Carlyle predicts surge in post-pandemic deals in Japan

The head of Carlyle’s Japan business has predicted a surge in private equity deals, as a new post-Covid business environment and rising pressure on companies to achieve carbon neutrality forces a wave of acquisitions and spin-offs.

Kazuhiro Yamada told the Financial Times in an interview that the pandemic was accelerating asset sales and purchases of new technology among Japanese companies that might previously have taken years to make such decisions.

“Consumer behaviour and [the] business model changed drastically as a result of Covid-19, so companies that were hit have no choice but to carry out structural reforms,” Yamada said, adding that the availability of cheap financing from Japanese megabanks made the environment particularly attractive to private equity.

A post-pandemic boost would build on excitement that has drawn the world’s largest private equity firms to Japan. Several groups, including KKR, believe the country is the most opportunity-rich market outside the US.

The average size of PE deals in Japan has been rising but Carlyle has concentrated on smaller ones, often involving companies with which it has been in negotiations for several years. Since 2000, Carlyle, which has been in the country for more than two decades, has invested more than $3.2bn in 27 Japanese companies.

Bain & Co, the consulting group, has calculated that private equity firms collectively held a record $477bn of unspent capital focused on the Asia-Pacific region at the end of 2020.

Private equity deal activity slowed in the first half of last year but Yamada said the pace was accelerating in 2021. “The number of deals we are seeing is definitely larger than 2019 and the latter half of 2020,” he added.

According to Dealogic, there have been 25 private equity and other similar types of investments in Japanese companies worth $8.6bn this year, compared to deals worth $9.5bn in the whole of 2020 and $10.3bn in 2019.

Big companies such as Hitachi and Panasonic would continue to come under shareholder pressure to sell non-core assets, Yamada said. But he added that about half of Carlyle’s pipeline of deals would arise from succession issues, as a glut of retirements at companies prompted many to consider previously improbable options, including sales to private equity.

Government pressure globally for companies to cut their carbon emissions is also expected to force businesses to buy new technologies and withdraw from traditional areas that are not environmentally friendly. “That will clearly be an investment opportunity for us,” Yamada said.

Carlyle exited its investment in WingArc1st in March after the software company launched an initial public offering on the Tokyo Stock Exchange. That marked its 18th exit from a Japanese company, of which eight have been through IPOs.

Public listings remain the preferred option for many of the chief executives Carlyle has dealt with in Japan and are reputationally important for the companies, said Yamada.

“It’s very important for future marketing to be known as a fund that will allow IPOs,” he said, even though exiting via an IPO is more time-consuming and risky than selling to a competitor for private equity groups.

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