firm considers Japan to be its core market but has an office in Hong Kong and invests opportunistically in Greater China. The LP base for its fourth fund, which closed last September on JPY 78bn (USD 545m), is split relatively evenly between Japan, North America, Europe and Asia ex-Japan. Global sales processes have been a feature of recent exit activity.

Internal operations, including investment committee meetings, are conducted entirely in English. Compensation and career path channels are modelled on global best practices rather than the hierarchical, seniority-focused systems pervasive in Japan. This is all said to have attracted staff with an international mindset, but it’s slow going and the talent is scarce.

According to Mark Chiba, a partner at Longreach, the cross-culture element now permeates the portfolio – and it will only become more prevalent as Japan’s declining population prompts engagement with overseas workforces and customers.

For example, J-CEP, a construction staffing company acquired from local GP J-Star in 2023, is an ostensibly all-domestic business, but as more labourers are brought in from across Asia, non-Japanese site management is increasingly essential. Likewise, the growth of coffee chain Chat Noir, acquired in 2020, is largely driven by inbound tourism, requiring multilingual kiosks and capabilities.

“At the same time, the global trading and investment order has lost US leadership, so Japan will have to stand on its own two feet a lot more than it ever did before,” Chiba said.

“If you’re building management teams and value-creation strategies, you need people who can be very agile and global, not just to de-risk companies in this environment but to identify and capture new opportunities. That’s an inherently cross-cultural skillset.”

Globally minded?

Greater complexity in the Japan deal market is driving both the supply and demand sides of the talent equation.

Amidst governance reforms, streamlining conglomerates, activist investor pressure, and tighter public listing rules, the flow of corporate carveouts and take-private opportunities has amplified and extended into the local GP-dominated middle market. These private equity firms must address global talent networks when taking stewardship of overseas subsidiaries and international teams.

Even in the small-cap space predominated by founder-succession deals, GPs are under increasing pressure to demonstrate differentiated value-add by thinking global.

Earlier this month, Rising Japan Equity generated a 3x return after building out the US business of industrials supplier Japan Chain Holdings and selling the company to a strategic for JPY 8.1bn. In February, Frontier Capital acquired 100% of HobbyLink Japan, a toy retailer with multilingual operations and 90% overseas revenue for JPY 2bn.

Meanwhile, Japanese private equity and venture capital has been increasingly involved in global M&A. Much of this has been in the growth and venture space, especially in terms of Japanese managers partnering with global peers and joining internationally diverse consortia targeting tech.

The most prominent recent activity on this front saw Tokyo-listed private equity firm Integral Corporation team up last month with Singapore’s Granite Asia, a multi-strategy firm best known for its experience as a start-up investor under the name GGV Capital.

The plan for the joint venture, known as Granite Integral, revolves around promoting two-way cross-border deal flow between Japan and outside markets, especially Southeast Asia. This will be achieved by combining the two investors’ cultural strengths and market-specific value creation capabilities.

“VC is very local, but you also need to understand what’s happening in the US, Europe, and Asia. This is a new asset class for us, so we need to build our global network,” said Makiko Hayase, a partner at Integral.

“Even in buyouts, pure domestic companies are now probably less than half of our portfolio, so we do need to understand global markets and international organisations to help them expand.”

For Granite Asia, the initiative facilitates access to a Japanese market that is largely impenetrable for investors that don’t have teams on the ground. Numerous mid-cap Asian managers – from China to Australia – are looking for exposure to Japan. They rely on partnerships with domestic peers to smooth the path, and this brings more international engagement.

In recent months, Australia’s Potentia Capital teamed up with J-Star to acquire human resources software provider Jinjer, leveraging the former’s domain expertise and the latter’s local knowledge. Meanwhile, FountainVest Partners, which focuses on international deals with a China angle, worked with Unison Capital on the purchase of jewellery business Tasaki.

Essential upskilling

There is a sense that this kind of activity is essential to the evolution of Japan private equity. The idea is that the skills osmosis that comes with opening up the industry will deliver global best practices, currently lacking, in core operational capabilities.

Jun Tsusaka, CEO and CIO of buyouts focused NSSK, pointed to business integration skills as a case in point, noting that Japan has not historically taken advantage of the full scope of synergies, unified branding, joint purchasing, and productivity improvements that characterise platform and bolt-on acquisitions in the US and Europe.

Furthermore, he pins the problem on cultural homogeneity. This has resulted in an industry where operational shakeups such as headcount reductions or workflow rearrangements are viewed negatively, even when they are financially essential and in the best interests of the most competent staff.

“If you want to stay competitive and grow your private equity firm, you need to adopt US-style integration practices,” Tsusaka said. “You need to understand roll-ups, if that is your strategy. If I’m doing one plus one equals three every time, and the other guys are doing one plus one equals two, then after five years, I’m way ahead.”

To some extent, the skills gap can be filled through education. Gregory Hara, CEO and managing partner at J-Star, has advocated for industry bodies such as the Japan Private Equity Association to expand their education programmes for young professionals and students.

“We need to attract and train capable young talents quickly. Otherwise, a limited workforce may be the bottleneck. Japan’s population is heading south while our industry is growing,” Hara said.

Formal, government-led efforts to expand the private equity industry’s international links are now addressing this dilemma directly.

In 2023, Japan Investment Corporation (JIC), a government-controlled tech investor, began making LP commitments to overseas VC firms as part of skills and knowhow crosspollination drive called Go Global. Much of the plan is about importing industry best practices.

