Ayumi Sakurai is an anomaly in Japanese private equity. While others have pursued ever-larger fund sizes, he moved in the opposite direction, swapping the upper reaches of the middle market with MKS Partners for the lower reaches, as co-founder of Valiant Partners and founder of Yukon Capital Partners.

During the third decade of this nearly 30-year journey, Yukon was conceived and raised two funds. Each one closed on JPY 12bn (USD 74m) and made six investments. Fund III is currently in the market and could exceed JPY 15bn – enough, according to Sakurai, for a few more deals to achieve portfolio diversification without leaving the small business succession space he finds most interesting.

There were a few overseas LPs in Fund I, a consequence of relationships established while he was at MKS and Valiant. They didn’t return for the 2020-vintage Fund II, which Sakurai blames on Yukon remaining resolutely small, while investors prefer to grow their commitments in tandem with fund size.

“We expect only to work with Japanese LPs in Fund III. We are open to talking to overseas investors and advisors, but we’re too small a pond for the larger fish,” he observed.

“There aren’t many players that have raised JPY 10bn-JPY 15bn and remained in that range; most move up in size. We still see others coming through in the lower middle market, but all in all, I don’t think the competitive situation is worsening, provided you have a reasonably distinctive investment strategy.”

Upward momentum

Japan’s middle market has arguably never been more dynamic, spurred by a combination of ample deal flow as more founder-succession and carve-out opportunities come to fruition and growing interest from domestic and international LPs. Fund sizes have scaled accordingly.

The latest vintages from Advantage Partners, NSSK, Integral Corporation, and Japan Industrial Partners are the largest they have ever raised, each comfortably exceeding JPY 200bn. They helped Japan buyout fundraising reach an annual average of USD 5bn between 2022 and 2025. Individual annual totals had only eclipsed USD 3bn in two of the prior 10 years, according to AVCJ Research.

The number of funds raised is equally striking. There were 112 incremental and final closes involving Japan buyout funds in 2022-2025, or four-fifths of the aggregate total for the preceding 10 years.

Over the entire 13-year stretch, barely 20 funds have secured commitments of JPY 100bn, across buyout and growth strategies. The likes of Aspirant Group, Sunrise Capital, Japan Growth Investment Alliance (J-GIA), Unison Capital, The Longreach Group, T Capital Partners, Nippon Investment Corporation (NIC), Endeavour United, and J-Star populate a second tier in the JPY 50bn-JPY 100bn range.

Dozens more occupy the sub-JPY 50bn space, including a spate of post-2020 arrivals. D Capital, CSRI, REVA Corporation, Nihon PMI Partners, IA Partners, J-Inc, Marathon Capital Partners, Coalis Capital, Bluepass Capital, and Fiducia are deploying Fund I or II. With X Partners, Patience Capital, Session Private Equity, and Invictus Private Equity Asia are working on – or thinking about – debut offerings.

“The mid-cap and large-cap segments are very competitive, so new managers tend to go smaller,” said Hiroaki Ando, a managing director at Alternative Investment Capital (AIC), a local asset manager.

“Fundraising is very strong, with a lot of interest from international investors. It is easier to raise money for Japan right now than most other markets globally, even the US and Europe.”

AIC is contributing to this trend on the domestic side, having launched a fund-of-funds last year dedicated to emerging managers. It has reached a first close of undisclosed size against an overall target of JPY 10bn. Sumitomo Mitsui Banking Corporation (SMBC), AIC’s largest shareholder, is the anchor investor. There are about 10 other LPs, mostly banks and insurance companies.

According to Ando, the impetus for the fund-of-funds was financial institutions looking for a way to respond to encouragement from government that they back more emerging managers. Kazushige Kobayashi, who raised a fund-of-funds on behalf of the Tokyo government at MCP Capital Management, added that the likes of Nippon Life and Mitsubishi UFJ Trust Bank now have similar programmes.

The Tokyo government fund-of-funds, which was about USD 40m in size, backed five managers. Only one – Yukon – is considered established; the emerging contingent comprised CSRI, Nippon PMI, RBG Partners, and Search Fund Japan. More than 60 sub-JPY 50bn managers were reviewed in total, half of them emerging. Not all ended up raising funds.

“They focus on domestic LPs like regional banks, insurance companies, and SMRJ [the government-controlled Organization for Small & Medium Enterprises and Regional Innovation]. PFA [Pension Fund Association] will do emerging managers, but most other pensions do not,” said Kobayashi.

