Japan: A New Frontier for the Private Equity Market

Private Equity (PE) is an investment class characterised by holding equity in a

privately-owned company, often to improve operations, restructure and later exit at

a profit. When receiving proposals from businesses, PE firms notably consider:

• Total Addressable Market (TAM): Pertaining to the overall revenue opportunity available should the firm receive 100% market share in the industry.

• Competitive Moat: A set of unique advantages (e.g: brand imaging, proprietary technology) that protect a firm from rivals and sustain profitability.

• Financial Profile: Overall set of cash-flow and capital efficiencies allowing for leveraged buyouts to be supported. Notably, cash-flow stability should be high (ensures debt service) in addition to a low Cap-Ex-to-revenue ratio (improves return on invested capital) (Rareliquid, 2024).

Private Equity was initially viewed with scepticism in Japan. Considered to be targeting vulture-funding, whereby PE firms would buy distressed companies for low rates, cut employment, and sell for a profit, politicians and the corporate landscape remained largely suspicious of foreign investors (Baba, N. and Hisada, T. (2002)). However, following the Japanese asset bubble burst in the 1990s, caused by loose monetary policy leading to speculation and thus inflated asset value prices, PE firms commenced entry into Japan to begin buying distressed companies, attempting to turn them around (Halton, C. (2021)).

Factors causing an emergence in Japan’s PE Market

• Bank of Japan Policy Rate at 0.1% being relatively lower compared to US at 4.00% and ECB at around 2.15% (Trading Economics, 2025), making Japan a low-cost leverage market compared to US and EU. As such, a weaker yen increases a propensity for FDI from USD (particularly) and EU funded buyers.

• Tokyo Stock Exchange (TSE) introducing a “soft law” directed at multiple Prime and Standard Companies with a Price-to-book ratio below 1 who had low profitability (ROE < WACC) to publicly disclose their plans showing investors how their capital will be more efficiently invested (Anon, 2024). In response, multiple Japanese firms (Hitachi, Toshiba, Fuijitsu etc.) began carving-out non-core divisions and selling subsidiaries: precisely aligning to specialisations of PE firms (Private Equity Wire, 2025).

• Ageing Demographics and Succession: The Small and Medium Enterprise Agency in Japan estimates 1.27 million SME owners over age 70 will have no successor, representing around 1/3 of Japan companies. PE firms thus step in as succession partners whilst also modernising these firms (Tochibayashi, N. and Ota, M. (2025)).

Analysis: Evinced above, PE deals in 2025 could almost exceed those made in 2024 by almost two-fold. David Gross, the managing partner of firm Bain Capital, who oversees 185 billion USD worth of assets globally, supported this by estimating that PE will make its way “80 to 85 percent” of big Japanese companies (Keohane, D. and Lewis, L. (2025)).

Notable recent PE transactions and their importance

Such discourse around the rapid emergence of PE in Japan primarily came about following American PE firm KKR and Co.’s acquisition of nearly 58% of Fuji Soft, a software maker, thus valuing the company at around ¥600bn ($5.93 bn AUD, (Bridge A, and Wu K, 2025)). The transaction, featuring a competitive bidding war between PE giants KKR and Bain Capital ending in a two-stage tender offer, provided a stark contrast to the type of sentiment expressed by management in a consensus-oriented Japan.

To elaborate, the TSE’s pressure on firms with a P/B ratio < 1 (Fujishima, Y. and Yahata, S. (2023)) meant that management needed to consider divestitures and restructuring (Keohane, D. (2025)). For a long time, the Japanese corporate decision-making system has been based on a unanimous, multi-layered construct to avoid open conflict (Pudelko, M. (2023)). As such, with the board and shareholders of Fuji Soft accepting foreign control in a fast, public, and confrontational takeover that was not met with analogous unanimity, this shift away from consensus-oriented corporate management was being solidified (Bridge, A. (2024)) *.

*Whilst the deal was closed in mid-2025, negotiations had been proceeding since 2024, thus the 2024 date published.

At a similar time, Bain Capital completed a carve-out of healthcare company Mitsubishi Tanabe Pharma (now Tanabe Pharma), in a ¥510bn ($5.04 bn AUD) deal which was closed on July 1, 2025. Tanabe Pharma, owned by conglomerate parent group (Mitsubishi Chemical Group), previously faced underinvestment in R&D and declining profitability (Bain Capital, 2025).

