Kent Chen is a managing director and head of Asia private equity at Neuberger Berman, having joined the firm in 2015 after a 17-year stint with Hong Kong Monetary Authority (HKMA). Neuberger has USD 613bn in assets under management globally, including USD 170bn across various private markets strategies. The firm recently closed its debut Japan-focused private equity fund-of-funds with commitments of JPY 70bn (USD 460m).

Q: How long have you been considering launching a Japan fund-of-funds? 

A: Neuberger has been investing in Japan’s private markets for over 10 years, and we leveraged our platform in Asia to build an investment team in Tokyo. That became a real differentiator for us, especially during the pandemic. While others were stuck at home, our Japan team was working non-stop with GP partners on the ground. The idea for a Japan-focused fund-of-funds emerged around 2019, but we couldn’t launch and go marketing during COVID lockdowns. We only started formal fundraising last year.

Q: Japan has changed a lot, pre-pandemic versus post-pandemic… 

A: Japan buyouts took off after 2015, and in the last five years deal volume has almost doubled. In the years right after the pandemic, there has been significant growth in annual deal numbers, exacerbated by challenging macro conditions in the aftermath of the pandemic.

Q: What are the main reasons for this? 

A: First, Abenomics took effect, which impacted the broader economy. And then the Tokyo Stock Exchange (TSE) introduced its own reforms, encouraging less actively traded companies to delist. On top of that, activist investors were targeting underperforming Japanese conglomerates, calling on them to carve out non-core businesses to improve return on equity. We were also seeing the first generation of founders getting old. Ten or 20 years earlier, they thought they could still manage and eventually their children would take over the business. But eventually those expectations lapsed. As a result of all these factors, there was an exponential increase in deal flow.

Q: Aren’t you concerned about local managers scaling fund sizes too aggressively? 

A: We’ve found they are generally disciplined. There has been a substantial increase in investor appetite for Japan, but funds are growing by modest percentages over the previous vintage, not by several times. Managers haven’t changed their focus, whether it’s the middle market or lower middle market. And they are still able to do deals at single-digit multiples. Deal flow in Japan is so large relative to the number of GPs, to the amount of dry powder in the market today, that valuations continue to be reasonable.

Q: What are the focal points when running due diligence on managers? 

A: We look closely at value creation. There are a lot of business succession deals, carve-outs and take-privates, and all these situations involve heavy lifting. Japan’s GDP has been relatively flat for the past three decades. You can’t rely much on topline growth, so you must expand EBITDA, and that means creating value. For GPs we know well, we would go through every investment and establish what difference they have made. It’s not just about how many operating guys they have and what titles people hold; it’s about bottom-line impact. Another area would be team continuity. Some GPs have been around for longer than others, and they are starting to see succession. We want to see how the new generation of leaders is carrying the platform forward.

Q: How did you go about introducing investors to Japan? 

A: The first group of investors we brought to Japan were Asian family offices. The logic was that most Asian families have been doing business with Japanese companies for decades, some of them have been investing in real estate in Japan, and they travel to Japan for business and pleasure. They understand the market, so they don’t need to be convinced.

After we launched the fund-of-funds, we received strong interest from Asian institutional investors – insurance companies, endowments, pension funds. They’ve been looking at Japan for a few years, they like what they see, but they find it hard to go in directly. First, Japan’s a unique market and you need some local expertise to navigate it. Second, with GPs being disciplined on fund size, LPs aren’t getting allocations or they’re being cut back. They might end up with one or two GPs and it’s USD 10m here, USD 30m there, which doesn’t move the needle. We’ve been investing in Japan for over 10 years, and we have relationships with leading local GPs, so we can be a one-stop solution for them.

Q: Are these LPs redirecting to Japan allocations that previously went to China?  

A: It is not mutually exclusive. China and Japan represent different sets of investment opportunities. LPs continue to invest in China and they’ve been looking at Japan in parallel – the challenge was finding a way to do Japan. Working with us, they write one cheque and get exposure to the top 10-15 Japanese GPs over the next three years. We are solving for three pain points: lack of local expertise, difficulty securing meaningful allocations, and cost efficiency.

Q: Historically, fund-of-funds in Asia have largely focused on China. What does the launch of a first Japan fund-of-funds say about the broader market?  

A: First, fund-of-funds still have value today. Asia is an evolving private equity markets; it’s not as stable, mature or transparent as the US and Europe. Fund-of-funds can play a role in navigating it. Second, Asia is not a single market. We don’t have a pan-regional fund-of-funds because every meeting would be a debate with potential investors as to how much should be allocated to Japan versus China versus India. It’s unlikely any two groups would agree on the same parameters because these markets offer very different opportunities. So, we decided to focus on one geography at a time, one product at a time. We create the building blocks, and investors can mix and match.

Q: Is private equity performance in Asia convincing enough to attract more investors? 

A: For Japan, in general, our numbers over the last 10 years have been solid, even compared to any global or Asian benchmark you care to choose – IRR, TVPI [total value to paid-in, DPI [distributions to paid-in]. DPI has been strong because multiple exit options are constantly available. TSE is one of the largest and deepest capital markets in the world. Japanese conglomerates might be forced to sell non-core businesses, but they are also active buyers of smaller businesses. And for lower and mid-market GPs, selling to larger GPs is a new and expanding exit route.

Q: What about elsewhere in the region?                                  

A: India has been supported by a vibrant IPO market in the last couple of years. China has been challenging over the last five years, but people are finally starting to see the exits they’ve been waiting for with the recovering of Hong Kong IPOs. It’s not going to change overnight. There are at least 500 companies in the queue to list. Assuming 100 IPOs per year, it will take five years to clear the backlog.

Q: If the mixed exits picture is making it harder to secure re-ups, where should Asia-based GPs look for new pockets of capital? 

A: There’s still room for Asian GPs to explore sources of funding from within Asia. However, people need to think outside the box. This is where listed private equity can play a role. Apart from the largest sovereign wealth funds, public pension funds, and insurance companies, there aren’t a lot of institutional investors in the region. Some of the smaller institutions, including insurers and endowments, have yet to start investing in private equity. Using listed vehicles, they can get exposure without changing their internal setup. There’s no need to hire new teams or redesign reporting systems. In Hong Kong, the SFC [Securities and Futures Commission] has already published a circular on listed alternatives and the MPFA [Mandatory Provident Fund Schemes Authority] has changed its guidelines so that MPF managers can buy shares in authorised PE products trading on the Hong Kong Stock Exchange. The door is open. We are waiting for GPs to take advantage.

Q: Why is Hong Kong a good testing ground for this? 

A: It has one of the largest stock markets and the most active in terms of IPOs in recent years. Some places have large advisor-led wealth segments, but in Hong Kong people are more used to investing directly in stocks. It’s the same investor culture in mainland China.