* Several Japan PE funds raising capital in coming months
* Change in governance rules encourages buyout activity
* Succession crises at Japanese SMEs also spur PE interest
* Some institutions investing in PE funds for first time
* IPO market picking up, making exits easier for PE investors
By Elzio Barreto
HONG KONG, Nov 20 (Reuters) - Japan’s private equity industry, held back by decades of pitiful economic growth and a hostile corporate culture, could see a flurry of activity, with several funds raising capital for deals encouraged by governance reforms and demographic shifts.
Japan’s private equity market is small relative to its economy, which ranks third behind the United States and China. Private equity buyouts averaged just $4 billion a year over the past decade, with $3.7 billion worth of exits annually, according to data provider Preqin.
China, by comparison, had $31 billion of buyouts in 2015 and raised $34 billion of funds, though its economy is not quite three times larger.
Aggregate capital raised by Japan-focused buyout funds were just $1.4 billion a year over the same period, but that is changing.
Funds including J-Star Co Ltd, Polaris Capital Group and Advantage Partners Inc are raising nearly $4 billion in total in the coming months, which would make 2016 the best fundraising year in at least a decade.
“This should be one of the best vintage years,” said Yuji Kimura, founder and CEO of Polaris Capital, which targets medium-sized companies and is raising $750 million for its third fund.
Japan has for decades been a difficult market for private equity since economic growth virtually ground to a standstill in the 1990s, with buyout firms forced to hold on to assets for much longer than the three to five years typical in the industry because.
Japan’s tight-knit corporate culture has also served as a barrier, with a reluctance to allow in external managers and shareholders.
In one high-profile case, U.S. firm Cerberus Capital Management LP led a bailout of railway and hotel company Seibu Holdings in 2006, but clashed with the board over IPO timing and board representation. The IPO didn’t take place until 2014, and Cerberus still retains a stake.
But deal activity is rising.
As Japan’s population ages, more owners of small and medium-sized businesses are reaching their twilight years without a successor, and are increasingly looking to private equity firms for capital and management expertise.
And in 2014, Japan’s Financial Services Agency published a Stewardship Code that promotes better management of company assets and so creates more impetus for companies to shed underperforming elements of their business - catnip to the PE turnaround specialists.
“Many companies accept that (stewardship) principle, which means that they need to do something with their low-performing, non-core business assets, so we see a number of carve-out transactions,” said Gregory Hara, chief executive of J-Star.
Hara said J-Star was also raising a fund, but wouldn’t comment on its planned size. Buyout firm Advantage Partners is raising two funds, a $600 million Japan-focused fund and also its first-ever pan-Asia fund, worth $400 million, said Taisuke Sasanuma, representative partner at the firm.
Others that have raised or are raising capital include Unison Capital, The Longreach Group Ltd, Ant Capital Partners and Tokio Marine Capital, people with knowledge of the plans told Reuters.
As Japan’s central bank implemented a policy of negative interest rates at the beginning of the year, exacerbating the difficulty of finding investment yield in an era of low returns, more investors started to look at private equity funds as an option.
Investors increasing their exposure or testing the waters for the first time include regional banks such as Yokohama Bank, Shizuoka Bank and Fukuoka Bank, as well as the public pension system and Japan Post Holdings, whose units have a pool of 285 trillion yen ($2.6 trillion) of assets and recently started investing in private equity.
“There are many institutions who would like to put money in the market, so it must be a good year to raise funds. It will continue for another couple of years,” said Yasufumi Hirao, president and chief executive of Alternative Investment Capital Ltd, an investor in private equity funds.
A spurt of activity in Japan’s IPO market is also stoking optimism that it will be easier for PE investors to cash out of an investment via a stock exchange listing.
There were $15.8 billion of initial public offerings in 2015, from 97 new listings, the most in nearly a decade, Thomson Reuters data showed. So far in 2016, companies have raised $10.2 billion from 73 IPOs.
“The IPO market is very favourable,” Polaris’ Kimura said. “The trend will continue this year and into next year.” ($1 = 108.8300 yen)
Reporting by Elzio Barreto; Editing by Will Waterman