A key explanation for this was that they faced LOEs (loss of exclusivity) on many of their fundamental revenue contributors and a thinning late-stage pipeline. As such, their patents were becoming strained in addition to their regulatory exclusivity running out, which pressurised revenue and engendered high volatility in medium-term projects (Matsuoka, K. (2025)). With Bain Capital’s carve-out, this suggests a deep trust from Japanese conglomerates and an increased propensity to let PE drive R&D strategy and globalisation. This mega divestiture by a blue-chip conglomerate (Mitsubishi Chemical Group) also exemplifies an increased proactiveness to sell strategic assets to PE firms if they can ameliorate capital efficiency and support their portfolio restructuring (Mitsubishi Chemical Group (2025)).

Both deals act as a “proof of concept”, reshaping the manner of buyer competition, seller behaviour, and how regulators think about PE’s role. Eiji Yatagawa, a partner at KKR in its Japanese division, cited such a deal as fixing a “growth bottleneck” in Japan through PE ownership (Yoshida, 2025).

What will be beneficial about a more PE-oriented economy in Japan?

Market Efficiency Theory:

• Given that multiple Japanese firms had their P/B ratio < 1 (market value < book value), this signalled that investors believed that capital was not being used optimally. As such, with an augmented presence of PE firms who act as arbitrageurs by purchasing undervalued firms, they are restructured to be left with higher productivity, employment, and capital expenditure (Lavery, P., Tsoukalas, J. and Wilson, N. (2024)).

Agency and Governance Theory:

• Historically, Japan has held relatively high corporate cash holdings, which have been linked to more inefficiently used capital and wasteful projects unless more discipline is imposed. With PE governance, which concentrates ownership and tight incentive contracts, these clearer ROE targets are associated with higher valuations and better capital allocation (Phan, P.H. and Yoshikawa, T. (2000).

Comparative Advantage:

• Japan’s aging workforce suggests that growth must be engendered from productivity rather than labour supply. Over the course of the 21st century, the bank-centric lending system limits the aggressive and turnaround financing needed to transform an underperforming firm (Baba and Hisada, 2002), with PE and affiliated private-credit providers (Blackstone Credit and Insurance, MUFG, KKR Capital, etc) supply long-dated, bespoke financing structure not offered by many banks at scale, though capital is more illiquid (Chvanov and Lietz, 2024). As such, with more of an active capital reallocation to higher-performing sectors, capital flows to industries where Japan is globally competitive (Automotives and Mobility, Industrial Automation and Robotics, etc.).

Analysis: Large amounts of small companies in Japan, each holding minimal amounts of market shares, make them ideal for PE firms to target. The Herfindahl-Hirschman Index by sector (%) measures the concentration of a sector, which is calculated as the sum of squares in each company’s market value. The higher the HHI, the less diffuse an industry is (higher HHI correlates with a longer rectangle length on the diagram, (Keohane, D. and Lewis, L. (2025)).

Are there any drawbacks of an emerging PE market in Japan?

To commence, a thriving PE market changes the culture surrounding nationwide employment, transitioning from a long-term and secure system to being oriented around restructuring loss-making units and advocating for labour cost flexibility (Japan Labor Issues, 2025). Though major deals such as the two aforementioned may be considered as growth drivers, PE ownership has historically been associated with a combination of layoffs and work intensification (that is, fewer people during more work), especially with high leverage and tight cash-flow targets (OECD, 2022). Furthermore, several of these Japanese target firms in the manufacturing, IT services, and logistics sector anchor regional economies (e.g: Takigawa Plastic Industry, Nichirin). As such, aggressively consolidating and potential HQ regulation may impact employment and harm local suppliers (Ito, M. (n.d.)).

A secondary risk pertaining to broader firms stems from a question of being under-governed to over-financialised. Whilst the TSE’s P/B ratio < 1 scrutinization has encouraged faster, more decisive decision making, leading to more divestitures and thus framing PE as an attractive solution (Fujishima, Y. and Yahata, S. (2023)), there exists a risk of being over-dependent on leverage and financial engineering. Because in an emerging PE market, there exists fierce competition between sponsors who push up entry multiples and rely on leverage to achieve target IRRs (Initial Return on Revenue, (Private Equity Wire, 2025)). As such, with management teams in these PE-owned firms likely prioritising the near-term EBITDA margin and working-capital extraction, OECD and IMF work on leveraged corporates has shown that they tend to cut investment and employment more sharply during a downturn. Therefore, widespread PE ownership means that a recession or a rate spike could yield most Japanese firms into defensive cost-cutting at once, threatening innovation (OECD, 2022), (IMF, 2024).

With this, the final pervasive risk concerns private credit. Given that Japan is now becoming a hub for private credit financing due to a surge in PE activity, looser lending standards in this relatively immature PE market flag potentially sharp losses if conditions turn (IMF, 2024). In addition, the OECD suggests that substantial losses on PE and private debt may impair pension funds, institutional investors, and other insurers heavily exposed to the asset class (Yamazaki, M. (2025)).

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