What you're hearing is a trailer from an old Japanese drama.
It's called Vulture, or in Japanese.
My colleague Leo Lewis, the FT's Tokyo bureau chief, loves this.
Hear how locked in he becomes when we watch this trailer together the other day.
That is just magnificent, isn't it?
That's brilliant.
Okay.
Do you want me to comment on it?
Yeah, go ahead.
I mean, it was a big phenomenon at the time.
It was the water cooler conversation in offices.
Vulture was about a foreign fund that exploits struggling Japanese companies.
First, it was a TV show.
And two years later, it was made into a film in 2009.
You know it had a primetime slot, but it was also thematically, it could not have been more on the minds of people going into their nine to five jobs.
That's in part because, just a few years before this, some major American private equity firms had started to set up shop in Japan.
What's in the trailer is a series of scenes that depict the perceived problem with foreign capital, which is that, you know, capital doesn't care about the nature of japanese companies and they're with sort of stacks of cash being thrown across the floor.
You know, the look of the thing was a little bit like, you know, barbarians at the gate and and kind of wall street and the idea that capital does kind of wicked things if it's left unchecked.
But fast forward to the present and our colleague David Keohan, who's the FT's Tokyo correspondent, says things are really different.
The easiest way to put it is that private equity is everywhere.
Private equity has basically managed to present itself as a solution to some of the problems that Japan faces, from succession planning to consolidation.
It's the world's fourth largest economy.
And what you have now here is a cocktail that's perfect for private equity, with companies needing reform, government and regulators all pushing it, and private equity ready to take them private en masse.
But even as private equity increases its influence in Japan...
Some in the country still worry about the knock-on effects of this growing trend.
The experience of companies and private equity in the United States in Europe has got a long track record.
And it's not necessarily a track record that Japan would like to see emulated in full on its shores.
There's not only tension with the idea of a foreign entity taking over a Japanese company, but I think also there's the real idea out there that private equity stories don't always end well for companies.
I'm Michaela Tendera from the Financial Times.
After roughly two decades in the country, international private equity firms are finally becoming more of a fixture in Japanese markets.
Today on Behind the Money, we're talking about what's changed in Japan to make this happen and how private equity's expansion might alter the country's unique corporate ecosystems.
David, Leo, welcome to the show.
Hello there.
Nice to be here.
Thanks.
So first, let's start at the beginning.
When do private equity firms first make their way into Japan and who are they?
You can probably date this back to kind of the early to mid 2000s, after Japan experienced an extremely aggressive asset price bubble that then very dramatically burst, leaving a lot of distressed assets on the table.
There were some kind of specialist firms that came into the market.
Ripple would very famously taking over kind of distressed financial assets.
But the big guys we're talking about here the Carlisles Bains, KKRs and Blackstones they're coming into the market around 2005 2006, something like that when these firms first came into the country.
How would you describe Japan's economy and business culture at the time?
Yeah.
So, as David alluded to just there, the 1980s asset bubble was a defining moment for Japan and for Japanese companies.
They went from being literally at the top of the world to being something that was a constant source of concern that you weren't sure whether companies were going to collapse.
In very simple terms, companies had gone into a kind of defensive mode.
They had been very aggressive risk takers.
What happened at the CEO level for quite a long time was that the predominant emphasis of your time as CEO would be not making a mistake.
It wasn't about advancing the share price a whole lot.
It was just about not having a disaster.
Yeah, very risk averse.
That it was risk averse, but there was no upside to taking big risk.
Well, what else was happening in the Japanese corporate world when these big PE players showed up?
I think one of the things that's important to remember throughout today's discussion is that public markets in Japan had gained a very, very strong reputation, which they maintain to this day.
There is a true reputational, practical and psychological value to being a listed company.
And private equity, in a way, was the antithesis to that.
That private equity was there saying actually there's a value in being not a public company, that there's a value to being off the market and away from that.
Now we heard earlier how these firms weren't exactly well received by the Japanese public at first with that show Vulture.
But Leo, as a journalist, you were living in Japan back then as well.
Talk a bit more broadly about how private equity was received, you know, beyond just this TV show.
Well, it was primarily negative.
In a lot of people's minds, there was a kind of vulture element that these guys were coming in at a time when Japan was at its relatively weakest and that this was therefore a kind of nakedly opportunist arrival on Japan's shores.
And so it was poorly received.
And at the time, it was quite difficult to find any positive media coverage in Japan.
The financial media were simply skeptical of whether any of this was good for Japanese companies.
And the mainstream media jumped on this with the idea that this was a kind of foreign arrogance and that this was just rude, that basically it was just insulting.
Now, let's jump ahead to 2025.
It's been several years since that show came out and since private equity firms first set foot in Japan.
So how have things changed?
Well, one thing that's just kept growing is how many publicly listed companies there are.
Leo and I play a game sometimes in the office, of looking up a corporate handbook and seeing if we can find a company that does X.
Is there something that makes like lollipop sticks?
There's actually seven of them.
How many funeral home operators are there?
Quite a few.
Japan has an enormous number of listed companies, something we really should mention.
It has like the same number of listed companies roughly as the United States.
