In 2015 the Government Pension Investment Fund (GPIF), the pension fund for Japanese public sector employees, and the largest pension fund in the world, decided to allocate 5% of its USD 1.4 trillion of assets under management to private equity, infrastructure, and real estate. The purpose was notably to tackle the issue of insufficient yield generated by traditional assets. It preceded other large Japanese and foreign LPs, such as more recently the second largest pension fund in the world – Norway’s Government Pension Fund Global (GPFG) – on the path to private equity fund investments. Japan has therefore emerged as a sector heavyweight in terms of capital provision.

Is this a coincidence? This revolution in asset allocation appears to match another one: the resurgence of Japanese private equity investments. For a long time, Japan did not really appear on the private equity map. This was a glaring anomaly: the second largest developed economy offers a modern financial sector, a sound legal environment and is home to powerful large industry and service conglomerates, as well as a dense network of small and mid-sized companies. This is a prime environment for private equity and the local economy apparently offers a significant potential for investments. A landmark takeover in 1998 of what became Shinsei Bank by Ripplewood and J.C. Flowers hinted at this potential, but it ultimately remained an exception.

A number of factors have been brought forward to try to explain why private equity has historically seemed to struggle to thrive in Japan. The weight and influence of Japanese Keiretsus is one of them. According to this theory, Keirestus would be competing with General artners for regional investments and pre-empting them – like in other Asian countries with a similar industrial structure. Another factor would be the mismatch between the often drastic changes and restructuring inherent to Leveraged Buyouts (LBOs) and the more cautious and moderate approaches supposedly preferred by Japanese businesses.

Fig. 1 – Performance and maturity of Japanese, Developed Asia-Pacific, American and Western European LBO funds

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