Private Equity in Japan
Seems like there has been a lot of PE activity in Japan lately. Most notably, electronics giant Toshiba was taken private by PE firm Japan Industrial Partners in a 2 trillion Yen ($13.5 billion; €12.5 billion) deal that was agreed last March and completed in December.
What’s the thesis behind record levels of sponsor activity in Japan? Why are investors so excited about Japanese private equity when they are facing demographic headwinds (i.e. a rapidly shrinking and aging population, thereby shrinking TAM and reducing room for organic growth).
How do businesses trade in Japan in comparison with the US? A company with similar size, operations, capital structure, and profitability in the US and Japan — what would the multiple discrepancy typically be? Is Japan dirty cheap?
to your last point--Japan is absolutely dirt cheap, conversion rates are beneficial for American investors and the entry multiples (take a look at any company, industrials etc) are some of the lowest in the world; I think it's a great place to invest because it offers a more secure gateway to the overall Asian market (not just Japan). The demographic headwinds (just like in China, Korea, and every developed nation besides America bc of immigration) are bad but actually comparably better than other East Asian countries (Japan's fertility rate is 1.3 compared to South Korea's fertility rate of 0.8 and China's fertility rate of 1.15). I'm probably the most bullish guy on Japan haha
What exit multiples are we talking here, and how does the spread look? For example would a company trade at up to a 50% discount compared to American peers? What ball park are we talking here? Is it more similar to the slower growth, family owned businesses of Europe?
It also seems interesting that Japan is so segregated from other parts of Asia in finance. Most banks are run APAC ex-Japan and Japan.
Curious where are good places/resources to learn about the Japanese market.
For learning more about JP mkt: Learning Japanese and getting info from JP news/twitter and watching JP fin/biz youtube is prob the best way (PIVOT, 経済の話で困った時にみるやつ etc... although many have vested interest or are just of poor quality in general)
Highly insular market thus difficult to learn w/ English only.
Korea is close to like 0.6 lol its fucked
I think there’s a lot of reasons why Japan is traditionally avoided in PE (or at least less favored than developing markets in Asia/Korea). These include declining birth rate, work culture and broader cultural norms that make it difficult to implement operational improvements that you could in other countries (especially for non-Japanese PE firms), government monetary policy, etc.
Birthrates are declining everywhere, not just Asia, and even still JP birthrates are among the highest in Asia, so this is an exaggerated problem.
Work culture (working hours related) has seen huge improvements post-2016, JP working hours are lower than the US, CA, AU for example (see OECD stats). To illustrate, you can see news of expat TSMC engineers in their new Kumamoto plant complaining about their Japanese colleagues leaving on the dot.
I think the main issues are with the labor-related legislation and hiring practices, such as expectations of life-long employment still going strong (終生雇用), hiring based on "potential" (ポテンシャル採用, meaning you are not hired based on your current abilities like in most other countries), and how difficult it is to fire someone (see Article 15, 19, 20, 22, 89, 104 of the 労働基準法, performance-related issues and cost-cutting measures are, in the overwhelming majority of cases, not valid grounds for firing an employee if it taken to court).
So, on top of cultural norms like you mentioned, I think this is the more important side of the work culture that I rarely see people bring up outside of Japan.
Dang dude, this is really interesting. You should make a separate post with more detail, would be great to read.
What do you mean on hiring for potential?
Do you visit Japan a lot?
Hiring based on "potentials" generally applies to fresh grads and "second" fresh grads (第二新卒, meaning those who quit their fresh grad jobs within the first couple years). This is basically unheard of outside of Japan (afaik) because even other East Asian countries (e.g. Korea, China, etc...) follows the West in hiring candidates based off their actual abilities (即戦力) instead of "potentials". On the other side of the spectrum, you have "midway hiring" / "career hiring" (中途採用 / キャリア採用), which is the kind most are familiar with outside of Japan and is based on your current, actual abilities. This usually applies to non-grad positions and more senior roles.
"Potentials" is very loosely defined and basically refers to your personality, your ideas, your familiarity with the company, and your "potential" to grow. That's why you see a heavy emphasis on culture fit and relatively less on technicals when you interview at JP banks for grad roles (the green one, the blue one, and the red one are some examples, from personal experience, you can also check their glassdoors) even outside of Japan. This is not to say your current abilities do not matter at all, it's just that the main emphasis is more on your "potentials" and your fit.
As for why this hiring practice exists, you can look back to the period of rapid economic growth during the Showa era (too long to explain in details here). This ties in with the paternalism within traditional JP firms, life-long employment, and how many (probably most?) grad positions are generalist roles (総合職). Your actual position will be decided based on a lottery once you are hired (配属ガチャ, you can state your preferences for certain departments but they usually will not be met). Generally difficult to arrange in-company transfers between departments, so if you want to do marketing for example but got assigned to sales, you're (basically) fucked unless you quit your job.
Important caveat to note here: Reforms have been taking place in the last 10 years to do away with certain elements of these practices (albeit at Japanese pace), and what I've said mostly applies to traditional JP companies (so not P&G JP, GS JP, etc... but some non-domestic companies have acclimatized to JP working culture anyways). I do not write in absolutes because I know exceptions exist and some dickhead will pop out and bash everything I write, but this is the general framework I believe one should keep in mind when looking to enter JP labor market.
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