From memory, I think the US has a GDP that's like seven times Japan.
So you get it.
So, if you're a private equity firm looking at this, if you're an investor looking at this, it's great because you have a strategy you want to play.
You can do it in Japan.
So it sounds like more companies, more investment opportunities.
How has the private equity industry responded to this environment?
Yeah, if you look at a chart of private equity deals, over time basically got a curve that goes very steeply up, like very few at the start, those first years, and then it starts to creep up a little bit.
And basically what you get is firms like Bain, in particular, starting to buy companies that people have heard of.
Domino's in Japan, they bought that, I think it was around 2010, 2011.
They buy Skylark around the same time, another kind of family eatery that like everybody in Japan would know.
And from there, they go deeper and deeper into the corporate establishment.
I think the big deal around 2018 that really established these private equity companies as firms that could buy whatever they wanted at the very center of Japan was Bain buying Toshiba's chip business.
And who are these main firms that we're talking about here at this moment?
Is it Japanese firms, American firms?
Yeah.
So there's, I think there's like 150 to 200 of them.
So you have every large private equity firm you can imagine is here.
So, as we've already mentioned, like KKR and Blackstone Bay and Carlisle, then you've got kind of EQT, you've got Chinese Hong Kong firms, you've got firms from the Gulf.
And then you have.
You do have Japanese private equity firms, but those Japanese firms haven't really gotten to the size where they can compete with with the big international, particularly American, private equity firms in this market.
So when you get into the really big carve-outs with the exception perhaps of JIP, a Japanese firm, which bought the rest of Toshiba, but when you're talking about the Hitachi which sold their business Panasonic, which sold some and may sell some more in the future
Those auctions, those sales processes are going to be mostly a battle on price.
And they've been and probably will be dominated by the big international private equity firms.
They're the guys who are really becoming dominant here.
So there's more growth happening now.
More deals are happening.
Why is that the case?
What's changed?
So look, one of the reasons that this is happening now is the demographics.
And that takes two forms.
One is that founders of companies, often men and often with large, substantial stakes in listed companies, are reaching the end of their lives.
And they're either estate planning and working out how to transfer this to other members of their families, or they're just looking at this and going I need to get out.
But at the other, Japan has a very substantial labour shortage.
The labour market is shrinking and is in long-term decline.
In other words, it's not about laying people off.
In many cases, it's about arresting the exit of the workers that you have got or reskilling them.
And these are actually things that private equity can do pretty well.
And so if they're going to use that capital to invest in productivity devices, labor-saving devices and so on,
That's probably no bad thing.
And why wasn't the company doing that anyway?
Well, and these firms, I mean, how do they operate in Japan?
Is the playbook pretty much the same as how they operate in the US or the UK, or is it quite different?
Yeah, I think the point is that when people think about the US private equity playbook, as Leo mentioned earlier, like barbarians at the gate, it's less barbarians at the gate here and more private equity banker takes kind of old founder out for whiskey at jazz bar 12 times in order to get him, to convince him that he should sell his company.
Yeah, I think the fear was that the winning bidder would end up completely restructuring, that there would be enormous job losses, that entire divisions would disappear.
In actual fact, the low-hanging fruit is comparatively painless to extract.
There are large real estate portfolios in many companies that can be sold and monetized without massive job losses.
There are IT upgrades that can be performed without really disrupting the overall structure of the company.
I think it's because they haven't actually ended up really mauling corporate Japan in that way that they've also continued to kind of look like progress rather than looking like huge disruptors.
And these guys are super, super nervous about giving the impression they will cut jobs.
As Leo said, there's extremely structural reasons.
Firstly, the contracts aren't as boilerplate over here.
They're much more bespoke.
That's what lawyers are saying, because the number of deals hasn't increased to the level where they can just kind of take a contract off the shelf and fill it in.
But what is very consistent in those contracts are terms about we will not fire people over this amount of years.
Because in the end that founder is going to have to say I've done this deal, but it's not going to be worse for you.
And he has to be able to do that with a straight face.
And that matters a very great deal in Japan.
Now, an interesting fact behind this growth of private equity and the increase in the number of private equity deals in Japan that you, David and Leo, have written about, is that the Japanese government is really pushing for a more robust private equity industry.
How does the government see this benefiting Japan's economy?
The whole corporate landscape has changed in a way.
You have a government... that realizes it wants to get its citizens investing in the stock market.
To do that, it needs companies to actually be performing.
They need stocks to go up.
So they need a catalyst.
They've decided that they're very much okay with private equity being that catalyst to being able to shake up companies.
Buy them, improve returns.
I think the government I mean you alluded to this before I think the government is concerned that the public markets have not been, or that Japanese companies have not been, very good allocators of the nation's store of capital and that the economy hasn't done catastrophically badly, but it could have done a great deal better if those companies had been different allocators of capital.
What the government is saying is we should be open to the idea that there are people out there who do know how to allocate capital more efficiently, and that that is a net good thing for Japan.
Again, an ideal world of private equity we can offer is a consolidation mechanism.
Returns go up.
Companies get more pricing power.
As inflation picks up, that's great.
People get more excited by the stock market.
