From "Vultures" to "Guardians"! Japanese companies actively embrace private equity, privatization transactions reach a record-breaking year.

According to private equity funds and consulting agencies, under the pressure to increase investor returns, Japan's total amount of private transactions this year may reach a historic high, surpassing the $40.3 billion in 2023. In the past, Japanese companies viewed private equity as "hagetaka" (meaning "vulture," referring to predatory investors), but such funds are now becoming drivers of reform. Faced with calls from activist investors and demands from the Tokyo Stock Exchange for capital management and cross-shareholdings reform, Japanese companies are significantly more accepting of acquisition transactions, even willing to give up their proud listing status. Private equity practitioners say that there has been an unprecedented level of interest in the Japanese market from investors behind these transactions despite a slowdown in such activities globally, Japan's private equity deals this year are on the rise. Data from Dealogic shows that as of August 20th, Japan's private equity transactions this year had reached $27.6 billion, nearly three times the $9.5 billion in the same period of 2024. There have also been significant transactions in recent months: Blackstone acquired engineering talent dispatch company TechnoPro for $3.5 billion, and EQT acquired elevator manufacturer FORSTAR for $2.7 billion. Kazuhiro Yamada, Managing Director of Carlyle Group Inc in Japan, said, "We have a significant amount of potential deals in hand." He further revealed, "Carlyle Group Inc Japan is currently tracking more than 300 potential projects in three core areas, with about 30 expected to be completed in the next 12 to 18 months." The Tokyo Stock Exchange has introduced stricter corporate governance standards to enhance the attractiveness of listed companies for investment, forcing companies to explore various development options including delisting. The backdrop of these exchange reforms is the unusually large number of undervalued stocks in the Japanese market. Under the reform drive, companies have been on a wave of share buybacks, asset sales, and management buyouts. Private equity vs. Activist Investors The increasingly active activist investment behaviors (often seen as a precursor to privatization transactions) are raising expectations for the target company's stock price. Akihiko Manaka, Co-Head of Investment Banking and M&A at Bank of America Corp Japan, pointed out, "Especially after activist investors intervene, speculators may push the stock price to a level where no one can make a reasonable takeover offer." As an example, the stock price of FORSTAR soared more than twice from when the activist fund Oasis first listed it as a target to when EQT proposed a takeover offer in July this year, which was even lower than the market price at the time. Kohei Fukushima, Director at the EQT Group involved in the FORSTAR transaction, said, "When a company reaches the point where privatization is necessary, it is often too late to consider potential partners." To avoid falling into this passive position, more and more companies are starting to contact private equity firms proactively before the management becomes a target of investor demands for change. Eiji Yatagawa, Partner and Head of Private Equity Business at KKR Group in Japan, said, "In a sense, privatization has become a natural strategic choice for companies. Some management teams take proactive action and start considering privatization even before activist investors become shareholders." Private equity funds reveal that about half of their negotiations with companies are initiated by the companies themselves. For the existing management of companies, privatization provides an opportunity to restructure away from the public market's scrutiny. Jeremy White, Partner at Morrison Foerster's Tokyo office and co-head of global M&A, said, "At the executive level, the common practice of private equity funds is to at least give the existing management an opportunity to drive reorganization." Private equity funds believe that Japan's stable capital market provides support for companies' future re-listings; additionally, companies can also gain potential exit routes through M&A activities or with the participation of other funds. Teruyuki Asaoka, Managing Director of the EQT Group's private equity team in Japan, said, "We expect to see more transfers of projects between funds. With a large amount of capital waiting to be deployed in the industry, the position of private equity firms as potential acquirers continues to strengthen."