“Managers led by people who trained at global firms can raise capital from overseas investors. We find that some family offices and smaller endowments have smaller exposure to Japan or they cannot get allocations to more established GPs. They are looking seriously at emerging managers.”

Global appeal?

CSRI, which was founded by a Bain Capital and KKR alumnus, and J-Inc, a spinout from NIC, which was itself a spinout from Bain, fit this profile. Both secured foreign LPs in Fund II. Other members of the post-2020 set have won international support for their second funds, with D Capital using the momentum to move out of the sub-JPY 50bn space.

However, this is not straightforward, even as global placement agents penetrate the ranks of Japan’s emerging managers. Language and differences to global norms in terms of accounting practices and disclosure are commonly cited difficulties. A model limited partnership agreement (LPA) introduced last year, with an English language version, is described as helpful rather than transformative.

“We were working with a manager that has raised multiple funds and has a great track record. The head of buyout comes across well in Japanese, but when meetings were held in English, he couldn’t really participate. While most of the global fund-of-funds have Japanese speakers, these people are fundraisers, not investors,” one placement agent observed.

“On another occasion, we had a global LP looking at an emerging manager and it fell over because there wasn’t an international vehicle. The LP said, ‘We want to be on the LPAC [LP advisory committee] but if it’s an onshore vehicle, we risk exposure to permanent establishment.’”

For some GPs, having dual Japan and offshore-domiciled vehicles for a single vintage isn’t economically viable. Bluepass raised JPY 10.4bn for Fund I, securing commitments from 13 local financial institutions, according to Yoko Sugita, a partner and CEO at the firm. It is targeting JPY 15bn-JPY 20bn for Fund II, but there will be no offshore vehicle, so global investors must be comfortable coming onshore.

RBG, which was established in 2018, closed its first fund in 2021 on JPY 4bn, supported by 10 domestic LPs, including Bank of Yokohama and Japan Post Bank. Most of them re-upped in Fund II, which closed on JPY 15.4bn in 2024 with a broader investor base. The manager worked with a placement agent, but the investor base does not feature any global LPs.

“We were introduced to a lot of foreign investors, but ultimately, we decided not to bring them in because at the time we didn’t have the back-office resources to provide a decent level of reporting,” said Nobuhiko Masuto, a managing partner at the firm.

“Since then, our headcount has grown from five to 13. So, when we come to think about Fund III, we will target foreign investors.”

Value propositions

The scale of the opportunity in the lower middle market – often defined in terms of companies with less than JPY 10bn in enterprise value, although the likes of Yukon start much lower – isn’t disputed.

Advantage tracked 214 private equity transactions in this segment in 2025 out of 264 in total. This is twice the size of the sub-JPY 10bn deal count as recently as 2021. Most involve founder-succession, but they barely scratch the surface in terms of addressable market.

Japan has 3.6m small and medium-sized enterprises (SMEs), according to the Ministry of Economy, Trade and Industry, and over one third are owned by individuals who are 70 or older and have no designated successor. Local M&A advisors have worked hard on founder education to turn this aging dynamic into private equity deal flow, typically small-scale invite-only auctions.

In this sense, the competitive edge is often in the sourcing – establishing relationships with advisors and founders. “Our team members have skills in legal, accounting, and consulting, but they also have soft skills because we run alongside founders, helping them deal with complicated situations,” said Yukon’s Sakurai, adding that founders often sell control and retain a minority equity stake.

While Yukon does value creation work as well, most of the post-2020 contingent seek to distance themselves from what they see as a lower mid-market where returns have largely been driven by low entry multiples, relativley high leverage, and picking off low-hanging fruit on the operational side. Rather, there is an emphasis on post-investment points of differentiation.

“When local private equity firms visit founders, the first thing they do is bring out spreadsheets and talk numbers. They don’t really try to understand the business, so there isn’t much constructive discussion as to what can be done on the growth side or to fix up operations. Their websites talk about operations, but the reality is different,” said Hiroaki Wakashita, founder and CEO of Session.

Session and Invictus are spinouts from Japan and South Korea-focused Orchestra Private Equity. Session is Japan-only, while Invictus positions Japan as the largest part of a mandate that also includes Korea and Southeast Asia. Both are working on a deal-by-deal basis, hoping to raise blind pool funds in the next two years; and both think they have more to offer operationally than incumbent GPs.

