15 ASIAN LEGAL BUSINESS – JANUARY-FEBRUARY 2024 WWW.LEGALBUSINESSONLINE.COM “Barring significant shocks, the outlook remains strong. The underlying fundamentals are likely to remain consistent, with low EBITDA multiples, cheap debt and a weak yen making investments attractive economically, continued effective government support for the PE industry through smart policies, continued growth and acceptance of private equity M&A, and increasing interest from international players.” — David Azcue, Simpson Thacher & Bartlett PRIVATE EQUITY generation inching closer to retirement, both Azcue and Laxer believe that business succession issues will persist as a source of PE investment opportunities. FULL STEAM AHEAD As there are signs that more PE firms are expected to enter the Japanese market, Azcue believes new entrants will mainly come from two places: Global PE firms expanding into the country, and spinouts from existing domestic players. Understandably, global PE investors are drawn to Japan for large-cap investment opportunities with a lower risk profile, compared to other countries that fall short in terms of either market scale, investment appetite, or room for growth. But it is equally important to note the internal evolution of the PE industry in Japan itself, lawyers say. “There has also been a natural diversification that comes with a maturing industry, with significant focus for domestic firms on venture capital (VC), real estate, infrastructure - including renewables and logistics - credit, secondaries and GP stakes,” says Azcue. “The factors driving these trends are likely to carry into the near- to mediumterm future, with the caveat that firms are constantly evaluating the significant volatility in the environment, and that any escalation of regional tensions, regional or global pandemics, or economic crises could quickly shift the calculus,” he adds. While both Azcue and Laxer agree that the real estate sector is one of areas registering robust momentum, Laxer also sees PE deals in life sciences and healthcare being hotly sought after, driven by “both innovation and sector consolidation.” Azcue highlights infrastructure and private credit as the ones to watch. Moreover, Azcue notices interest in GP-led secondaries and VC investment, although VC deals in Japan have experienced a slump amidst downward pressure globally, according to data from Pitchbook. Retail strategies also come under the spotlight, as “large global sponsors continue to seek new distribution channels for alternative investments, and Japan represents a large and fairly well-developed market, with a critical mass of high-net-worth individuals and potential retail investors,” says Azcue. Looking ahead, lawyers strike an upbeat tone. “As a general trend, we expect that lower interest rates, the high volume of dry powder on the PE/ debt fund side and the return of bank risk appetite will lead to a significant increase in M&A activity during 2024. While we expect this to be a global trend, Japan is well positioned to benefit from this uptick in deal activity and availability dry powder,” says Laxer. Azcue concurs. “Barring significant shocks, the outlook remains strong. The underlying fundamentals are likely to remain consistent, with low EBITDA multiples, cheap debt and a weak yen making investments attractive economically, continued effective government support for the PE industry through smart policies, continued growth and acceptance of private equity M&A, and increasing interest from international players,” he says. Furthermore, “many of the larger domestic fund sponsors appear set to come back to the market and push for new fundraising records, increasing diversification of asset classes and continued growth in deal volume,” adds Azcue. Image: giggsy25/Shutterstock.com
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