Go Global entails significant overlap with JIC’s ambitious mandate to bring more women into Japanese fund management, especially in avoiding the groupthink and complacencies that hinder an undiversified industry.

Yoshie Suzuki, a managing director at JIC responsible for investee funds, does not correlate a lack of diversity in terms of gender and race to a lack of skills, but she does tie it to lower competitiveness.

“GPs with more overseas attributes do have higher diversity. In order to replicate this in Japan, it is important to increase women’s interest in private equity and venture capital as a career,” Suzuki said. “And it’s not only about women – we need to have diverse perspectives to enhance competitiveness and generate innovation. Diversity improves productivity and growth.”

Diversity delivers

JIC is encouraging foreign GPs to invest directly in Japan with an understanding that internationalisation begets diversity-enhanced productivity. The Go Global programme currently includes UK-based Atomico, US-based New Enterprise Associates (NEA), and Singapore-based Vertex Ventures.

“I hope that the PE and VC funds from overseas that are coming to make investment in Japan will establish entities here because I believe it would promote diversity in the local industry,” Suzuki added.

Sourcing a greater diversity of skills locally can also be a matter of overcoming the unconscious biases at the root of women’s underrepresentation in Japan private equity.

One investment professional with a domestic GP said his firm recently hired a female senior executive with strong English and cross-cultural skills from a male-dominated conglomerate that effectively blocked her career progression by underutilising her.

“There are also a lot of people who immigrated here when they were kids, typically from China, came up in the Japanese system, are very talented but face discrimination and blockage at traditional Japanese companies,” the investment professional said.

“Private equity is a great opportunity for them. If they’ve made it in Japan, they have determination and something very strong.”

In some instances, integrating cross-cultural skills is more about networking than hiring. For example, D Capital, a middle-market digital transformation specialist that closed its second fund earlier this month on JPY 67bn, maintains a rolodex of about 40 data science and engineering advisors dubbed the DX Guild.

Investment team members generally lead overseas initiatives for portfolio companies, but some DX Guild members have sufficient foreign language capabilities to support international IT work. This was the case in 2023, when D Capital acquired Catalina Marketing Japan via a carveout from its US parent and had to separate the IT systems.

“Part of the reason we formed DX Guild is because it’s difficult to retain tech people long as a firm. They don’t like to stay in one firm. They want to be more free to do more projects,” said Jun Niki, a partner at D Capital.

Hotbeds of talent

Global consulting advisories and investment banks remain the most trafficked hunting grounds for cross-cultural talent, followed by the corporate sector as a distant third.

There is recognition that Japan’s conglomerates are well staffed with relevantly experienced professionals, and that those among them who decide to apply for private equity positions are likely to have the right disposition to cross over.

Yet there are still cultural risks around bringing people in from slow-moving institutions with compensation structures that are not liked to performance into a system of high-stress, merit-based career paths.

“There are people with global mindsets and capabilities who are frustrated in the culture of conglomerates. The question is whether they are really up for the intensity of a private equity business,” said Chiba of Longreach. “Sometimes, that doesn’t take.”

The cost of global talent – whether in the form of fresh hires or upskilling – is also an inhibiting factor. Speaking at the Hong Kong Venture Capital & Private Equity Association’s (HKVCA) Asia forum in January, NSSK’s Tsusaka recounted telling his partners that they would need to “redeploy a lot of our carried interest” to accumulate the talent needed for a strong and sustainable organisation.

The cost challenge adds logic to the school of thought that cross-cultural skills are better developed in-house by hiring young and letting junior professionals grow into the relevant roles.

Integral took this path in 2023, when it seconded a vice president with no significant overseas experience to Chicago to take up the role of corporate planning manager for the US division of office services provider Daiohs.

“When we recruit, many applicants tell us they want to support Japanese companies, not just to grow domestically but internationally as well,” said Integral’s Hayase. “They’ve seen that our portfolio companies, historically, often expand overseas, and they want to do that.”

Asked whether non-Japanese talent is a nice-to-have or table stakes for Japanese GPs, TJ Kono, a partner at Unison Capital, described diversified perspectives and cultural backgrounds as merely one aspect of a broader commercial insights capability set. They are indispensable for some strategies, less so for others.

Unison, which has staff fluent in English, Chinese, and Korean, makes far more use of cultural diversity in consumer than in healthcare. Kono noted that, medical equipment exports notwithstanding, healthcare is a strongly domestic-focused industry.

“You don’t have to have a United Nations team and an expert on every industry in house. That’s just not realistic. But if a GP thinks they’re going to continue investing in companies where a big chunk of the model is in the US, you have to internalise it,” Kono said.

“If only one in 10 portfolio companies has a US business that is 5% of revenue, why have that in house? Use that money on some other commercial insight you need.”

No turning back

Overarching everything is the idea that the drivers of the internationalisation of private equity in Japan are entrenched, structural trends.

Global investment flows into the market can be attributed as much to the improved reputation of the private equity in Japan’s business community as any geopolitical blip. The demographic declines now forcing an insulated industry to open up are seen as all but irreversible.

The influx of talent that will reshape the industry by bringing in new skills and accelerating its cross-border integrations will continue to be impeded by language and cultural challenges. But the momentum will be self-reinforcing.

“As Japan generates better returns, our industry is going to be able to pay for talent. People will come from all over the world, because if they see an opportunity to make a lot of money and build a career, they’re going to do that, and we need experts,” NSSK’s Tsusaka said.

“Some will be experts that want to make a mark here in Japan, and others will be prospective experts who want to come in and be part of the growth and the learning process.”