Private Equity Asia | Manulife Investment Management

Key takeaways

While China may soon become the world’s largest economy, opportunities in Asia-Pacific private equity abound beyond its borders.
In building balanced exposure to the region—including to countries as different as Australia, India, and South Korea—investors can pursue a diverse range of private equity return drivers that are unlikely to be replicated in other asset classes in other regions.
Deal-rich Japan stands out as an especially compelling case today.

Japan, the third-largest economy in the world, and its active and growing private equity market are being driven by family business succession planning, corporate carveouts, and take-private transactions. In fact, the continued availability of low-cost debt financing in Japan makes it one of the most interesting areas of the global buyout market today. Also buoying Japan’s robust deal flow pipeline are a strengthening corporate governance culture and broadening acceptance of private equity value creation practices. Whereas, say, cost rationalization initiatives were once viewed as a taboo subject in Japan, such initiatives are now regarded as a legitimate approach to making businesses more efficient and more profitable.

A challenging macro environment throughout 2022 and 2023 has encouraged Japanese conglomerates to focus on their core competencies and sell unrelated businesses, which provided a steady flow of carveout opportunities for private equity investors. Corporate restructurings and take-private transactions, have also remained robust throughout certain sectors, including healthcare, business services, and industrials. Small- and medium-sized enterprises—many of which are family owned—account for most companies in Japan. Many of their founders are aging and engaged in succession planning, which has further strengthened the country’s private equity deal flow. We expect these trends to persist.

More investors around the world are allocating to Japanese private equity

Source: PitchBook, as of September 30, 2023. LHS refers to the left-hand side y-axis; RHS refers to the right-hand side.

Current foreign exchange rate dynamics also make this very moment an attractive entry point, especially for U.S. dollar-based investors. While the U.S. Federal Reserve has been aggressively tightening monetary policy, the Bank of Japan has so far kept interest rates relatively low. As a result, the yen has lost roughly one-tenth of its value against the dollar in the past three years, creating a buying window of opportunity for U.S. investors considering Japanese private equity. If interest-rate differentials between the two countries narrow in the years ahead, which we view as likely, then we would also expect the yen to recover relative to the dollar over the course of a typical private equity holding period, setting up U.S. investors for striking exit multiples later this decade.

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