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