And we should mention that in our reporting.
An interesting moment was former Prime Minister Kishida speaking at a KKR dinner quite recently.
You know, maybe a risk they wouldn't have taken when private equity presented the market.
So, speaking of risk, are there risks or concerns that you're hearing from sources about private equity expanding in Japan?
And if so, what are those in writing with private equity, particularly talking to government sources?
We ask this question all the time.
So are you monitoring for excess?
What would that excess look like?
You know, how will you know when things are going too far?
We get the sense that from the kind of government regulatory point of view, that we're probably a few years away from real concern materializing.
Now, what you think that concern will look like depends on your view of private equity.
I mean, private equity in the US is now one of the biggest employers there.
And you know we wrote recently that as one Japan expert we spoke to, Alicia Gower, said it is entirely plausible to think that in the coming years private equity could own 30 to 40 percent of the SME market, the small and medium sized enterprise market, kind of mid cap firms.
What does that mean for Japan?
What does that mean for Japan's public markets?
Japan has this amazing depth of expertise.
I mean these founders sitting at the top of, like semiconductor material companies, advanced manufacturing companies.
These guys deeply care about their products.
And one of the issues with the idea that you just find another person to run the company, you sell it to private equity is that you run the risk of and I'm not saying this is definitely happening, I'm just saying the risk is there of hollowing out something quite valuable and unique to Japan.
I think one of the things that is a risk that is flagged, not so much talking to the government but just generally, is that the pool of experts on whom Private equity depends for parachuting in people and so on.
The domestic Japanese pool is not enormous.
And that if the deal numbers pick up and pick up, and pick up, I think you are going to see quite intense competition for the people that can do this thing, in a way that perhaps in the US you've got this much deeper competition pool of consultants and so on that have got that kind of experience.
So that I think is the only thing that I would add to the list of concerns that David outlined.
So, from the perspective of these private equity firms that have entered into Japan and expanded, it seems like they are playing a long game here.
Is their experience in the market paying off for them so far?
I think you'd have to say yes.
I think careers are being made here.
You know, the guys who built up Japan experience are now deploying this capital, are rising to the top of their firms.
I think also if you look at returns data, I do think this stuff is patchy and it's hard to really discern precisely what each firm is doing, particularly the non-listed ones.
I think Japan is performing at or better than any other major market.
What I would say though, is that the question of if it is paying off will only really be clear in a few years' time, because the bigger, more frequent deals are happening now.
It is a rising market.
That makes things easier, and the exits of these companies in the coming years will be the real test.
We don't know how that'll go yet.
Yeah.
So what are you both watching for and expecting going forward?
I'll just have one observation, which is that, first of all, I would preface this by saying I think that the interest in doing deals in Japan is simply going to get stronger.
This resonates with something that David and I first started to pick up on earlier this month, And that is that Japan's private equity scene has been a big beneficiary of the fact that for at least a year now maybe a bit more China has been off limits really.
They haven't seen a horizon on which it's going to be easy to get back in to China at scale for a whole series of decades.
Both domestic US reasons, geopolitical reasons, that's all we know.
They've got an awful lot of dry powder and capital that needs to be deployed.
Japan has been the answer for a lot of them to the question of what on earth are you going to do in Asia?
Where are you going to deploy this capital if you can't do it in China?
I think we just started to hear, partly because of Trump's visit to Asia, and the sort of progress perhaps on a trade deal between Beijing and Washington that you just started to hear noises about.
Well, maybe some of these big private equity firms are going to look back at China and I don't make any predictions of that but I do wonder whether the scene could go back to a sort of pre-2020 norm where there was a lot of deployment of capital in China and Japan was there as a kind of wildcard opportunity.
But I'll leave it to David to make the better prediction what will happen in Japan itself.
That was a good prediction.
I don't know what will happen.
I think on a long enough timeline, there will be another big blow up.
There's been one or two before, but the market has moved past them to a large degree.
And you know, the reaction to the next big blow from regulators and government will be telling, will probably shape what private equity will do afterwards.
I think it's also probably true that as private equity goes further out of Tokyo, the question about finance as a tool or a good in itself will become ever more important.
If finance is there to strengthen Japanese corporates, then I think it can continue to grow.
I would like to think that we'll land somewhere in the middle, away from the excesses of private equity in some markets and away from where Japanese corporates were maybe far too comfortable.
I think that's also where the Japanese government wants it to be.
But as Leo said, there's this massive pressure to deploy, deploy, deploy.
And if you're out drinking with private equity guys, there's occasionally a slight mania where even they kind of admit like we can't get off the hamster wheel.
We got to keep doing it.
So as I said, there will be another big incident, big blow up.
And from then we'll have to, we'll have to see where it goes.
Well, David, Leo, thanks for coming on the show.
Thank you very much for having us.
Thank you.
Thanks so much.
Behind the Money is hosted by me, Michaela Tendera.
This episode was produced by me and Safiya Ethman.
Fact-checking by Simon Greaves.
Sound design and mixing by Sam Giovinko.
Original music is by Hannes Brown.
Topher Forges is the FT's acting co-head of audio.
Thanks for listening.
See you next week.
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