Global Private Equity Barometer

Global Private Equity Barometer JAPANESE SNAPSHOT A UNIQUE PERSPECTIVE ON THE ISSUES AND OPPORTUNITIES FACING INVESTORS IN PRIVATE EQUITY WORLDWIDE ...
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Global Private Equity Barometer JAPANESE SNAPSHOT

A UNIQUE PERSPECTIVE ON THE ISSUES AND OPPORTUNITIES FACING INVESTORS IN PRIVATE EQUITY WORLDWIDE

Coller Capital’s Global Private Equity Barometer Coller Capital’s Global Private Equity Barometer is a unique snapshot of worldwide trends in private equity – a twiceyearly overview of the plans and opinions of institutional investors in private equity (Limited Partners, or LPs, as they are known) based in North America, Europe and Asia-Pacific.

Japanese Snapshot This special edition of the Global Private Equity Barometer on the Japanese private equity market captured the views of 70 private equity investors from around the world. The Barometer’s findings are representative of the LP population investing in Japan by: Investor location Type of investing organisation Total assets under management

JAPANESE SNAPSHOT

3

Returns from Japanese private equity

LPs achieving net returns of 16%+ from their portfolios since they began investing – by type of private equity 80% 70%

Investors have done very well out of Japanese private equity –

net returns of 16%+ from Japanese buyout funds.This compares with around half of LPs who have achieved similar returns from

60%

Respondents (%)

especially buyouts. Almost three quarters of LPs (72%) report

buyouts in Europe, North America and Asia-Pacific generally.

50% 40% 30% 20% 10% 0% Japanese Japanese Asia-Pacific Asia-Pacific European European North North buyouts venture buyouts venture buyouts venture American American buyouts venture

(Figure 1)

Medium-term return expectations

LPs expecting net returns of 16%+ from their portfolios in the next 3-5 years 100%

This strong performance is expected to continue in the medium

80%

from Japanese buyouts. For other types of private equity, the proportion expecting returns of this magnitude ranges from

Respondents (%)

term – over 80% of investors expect 3-5 year returns of 16%+ 60%

40%

around two thirds of investors for European and Asia-Pacific buyouts, to just over one third for European venture capital.

Expectations for Japanese venture capital are also high – well over half of investors (58%) expect returns of 16%+ (around the same proportion as for North American venture).

4

JAPANESE SNAPSHOT

20%

0% Japanese Japanese Asia-Pacific Asia-Pacific European European North North buyouts venture buyouts venture buyouts venture American American buyouts venture

(Figure 2)

LP appetite for private equity in Japan

LPs’ planned allocations to private equity in Japan in the next 2 years 100% 90% 80%

plan to increase their allocations to Japanese buyouts over the next couple of years.

Respondents (%)

Nearly two thirds (62%) of investors in Japanese private equity

70% 60% 50% 40% 30%

Allocations to Japanese venture capital are expected to remain

20%

more or less unchanged – with only around one third of LPs

10% 0%

planning to change their allocations.

Japanese buyouts Increase

Japanese venture Stay the same

Decrease

(Figure 3)

New investors in Japanese private equity

Likelihood of LPs without a current Japanese allocation investing in Japanese private equity in the next 2 years Yes - it is likely (8%)

Almost a tenth (8%) of private equity investors who currently have no allocation to the Japanese market are actively planning to make an allocation in the next couple of years, while half of

Yes - it is possible (50%)

LPs would be willing to do so in principle but have no firm plans

No - it is unlikely (42%)

at the present time.

(Figure 4)

JAPANESE SNAPSHOT

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Investing in Japanese private equity Although domestic LPs invest in Japan predominantly via Japan-

Types of fund investing in Japanese private equity – proportion of LPs investing via particular routes

Japan-focused fund managed by Japanese GP Japan-focused fund managed by foreign GP franchise

dedicated funds, foreign investors tend to do so via Asian and global funds with an allocation to Japan.

Global fund with an office in Japan Pan Asian fund with an allocation to Japan Asian fund-of-funds with an allocation to Japan

20%

0%

40%

60%

80%

100%

Respondents (%) Japanese investors

Foreign investors

(Figure 5)

Best ways of investing in Japanese private equity Japanese LPs are very clear about the best way of investing in Japanese private equity – namely via Japan-dedicated funds. However, there is no such consensus among foreign investors.

The best way to invest in Japanese private equity - views of Japanese and foreign LPs Foreign investors

Japanese investors

Japan-focused fund managed by Japanese GP Japan-focused fund managed by foreign GP franchise Pan Asian fund with an allocation to Japan Global fund with an office in Japan Asian fund-of-funds with an allocation to Japan Japan-focused fund managed by Japanese GP Japan-focused fund managed by foreign GP franchise Pan Asian fund with an allocation to Japan Global fund with an office in Japan Asian fund-of-funds with an allocation to Japan

0%

20%

40%

60%

Respondents (%)

(Figure 6)

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JAPANESE SNAPSHOT

80%

100%

Japan as a private equity market Investors believe Japan generally offers good conditions for private equity investment:

Strong economy The country’s macroeconomic climate is seen as a particular strength, with two thirds (68%) of LPs citing this as an important and positive factor for private equity in Japan.

Developed financial markets The availability of bank debt and the sophistication of the country’s capital markets are also seen as important – being cited as strengths by 61% and 53% of LPs respectively.