Cross-border expansion is inevitably part of this proposition, given the firms’ heritage. By the same token, operational smarts claimed by Bluepass derive from its status as an autonomous subsidiary of Prored Partners, one of Japan’s largest consulting firms. Half a dozen Prored staff spend 50% to 100% of their time at Bluepass, working on initiatives ranging from cost efficiencies to sales strategy revamps.

“Smaller private equity firms in Japan typically rely heavily on multiple expansion to generate returns, but we can do value creation as well. We’ve already exited six out of 15 investments from Fund I, and in each case, we achieved our targeted EBITDA growth,” said Sugita.

Others are carving their own niches. D Capital, a spinout from Unison, and REVA, which claims strategic support from Sumitomo Corporation, emphasized digital transformation capabilities from the outset. For Patience Capital, currently in the market seeking JPY 30bn for a debut private equity fund, it’s crossover support that comes from an existing real estate strategy.

Not so specialist

Not every firm is wedded to founder-succession deals. Indeed, IA Partners is positioned as a carve-out shop based on a track record of such investments at Development Bank of Japan (DBJ). Having raised JPY 30bn for Fund I, the firm is targeting upwards of JPY 50bn for Fund II, reflecting an appetite for larger-ticket exposure beyond the lower middle market.

IA Partners is also an industrials specialist, but only up to a point. While the shift towards dedicated sector strategies is an acknowledged signpost on the route to market maturity, it is still nascent in Japan. Nihon PMI is the sole manager of meaningful size focus on healthcare, having secured JPY 4.7bn for its debut fund and now targeting JPY 20bn for its second vintage.

Some GPs are wary of becoming too narrow in scope. RBG, for example, has one sector team covering healthcare – comprising four of the 10-strong investment team – because one of the founders claims considerable domain expertise in medical devices. Masuto doesn’t believe this could develop into a sole specialty, citing the relative scarcity of medical devices companies in Japan.

There has been an influx of managers in the growth-stage technology space, with Fiducia and Coalis closing debut funds of JPY 4.5bn and JPY 20bn, respectively. About 25% of Fiducia’s capital came from overseas, with Singapore’s Temasek Holdings participating alongside several family offices. This support was welcome given growth equity was alien to some Japanese LPs when the fund launched in 2020.

“Growth equity space is not familiar to institutional investors in Japan – they don’t know whether to put it in the private equity bucket or the venture capital bucket. That was even the case with General Atlantic,” said Tokihiko Shimizu, CIO of Fiducia, who is now seeking around JPY 20bn for Fund II.

“However, now that the Tokyo Stock Exchange wants larger IPOs, start-ups must raise one or two more private rounds before they consider going public. This has made growth equity funds, including crossover funds, more appealing to investors. More funds are now being launched.”

There is a sense that specialisation will become more entrenched as operational requirements intensify, instigated by founders with a clear idea of what they want from private equity or LPs asking more questions about what is driving returns. Ando noted that managers with specialist groups, typically focused on sectors and operations, are viewed favourably by AIC’s emerging manager fund-of-funds.

“They should also be able to demonstrate an ability to do roll-ups. Few Japanese GPs can do this compared to the US and Europe, but we are seeing more M&A in the small to mid-cap space,” he said. “There will need to be more differentiation because competition is going to increase.”

Competitive dynamics

It remains to be seen how quickly this happens – or how quickly it needs to happen. For all the talk about founders having more potential partners to choose from, MCP’s Kobayashi observed there is still a lot of white space, enabling managers to buy cheap and add value relatively easily. This is consistent with accounts from low mid-market GPs that they seldom see much competition for deals.

According to a recent report by placement agent Rede Partners, Japan’s average realised returns of 3x over the past 15 years are higher than any other market globally, while the associated risks, based on standard deviation of net IRR, are among the lowest. The country’s unique middle-market dynamics are a key contributing factor, and they appear to be holding firm.

“We know of about 70 GPs in Japan, maybe 30 small cap managers, 25 in the lower mid-market, 15 mid-cap, and then a handful of large cap. It’s a stratified market, but then Japan’s SME market has a larger population of companies than anywhere in the region, even China,” said Charles Wan, a partner and head of Asia at Rede, which has represented Japanese GPs.

“There is still lots of low-hanging fruit, and managers can operate in their own segment without seeing anyone else. They don’t necessarily need to look across the able and think about how they should be differentiating themselves.”