Private equity surge in Japan defies Asia Pacific downturn

The private equity landscape across the Asia Pacific region witnessed a notable downturn in 2023, experiencing a decline of more than 23% in total deal value, as reported by Bain & Company. Amidst this trend, however, Japan emerged as a remarkable outlier, with its deal value skyrocketing by an astonishing 183% compared to the previous year. This surge positioned Japan as the leading private equity market in Asia Pacific for the first time, according to Bain’s 2024 Asia-Pacific Private Equity Report released on Monday.

Private equity surge in Japan defies Asia Pacific downturn

The surge in Japan’s private equity market can be attributed to several factors, including its abundant pool of target companies ripe for performance improvements and mounting pressure on Japan Inc. for corporate governance reforms, leading to the disposal of non-core assets. The overall decline in deal value across the Asia-Pacific region, amounting to $147 billion, reflects a downturn to levels not seen since 2014.

Fundraising experienced a 10-year low, influenced by factors such as slowing growth, high interest rates, and volatile public markets. Exits from investments also saw a significant drop, plummeting by 26% to $101 billion in 2023 compared to the previous year. Notably, 40% of these exits were facilitated through initial public offerings (IPOs), with Greater China dominating the IPO exit landscape, particularly in Shanghai and Shenzhen.

Excluding Greater China IPOs, the total exit value in the Asia-Pacific region stood at $65 billion. Looking ahead, the outlook for exits in 2024 remains uncertain. However, private equity funds are not passively awaiting market rebounds. Instead, they are actively strategizing to meet target returns, with a focus on reducing aging assets and returning cash to limited partners through 2024, even amidst a potentially depressed exit market.

In response to the evolving landscape, many leading private equity firms are diversifying into alternative asset classes such as infrastructure operations, particularly those offering medium to high returns such as renewable energy storage, data centers, and airports. Key findings from the report include the dominance of buyouts, accounting for 48% of total deal value in Asia Pacific in 2023, surpassing growth deals for the first time since 2017.

Despite a shrinking pool of investors, private equity returns continue to outperform those from public markets over five, 10, and 20-year horizons. While signs of improvement were observed towards the end of 2023, the timing of a full recovery remains uncertain. Nonetheless, emerging technologies like generative artificial intelligence are identified as promising areas amidst this uncertainty. Japan, India, and Southeast Asia stand out as favorable markets for private equity investment opportunities in the coming year, as per Bain’s analysis, citing Preqin’s 2023 investor survey.