Back in 2012, I wrote a blog post calling for more private equity in Japan. Japanese companies are held back by a hidebound, inefficient workplace culture. Managers are often grey elder statesmen promoted up through the ranks, instead of dynamic outsiders ready to shake things up. Shareholders are often passive owners, doing little to push companies to raise profitability, while managers build empires instead of focusing on what their companies do best.
Private equity has the potential to shake up this cozy, stagnant corporate world, and in the process help revive Japan from its long productivity slump. But several things get in the way. First, hostile takeovers are very difficult, because Japan's corporate boards are mostly occupied by managers, and Japan's courts are unfriendly to takeovers. Second, Japan's government regularly steps in and bails out failing companies, essentially muscling aside private equity. These forces have blocked private equity from contributing to a much-needed overhaul of Japanese business practices.
But in the last few years, this situation has begun to change. During my recent trip to Tokyo, friends in the finance industry were gushing over a sudden "explosion" in private-equity deals. It's possible the dam has broken at last.
The actual value of private equity deals in Japan hasn't risen in the last couple of years -- it was about US$8 billion (265 billion baht) in 2016, compared with more than $10 billion in 2013 and 2014. But the number of deals is on the rise:
Kohlberg Kravis Roberts has been responsible for some of the most eye-catching activity of late, acquiring car partsmaker Calsonic Kansei Corp in 2016 for $4.5 billion, buying one unit of Hitachi Ltd for $1.3 billion, and tendering a bid for a second unit. Meanwhile, PE firms are reportedly raising more money, enthusiastic that the wave of deals will continue.
Why the surge in PE? Both the demand for PE money and the supply appear to be increasing. On the supply side, Japanese interest rates remain extraordinarily low, making it very easy to do leveraged deals:
More private-equity firms are entering the market too.
On the demand side, two main kinds of deals seem to be happening. The first involves small and medium-sized companies. In Japan, as in most countries, business is traditionally a family affair. But since Japanese fertility rates have been very low for a long time, many families that own businesses are finding themselves without a scion willing to take over the operation. That means there's nothing to do but sell, and PE firms are the obvious buyers.
On the larger side, big Japanese companies are starting to spin off some of their divisions. Hitachi Koki, and Hitachi Kokusai, the power-tool division that KKR bought from Hitachi and the chipmaker it's trying to buy, fit into this category. Calsonic Kansei, although an independent company, was 41% owned by automaker Nissan Motor Co, which was also Calsonic's main customer. The government's new corporate governance code and investor stewardship code may be helping to encourage this sort of deal. Big banks, which provide some of the loans to finance the PE deals, may also be encouraging their borrowers to spin off divisions in order to use PE firms to whip underperforming businesses into shape.
Both of these types of deals are important for changing Japan's corporate culture. The slow decline of family-owned business may be heart-wrenching for old people who sell their companies, but it will contribute to productivity. Businesses owned by families tend to be run in more traditional ways, limiting their ability to expand into new lines of business, modernise, and adapt to various other dictates of economic necessity -- thus, they tend to be less productive.
Meanwhile, Japan's corporate giants are prone to empire-building. Though giant companies that do everything under the sun make for impressive national champions, they can easily become lumbering and inefficient. Japanese conglomerates, in trying to do everything at once, have long tolerated the existence of money-losing divisions. This unfortunate tendency was documented by Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara in their landmark 2000 book Can Japan Compete? Porter et al recommended that Japanese mega-corps split up, so that each division could become an independently managed company focusing on its core competence. Now, thanks to private equity, this may finally be happening.
The shift toward private equity is thus part of a larger change -- a shift in what it means to be a company in Japan. Where Japanese firms were once considered eternal entities, they're becoming more like those in the West -- ad-hoc arrangements, to be merged, bought, sold, split up or shut down as economic necessity demands.
That creates uncertainty and risk, but also opportunity. Family businesses and managerial empires provide comfort and stability, but often entail long-term stagnation. If Japan is going to grow again, it will need to take more risks. The PE industry will be an important part of that awakening. (BLOOMBERG VIEW)
Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications.