TOKYO -- New Japan-focused equity funds are on track to rake in more than 500 billion yen ($4.8 billion) in investment this year, which would rival the largest annual sum on record.
Such an outcome would mark the first time since 2006 that fresh investment funds topped the 500 billion-yen threshold, according to an estimate by PwC Japan Group. The volume reached an all-time high of 540 billion yen that year.
The new funds mainly target corporate spinoffs and family-run businesses with no one in line to take over management. The portfolios are flush with money from global institutional investors hunting for viable alternatives to conventional investments.
"International investors are expressing strong interest in funds active in Japan, such as those specializing in carve-outs," said Satoshi Sekine, private equity lead at PwC Japan Group, describing the move by companies to make noncore operations independent businesses.
Polaris Capital Group, a Tokyo-based asset manager that acquired Panasonic's security camera business last year, is establishing a fund worth approximately 150 billion yen -- double the previous fund launched in 2017. The vehicle will invest in other spinoffs, as well as in family-run companies with no successors to take the reins.
Basic Capital Management, also in Tokyo, will set up a roughly 30 billion-yen fund to invest in small to mid-size companies, with a focus on management buyouts and the transfer of family-run businesses without successors.
Integral, a Tokyo fund manager, appears to be launching a vehicle topping 100 billion yen, more than the 73 billion-yen fund established in 2017. U.S.-based firms are rolling out Japan funds as well.
The purchases of such businesses, however, are outpacing the capital available in existing Japan-focused funds, necessitating the tear of fresh fundraising.
At the same time, money has poured in from institutional investors drawn by the prospect of double-digit annual returns. Demand has shifted from bonds, whose yields have dropped to historic lows, as well as from the now-volatile equity market.
The surge in investment activity risks driving up the costs of taking over Japanese firms. Last year, the average enterprise value of targets were about 14 times their earnings before interest, tax depreciation, and amortization, according to Refinitiv. The multiple, equivalent to how many years it takes to recoup an investment, is up from the ratio of 11 logged for 2013.
However, there are signs that the novel coronavirus pandemic may take the wind out of buyouts.
"International investors have canceled trips to Japan," said a source at a Japanese investment fund. "We can't visit them from Japan, so we're unable to hold face-to-face information sessions."
In fact, the number of mergers and acquisitions involving domestic companies fell 7% on the year in the two months through February, according to M&A consultancy Recof. If economic activities continue to slow, the trend could become more pronounced, clouding prospects of some investment funds, one observer said.