Regulation promoting capital efficiency provides boost for Japan’s private markets

May 7, 2024

Luke Hinchliffe

Marketing Director

Private equity in Japan has experienced robust growth in recent years, despite the sector struggling on a global level (including China stocks experiencing a three-year slump), and geopolitical issues in the wider Asia region. With no major regulatory hurdles on the horizon, current regulation that promotes capital efficiency, and corporate governance reforms fueling growth, the Japanese private markets scene looks strong.

A story of positive growth

All-in-all, a positive picture against the backdrop of a global slowdown.

How private equity has grown

A combination of recent initiatives such as the 2019 Fair M&A Guidelines, the 2022 Tokyo Stock Exchange market restructuring, and 2023’s guidelines for corporate takeovers have all contributed to companies’ focusing on profitability, performance and capital costs.  

These reforms have in turn fueled a rise in shareholder activism, with investors frequently targeting inefficiently run conglomerates. In 2023 activists targeted Japanese companies worth a total of $252 billion, which was more than double the previous year according to Bloomberg. The result means that some company management teams prefer to de-list and choose their own investors from private markets, rather than deal with activists.

This momentum is expected to grow in 2024, as more firms face pressure to improve shareholder value, explore possibilities with buyout firms or go private.

Private fund regulation

Presently, the Financial Services Agency oversees the regulation of Japanese funds. Individuals responsible for overseeing the investment activities of partnership-type collective investment funds, including private equity funds, must undergo registration as a "financial instruments business operator" in accordance with the Financial Instruments & Exchange Act. This requirement extends to fund operators located outside of Japan who cater to Japanese investors, with certain exceptions granted for institutional investors.  

Reporting requirements are typical for the industry: investment managers (General Partners) must provide investors with periodic management reports describing the status of assets of their alternative investment fund(s). As with any alternative investment manager, an automated calculation and reporting automation solution can alleviate the headache of trying to do this manually.

A private equity opportunity

Much of Japan’s financial regulation is geared towards public money and has a focus on optimizing capital efficiency, but Japan’s Ministry of Economy, Trade and Industry (METI) recognize private equity’s contribution through the increase of M&A activity via foreign PE funds, as well as a sector that encourages foreign talent.

Against a stable background, experts agree that Japan presents a strong opportunity for private equity, with recent take-private deals evidence of that potential.

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