Japan’s dealmaking machine revs up
Private equity is enjoying a renaissance in an unlikely place
Illustration of a large black car, its body is shaped like a city skyline. The hood is open with white smoke coming out. A smaller, white version of the car sits below./ Illustration: Satoshi Kambayashi|
The corporate raiders of the private-equity (PE) industry have been memorably compared to invading barbarians.
But the industry is more usefully described as a machine, which converts investors’ money into deals, deals into profitable divestments (or “exits”), and exits into investor returns.
When running well, this contraption gathers a momentum of its own.
Profitable exits generate handsome returns, which tempt investors to pump in more capital, enabling further dealmaking.
Unfortunately, private equity is not running well in America.
Funds are struggling to exit profitably.
Deal volumes have slumped.
And new capital has become harder to raise: it could fall in 2025 for the third year in a row.
What was once a dominant and successful model has become sluggish and unreliable, like one of Detroit’s infamous gas-guzzlers from the 1970s.
Across the Pacific, though, is a machine roaring back to life.
In Japan the number of private-equity deals has doubled since 2019, and their value has tripled.
Mergers and acquisitions reached a record $232bn in the first half of 2025.
Western raiders such as Ares, Carlyle and Apollo are opening new offices in Tokyo, or expanding old ones.
Japanese PE is having a “major renaissance”, proclaimed bigwigs at KKR, another titan, last year.
Three things explain the contrast between the world’s biggest PE market and its hottest one.
First is value.
Like Detroit’s disappointing cars in the 1970s, American firms are not especially affordable.
The enterprise value of American listed companies is 11 times their operating profit (less depreciation and amortisation).
In Japan, the median firm costs only seven times its operating profits.
Japanese firms are cheap partly because their managers tend to squander shareholders’ capital.
Many companies have giant cash hoards and plenty of inessential assets sitting around.
But that drawback is also an opportunity.
In America, tuning up companies’ operations is hard work.
In Japan simple rationalisations would reap massive returns.
The median listed firm holds cash worth 21% of its total assets, compared with 8% for American public companies.
The second flaw in American PE is that money pumped in often cannot get out.
Many deals were struck in 2020-21 when interest rates were low.
The industry has struggled to adapt to tighter monetary policy, just as Detroit struggled to adapt to tighter fuel-efficiency standards.
Higher interest rates have reduced the value of the bought-out companies.
They have also raised the cost of financing the deals.
Yet many funds, having made lofty promises to investors, are now unwilling to sell at diminished valuations, for fear of realising losses.
That has created an exit backlog for American PE funds, which have become slower to pay investors.
In Japan, by contrast, the pipes are less clogged.
Exits are 68% above the 2019-23 average, according to Bain (although they remain short of the highs of a decade ago).
Big-ticket listings, such as the 2023 sale of Kokusai Electric, a maker of chip tools that is backed by KKR, have increased confidence.
Japan’s low interest rates have helped, too.
The third trend favouring Japan is surprising: deglobalisation.
The rise of protectionism is rattling Japan’s many exporters.
But Japanese PE has one big advantage over its American counterpart: it benefits from the retreat from China.
As the risk of doing deals in the People’s Republic has grown, global PE funds have shuffled their Asia allocations away from China towards its biggest neighbours, Japan and India.
China’s appeal may improve if its stockmarket continues to rally.
But fear that Chinese investments could attract bad press or fall on the wrong side of a geopolitical dust-up has made many PE investors skittish.
Greater scrutiny of Chinese investments has fuelled the trend towards markets like Japan, says Jim Verbeeten of Bain.
If American interest rates fall, its PE industry could recover, just as Japan’s progress could sputter if the country’s central bank resumes raising rates.
Recalcitrant managers in Japanese firms could still frustrate PE’s ambitions.
Efforts in America to bring PE to the masses may let the industry sell assets to risk-happy retail investors, clearing the pipes.
But for now, Japan’s dealmaking machine looks as cheap, nimble and reliable as a trusty Corolla or a Civic, while American PE remains a bit of a clunker.
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