Unlocking Asian growth opportunities: Why private equity is increasingly interested in Japan

At a glance

• Reforms and steady economic improvements have helped make Japan an increasingly compelling market for private equity investors over the past decade.
• Japanese companies excel at driving operational improvements and unlocking efficiencies.
• Japan has a number of attractive opportunities, particularly in the industrial tech space and healthcare space.
• At Ontario Teachers’, we’re always looking at managers who want to work with us on co-investment and co-underwriting transactions; our sweet spot is deals where we can collaborate and find alignment on our strategy.

Private investors are navigating the increasingly intriguing Japanese market

Recently, Cindy Yan, our Senior Managing Director of Direct Investing in Asia Pacific (APAC), joined a panel discussion at AVCJ Private Equity Forum Japan 2024 to discuss how the market in Japan has evolved and how that’s unlocking new investment opportunities. Here is a summary of her remarks on what’s making Japan a compelling market and the types of deals in Ontario Teachers’ sweet spot.

Tell us about Ontario Teachers’ presence in APAC and Japan.

Cindy Yan: Ontario Teachers’ manages roughly C$248 billion for 340,000 teachers in Ontario, Canada. Globally, we have multiple asset classes, including private equity, which is where I sit. In Asia, we have about 10%, or C$22 billion, invested across the region.

We have several billion dollars of exposure to Japan, but we are improving our capabilities in the market to support continued growth through direct investing. Historically, our exposure to Japan has been through public equities, funds and some of our portfolio companies. In the past 18 months we have been exploring more active investments in Japan across real estate, private equity and venture growth. Personally, I supported an established GP in Japan on investment strategy and execution for about 15 years, so I certainly have an attachment to this market as well.

Discuss the investment opportunities in Japan and why it’s a compelling market.

CY: Japan has demonstrated a strong return for private capital for the last decade or so. It’s also probably one of the best leveraged buyout (LBO) markets in Asia, and on par with North America and Europe.

We also view it as a value investment, which is different from investing in countries like India, which is more for growth. The source for returns in Japan is also a little different from North America and other countries – focus on operational or efficiency improvement could drive the bulk of the return.  

In general, Japanese companies have produced solid revenue and secular growth. There is also abundant leverage and a willingness to deploy that money to underwrite margin expansion or an operational improvement. You don’t see that happening in North America to the same extent, so there is a clear proven return and a source of returns. Because of all the tailwinds from corporate reforms in the country, we’ve also seen steady private equity deal flow from large-size to mid-cap companies.

How has Japan’s investment landscape changed over the recent years?

CY: A number of deals in the past were driven by carve-outs from large corporations. You still see that happening, which is creating a ripple effect for the second-tier conglomerates. 

Corporate governance reform has been another change that started with the country’s economic reforms in 2013, which were intended to halt years of deflation and return the country to growth. Much has evolved since then, including improvements in business execution, activist participation and having independent directors on company boards.  

On the interest side, there’s a lot more capital coming into the market. Still, when estimating how long it might take to complete a transaction, it is not unusual for a deal to take about two years – it will happen, you just need some patience.

What about when it comes to buyout and exit strategies?

CY: The past couple of years have been a great exit vintage for many of the buyout funds. I saw many firms consistently exit strong returns to their LPs. Given today’s higher valuations, investors must stay disciplined on pricing when looking to buy in.

How do you view sector expertise in Japan given that most managers tend to be generalized?

CY: A lot of GPs in Japan are generalists, but some are starting to pick their spots based on what they are good at, so there’s strong sector expertise. Within Japan, there are sectors that have a lot of attractive opportunities. For instance, the country is leading in the industrial tech space and then there is healthcare because of the aging population.

How do you think about doing a co-invest or a direct deal alongside a GP in Japan?

CY: Ontario Teachers' is a global direct private equity investor and one of the pioneers of institutional direct investing. ​In Japan, we’d like to work with reputable GPs to co-invest and co-underwrite on transactions.

Our GPs are usually long-term strategic relationships where we have supported their growth for many years. On the deals we collaborate, we actively co-underwrite these with the GPs we partner with where we can bring in both sector expertise and value creation angles.

For us it is key to build trust and mutual understanding of each other’s investment strategy and sweet spot types of deals to collaborate on.  ​

From an investment perspective, we look at a number of different factors. We look at returns, we look to ensure companies have a proven business model, a stable team and strong capabilities. We also look at our sector expertise and value creation angles, which creates alignment on future growth strategies with GP partners and company management.