On the other hand, over a third (37%) of LPs believe the tax climate for private equity is unfavourable in Japan compared with other countries.

Relative strengths of the Japanese private equity market – LP views

Macro-economic climate Availability of bank debt Sophistication of capital markets Legal/regulatory infrastructure IPO markets Availability of dealflow Taxation for PE investors

0%

10%

20%

30%

40%

Strong

50%

Acceptable

60%

70%

80%

90%

100%

Weak

(Figure 7)

JAPANESE SNAPSHOT

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Market risks Investors believe Japanese private equity risks becoming a victim of its own success:

Over three quarters (79%) of LPs believe increasing competition for deals will threaten returns over the next few years.

Two thirds of investors believe a continuing scarcity of talent will mean GPs struggle to find as many good people as they would like to employ. Risks facing Japanese PE in the next few years – LP views

Increased competition for PE dealflow Scarcity of PE talent More stringent legal/regulatory restrictions on LLPs* Increases in interest rates Changes in taxation

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

*Limited Liability Partnerships

(Figure 8)

Maturity of Japan as a private equity market

LP views on whether Japan is an emerging market for PE

100% 90%

Investors believe the Japanese market has significant potential

emerging market for private equity – two thirds of Japanese LPs hold this view, and the proportion is even higher for nonJapanese investors.

70%

Respondents (%)

for future development. A clear majority of LPs see Japan as an

80%

60% 50% 40% 30% 20% 10% 0% All investors

Japanese investors

Yes – it is an emerging market for PE

(Figure 9)

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JAPANESE SNAPSHOT

Foreign investors

No – it is already a developed PE market

Private equity dealflow

Sources of private equity dealflow in Japan in the next 2 years – LP views 100% 90%

companies (public-to-privates) and corporate restructurings are

80%

all expected to become more important as sources of private equity dealflow in Japan over the next couple of years. Opportunities from distressed/turnaround situations – an

Respondents (%)

Secondary buyouts, private equity purchases of publicly-quoted

70% 60% 50% 40% 30% 20%

important source of dealflow in recent years – are expected to

10%

decline in number.

0% Start-ups

Distressed/ Corporate turnaround restructurings situations

Increase

Stay the same

Public-to -privates

Secondary buyouts

Decrease

(Figure 10)

Private equity’s share of Japanese M&A over the next 2 years – LPs’ expectations

Private equity’s share of Japanese M&A

Stay the same (13%)

Almost all investors (87%) expect private equity’s share of the Increase significantly (21%)

Japanese M&A market to increase over the next couple of years. Not a single investor expects private equity’s share of Japanese Increase moderately (66%)

M&A to decrease.

(Figure 11)

Exits

Exit routes in Japan over the next 12 months – LP views 100% 90%

Around two thirds of LPs see secondary buyouts and trade sales

believe recapitalisations of existing investments will become more common. Two thirds of investors expect no change in the outlook for IPOs over the next 12 months, though one third of LPs are more optimistic.

Respondents (%)

increasing in importance as exit routes in Japan. Over half of LPs

80% 70% 60% 50% 40% 30% 20% 10% 0% Secondary buyouts Become more common

Trade sales Stay the same

Recaps

IPOs

Become less common

(Figure 12)

JAPANESE SNAPSHOT

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Global Private Equity Barometer – Japanese Snapshot Respondent breakdown

Respondents with commitments to Japanese private equity Japanese investor with commitments to PE in Japan (30%)

PE investor with no specific exposure to Japan (39%)

Coller Capital’s Global Private Equity Barometer researched the plans and opinions of 70 private equity investors based in Foreign investor with commitments to PE in Japan (31%)

Asia-Pacific, Europe and North America. Of these, 43 had commitments to private equity funds investing in Japan –

(Figure 13)

either through Japan-dedicated funds or through more broadly-focused funds with an allocation to Japan. They form

Respondents by region

a representative sample of the LP population investing in

Asia-Pacific (excluding Japan) (9%)

Japan. North America (37%)

About Coller Capital

Japan (33%)

Coller Capital, the creator of the Barometer, is the leading global investor in private equity secondaries – the purchase of Europe (21%)

original investors’ stakes in private equity funds and portfolios of direct investments in companies.

(Figure 14)

Respondents by total assets under management

Research methodology $50bn+ (23%)

Research for the Barometer was undertaken for Coller Capital

Under $500m (9%) $500m-$999m (4%)

in October-December 2006 by IE Consulting, a division of Incisive Media, which has been conducting private equity

$1bn-$4.9bn (23%) $20bn-$49.9bn (10%)

research for nearly 20 years. $10bn-$19.9bn (14%)

$5bn-$9.9bn (17%)

(Figure 15)

Notes: Respondents by type of organisation Public pension fund (20%)

Limited Partners (or LPs) are investors in private equity funds General Partners (or GPs) are private equity fund managers In this Barometer report, the term private equity (PE) is a generic term covering venture capital, buyout and mezzanine investments

Other pension fund (4%)

Corporation (4%) Endowment/ foundation (14%)

Corporate pension fund (11%)

Insurance company (19%)

(Figure 16)

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JAPANESE SNAPSHOT

Bank/asset manager (19%)

Family office/private trust (6%)

Government-owned organisation (3%)

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