Japan‘s Family Empires Confront a Succession Crisis, Fueling Private equity Boom

Tokyo, Japan – A demographic shift is reshaping the landscape of Japanese business, with a growing number of family-owned companies grappling with the lack of successors and the burden of high inheritance taxes. This has led to an unprecedented surge in interest from private Equity (Pe) firms looking to acquire these venerable businesses,a trend once considered highly unconventional.

Recent data indicates that Japan’s Private Equity market has exceeded 3 trillion yen – approximately $20 billion USD – in transaction value for four consecutive years. Figures from PitchBook reveal a further increase of over 30% this year, reaching $29.19 billion, driven primarily by family-owned enterprises considering a sale as owners approach retirement age.

The Weight of Legacy and Tax

Jun Tsusaka, Chief Executive Officer of Nippon Sangyo suishin Kiko, recounts a recent conversation with a 61-Year-Old entrepreneur actively seeking assistance with a company sale. “They expressed that their children simply have no desire to continue the family business,” Tsusaka stated. This sentiment is becoming increasingly common across japan.

Japan’s inheritance tax, among the highest globally at 55% for substantial estates according to the Tax Foundation, adds further pressure. Heirs typically have a 10-Month window to settle these taxes, ofen requiring the swift liquidation of company assets. This situation makes selling to Private Equity firms a particularly appealing option.

Did You Know? Over 90% of Small and Medium-sized Enterprises (Smes) in Japan are family-run businesses,while approximately 65% of all acquisition deals within the country are now linked to succession concerns,based on data from Neuberger Berman.

A World economic Forum report projects that by 2025,around 1.27 million Sme owners aged 70 and above will lack designated successors, representing a third of all businesses in Japan. Kyle Walters,a Private Equity analyst at PitchBook,emphasizes that succession issues are the key drivers of domestic transaction activity stating,”Japan’s shortage of successors and aging population are important factors in the growth of Private Equity in the country.”

A Cultural Shift in Viewpoint

Historically, selling to outside investors was largely avoided due to cultural norms. Manoj Purush, a corporate partner at Reed Smith specializing in Mergers and Acquisitions, noted, “Ten years ago, selling a company was considered taboo. Initially, focus was solely on local investors, but over time, openness to foreign investment has grown.”

The success of foreign firms like KKR, Carlyle, and Bain in revitalizing Japanese Companies has played a significant role in changing perceptions. KKR’s 2013 acquisition of 80% of a Panasonic business unit – later rebranded as PHC Holdings and successfully listed publicly in 2021 – serves as a prominent example.”Seeing foreign investors succeed encouraged others to consider those options,” Purush explained.

this trend extends to younger business leaders, manny of whom are confronting labor shortages and difficulties in attracting experienced management. The “Employment Ice Age” of the 1990s and early 2000s, characterized by a stagnant job market, created a void in the ranks of experienced professionals, further exacerbating the succession crisis.

Regulatory Changes and Macroeconomic Factors

Jim Verbeeten, a partner at Bain & Company, attributes the current Private Equity boom, in part, to governmental regulatory reform. “The roots of this growth trace back to 2015-2016,” he stated, referencing the introduction of mandatory external directors and pressure from the tokyo Stock Exchange to improve Return on Equity.

Beyond succession challenges, corporate carve-outs – the sale of non-core business divisions – are also fueling activity. Many large Japanese conglomerates are divesting assets to strengthen balance sheets and enhance capital efficiency. Pressure from activist investors to streamline operations or seek private ownership has also propelled this trend.

Macroeconomic conditions are also contributing-a weaker yen is making Japanese assets more attractive to foreign investors, while Japan’s low interest rates enhance the feasibility of leveraged buyouts. The yen has weakened almost 4% against the US dollar year-to-date, currently trading around 150.93 per dollar.

Navigating Potential Risks

Despite the momentum, caution remains. “When a market appears exceptionally attractive, increased capital flow can inflate prices,” adds Verbeeten, warning against repeating the pitfalls of the 2006-2007 period, where inflated valuations led to investment failures following the 2008 financial crisis.

While the Japanese Private Equity market is thriving, it remains relatively small – roughly 0.4% of GDP, compared to 1.3% in the US and 1.9% in Europe. “Japan is currently attracting attention, but regarding market maturity, it is indeed still in an early growth phase,” says Verbeeten.

With the succession crisis showing little sign of resolution, Japan is poised to remain a fertile ground for Private Equity investment.

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